Q3 2023 Kratos Defense & Security Solutions Inc Earnings Call
Okay.
Afternoon, everyone. Thank you for joining us for the credits defense and security solutions third quarter 2023 conference call.
With me today is Eric Demarco, President and Chief Executive Officer, and Deanna Lund.
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. This paragraph emphasizes the major uncertainties and risks.
Parents and the forward looking statements we will make this afternoon.
Please keep these uncertainties and risks in mind as you 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 and that time is defined in regulation G. non-GAAP financial measures should not be considered in isolation from or a substitute for financial information presented in compliance with GAAP.
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.
Ill now turn the call over to Eric Demarco.
Thank you Marie good afternoon.
We recently received additional interest in kratos from existing and potential new stakeholders.
As a result, I'll begin my remarks, with a summary of our strategy.
Great assist technology company in the National Security commercial and global markets and we make targeted internally funded investments to be first to market with relevant products and software.
The benefit of tradeoffs being both defense and commercial market focused because every level of our technology, our resources facilities production quantities.
Providing creates a competitive advantage including cost.
It also unique rapid technology development and delivery aspect to our customers.
Greatest utilizes existing leading edge technology.
Not yet to be developed a bleeding edge technology.
As you approach accelerates our development in fielding time, while reducing our risk schedule and cost elements.
Great USCIS dual commercial one security market focus is most represented by our space satellite software and turbine technologies areas, representing approximately 50% of <unk> revenue today.
Also consistent with making targeted internal investments in our first to market strategy at.
At Credo affordability is a technology and better is the enemy of good enough ready to go today.
Which is becoming even more important in the existing budgetary and threat environment.
As reflected in our third quarter and year to date results <unk> 2023 transition year of making targeted internal investments in high growth market opportunity areas. While also generating increased revenue profit and cash flow.
Is on track with this trajectory, we expect it to continue into the future.
As an increased number of our programs and initiatives enter or increased production or deployment.
The creative team in every business unit are successfully executing our strategy and business plan in the light of day as a public company.
<unk> bidding on and receiving large contract and program awards and programs of record generating revenue and cash flow, while simultaneously managing significantly internal funded investments to further grow the business.
This approach has positioned the company for sustained future year over year organic growth with increased margins along with potential transformational work opportunities.
Clothing, and tactical drones software based satellite <unk> and TMC turbine propulsion engines, hypersonic and certain other system areas.
As we complete 2023, we expect to achieve our forecast and we currently expect <unk> base case 2020 for revenue and EBITDA profitability to continue to increase.
Great US as base case forecast does not include any assumed tactical drone production contracts, which we will only forecast once assured.
With the United States government the defense industry and Credo is currently operating under a continuing resolution authorization.
Similar to previous years, we will wait until we report <unk> fourth quarter financial results in February to provide our detailed 2024 financial guidance to you as.
As we should have additional clarity on both the fiscal 'twenty four it budget and the 25 budget request outlooks at that time.
However, unless something significantly adverse occurs funding wise at a high level. We are currently expecting at least 10% 2020 for over 23 base case organic revenue growth and increased EBITDA margins with Q1 dollars 24, similar to prior years being the weakest due to the currently ongoing.
Alright.
<unk> recent program awards on our record backlog and opportunity pipeline, which are driving our demand for qualified personnel is a primary reason for our expected future organic growth trajectory confidence.
Simply stated create ourselves the right technology software systems products and solutions at the right price at the right price points at the right time to address certain of the most mission and time critical national security and commercial market requirements.
We currently have 400 open billable requisitions across our company on a base of approximately 3800 employees, which is also indicative of the strength of our business and the demand for our offerings.
The obtaining and retaining of qualified workers, including those willing and able to receive the national security clearance remains a primary operational challenge.
<unk> the continuing increased cost of these individuals which is impacting our margins.
Recent creative business highlights include.
The Air Force has now reported that an artificial intelligence combat enabled Valkyrie successfully recently flew at the Eglin golf test and training range.
As reported AI algorithms developed and trained by the United States Air Force Research Lab Autonomous Air combat operations.
With the AI trained through deep reinforcement learning.
Use neural networks to fly the valkyrie against simulated opponents missing mission systems and weapons.
Also recently reported in a separate flight <unk> Valkyrie successfully demonstrated all defined artificial intelligence enabled high performance unproved air vehicles specified relevant functions.
<unk> Valkyrie with United States Marine Corps also continues to progress with the Marines recently announcing the successful first flight of Kratos Valkyrie.
Under the penetrating affordable autonomous collaborative killer portfolio or Pac P program as cradles was able to announce today.
As reported the Marine Corp's partnered with the office of the under Secretary of Defense or OSD for research and engineering.
The Navy Air Systems Command and the Naval Air Warfare Center aircraft Division with multiple expected additional funded future Valkyrie flights planned under the program.
<unk> drones, including Valkyrie also continued to progress under the rapid defense experimentation reserved or radar program, including as related with the Usmc.
The Valkyrie is the only high performance stealthy jet drone in its class flying today continues.
Continues to mature and actual flight with funded customers, including with artificial intelligence and other relevant mission systems as the Dod progresses towards the future large scale deployment of high performance jet powered drone UAV systems.
Yeah.
We have now executed phase one of an expected five year funded contract initiative with a new national security entity.
For Kratos Valkyrie B version mission capability expansion, which initiative is very confidential.
We have also now completed negotiations and expect to receive in the fourth quarter, a valkyrie related contract and the tens of millions of dollars from a separate national security entity for a Valkyrie version a category.
And we have recently received an entirely new tactical system related contract award.
Which we are unable to discuss further in any detail at this time.
Separately.
We are in negotiations with a customer related to <unk> tactical drone system, a version of which is flying today with multiple for Anatol system is expected to be performing funded mission capability demonstration expansion flights with this new customer in the future.
We have also recently entered discussions with the customer regarding <unk> Athena Tactical drone system also which is now flying and we hope to be under contract next year.
Since our last report to you Deputy Secretary of Defense, Kathy Hicks announced the new Replicator initiative to field thousands of attributable autonomous drilling systems over the next few years.
Similar to the reported completely separate air for CCA program, where it has also been reported that thousands of CCA drones are expected to be fielded.
I'm also unable to say anything more on either replicator or CCA at this time.
However.
<unk> is the only company with low cap cost high performance expandable and Accretable jet drones, both in production and flying today.
Including Air Wolf May go Valkyrie, Vanitas, Athena and others.
Assuming the fiscal 'twenty four budget is approved as we expect and the fiscal 'twenty five NDAA and fight up typically released by the Pentagon in calendar Q1 are also as we expect late next year, we hope to receive our largest to date credo as tactical drone related contract award.
Which once again is not included in <unk> base case financial forecast.
In addition to recent developments with anecdotes on Athena tradeoffs.
<unk> Ghost works continues to make progress on a separate new system and assuming the range scheduling holds we expect to demonstrate this system later this year.
<unk> has also recently been focused on a large new prime program opportunity, which includes the rapid design and build of an additional separate new system, requiring significant tradeoffs funded NRA BNP and other costs, which.
Which we expect to incur through Q4 and into Q1 of next year.
We recently acquired Sierra technical for approximately $25 million in credit stock of all earn outs are achieved.
Sierra is a longtime partner of <unk> and this was a one on one negotiated stock exchange merger with Sts's husband and wife founders.
See our recently received an approximate $77 million single award contract for two stealth jet drone.
Generation aerial target or five got aircraft.
With an initial period of performance of approximately three years and then expected production thereafter.
For both competitive and security considerations I am not going to comment any further on Sierra relative related to future growth expectations.
Other than to say that Kratos has big plans for the five <unk> drone and also an additional opportunity Sierra is working on that is highly confidential along with Credo Cisco works.
Our primary focus is to successfully execute the five GAAP program and be first to market with a fifth generation aerial target drone systems.
We are working with shield AI with shields artificial intelligence pilot integration into several of <unk> high performance jet drones, including Valkyrie.
The shield cradles relationship is exactly consistent with Kratos is first to market with relevant system strategy with Kratos flying drones and shield flying today Hive mind AI pilot.
We believe shield will have a clear market advantage over its primary competitor as shield has access to <unk> family are flying today jet drone systems.
And its competition of Powerpoints ground models simulations are propeller planes.
The Credo shield flights are occurring at the Oklahoma Burns flat facility, which I completely endorse that the competition does not know what tradeoffs and shield or up to.
As shield AI is expected to be advanced through these flights and also had a separate additional arrange facility.
We continue to come down the learning curve on the 24 Valkyrie serial production run.
With currently three separate Valkyrie variance, a b and C underway and a fourth variant. We are currently considering based on recent customer interest.
We our internal resource planning balancing and phasing the valkyrie production pace and cradles his capital allocation against other new customer funded tactical drone programs, we have recently received and potential opportunities.
We have also now submitted a large quantity wrong or rough order of magnitude to government customer for a significant cradles tactical drone production run, which production planning and preparation we have completed along with our existing in place critical suppliers.
The demand for four <unk> target drones are strong and we expect to continue for the foreseeable future as the global recapitalization of weapon systems, and the need to test and training on these weapons systems increases.
As recently demonstrated in the vigilant Wyvern test last week.
In the space and satellite area almost every aspect of our satellite ground station can now be converted from hardware software lowering cost accelerating technology advancement and deployment time and increasing the ability for an operator to immediately react to changing conditions and requirements, which is the law.
Large new and growing addressable market <unk> is pursuing.
New satellite space vehicle technology and requirements, providing cradles market opportunity include software defined payload high throughput spot beam enabled and other advanced system payload and laser optical and other capabilities.
<unk> first to market open space software platform is the only software networking solution, specifically designed to address and advance this new software and commercial technology focused paradigm.
Connecting dynamic space to a dynamic virtualized ground system.
We recently announced that <unk> open spec space platform is the first commercially available fully virtualized satellite ground system to achieve EMEA up 3.0 carrier Ethernet certification.
The Mes cap carrier Ethernet or CE standard is the same industry standard adopted by global terrestrial and mobile network carriers, meaning Credo is open space makes satellite service networks seamlessly inter operate with terrestrial and cellular transport networks.
The CE standard achievement as representative of <unk> satellite team's successful and methodical execution of our global satellite software base virtualization strategy led by <unk> first to market open space system.
The total addressable market opportunity for <unk> is open space, both commercially and for National Security is expected to remain strong with thousands of additional satellites planned for launch in the future.
<unk> turbine technologies, or <unk>, and our TDI engine business, we believe similar to our tactical drone business is well positioned for the expected significant growth in drones cruise missiles powered munitions high performance loitering munitions and other systems all of which need.
Engines.
<unk> first to market and made in the USA engines are flying today and are designed into several new program systems, including as recently reported with Kratos TDI engine and the Boeing powered joint direct attack munition.
For engines Motors and propulsion systems, the time to get successfully designed into the vehicles munitions and systems is now with working engines not unproven startup technology and photo renditions in credo is taking advantage of our first to market positioning.
Since our last report to you we have received a contract to integrate cradle is running engines into certain of tradeoffs as jet drones bulk target and tactical.
Once integration is complete we believe that <unk> will be one of the only companies in the world vertically integrated building, both the jet aircrafts and propulsion system significantly reducing cost and supply chain risks, while also increasing system performance for our customers with new technology provided by <unk>.
<unk>.
We will also have the same vertical integration with cradle, Zeus rocket motors, and our <unk> and dark Fury aerial fliers.
Cradles turbine Shadow works development team has also been working on a separate new class of Turbo fans Credo code named blade for new larger drones.
And I hope to be able to provide an update on our tangible progress with this initiative in the future as.
That is the total addressable market size for this larger engine class is incredibly large as represented by recently published reports.
The demand for Kratos turbine products technology and solutions is strong across the portfolio, including in the turbo fan space propulsion hypersonic and other classified areas.
Our Seattle works is the crown jewel of tradeoffs and is having an incredible 2023.
And we are expecting continued significant future organic revenue EBITDA and profit growth from the business.
Yeah.
<unk> microwave electronics business with a record backlog and opportunity pipeline is also performing well, including our team's successful penetration of the new to kratos microwave space and satellite market.
In addition to space and satellite the global Recapitalization of Air Defense drone counter UAS missile radar powered and loitering munitions and <unk> ISR systems is providing a large and growing market opportunity for kratos as microwave business.
Tradeoffs rocket systems business, where credo, Zeus Aaron East Dark Fury, a rabbit other rocket related systems are produced.
Also recently had a very successful mission with our government partners at the vigilant wiser and exercise with multiple cradles rocket system ballistic missile targets and multiple kratos unmanned drone system targets utilized.
With all cradle systems being successfully tracked intercepted and destroyed by the USS Carl <unk> 11.
The vigilant whiteboard exercise as a recent example, a franchise cradles programs systems and products from multiple <unk> business units, providing mission critical solutions to our customer for the United States National Security.
I encourage you to watch the videos are vigilant why Vern when you can when you can see your company's products in action.
Importantly, the Credo rocket system team recently met with the L. III Aerojet team and I can assure you that L. Three is 100% mission and customer focused including as related to <unk> Zeus systems and <unk> recently ordered numerous Zeus rocket motors from L. Three.
Related to upcoming cradles era knees and other missions.
Great also see five ISR product hardware and systems business is expected to be one of our strongest future organic growth generators for the next several years with important contracts and programs of record, including Sentinel Patriot Fad enduring freedom or if pik.
Integrated Air and missile Defense Battle command, or <unk> short range air defense or shorter AD and many others.
Great OCC five ISR teams professionalism, our facilities classified assets past performance qualifications et cetera, and their mission focus and execution has positioned cradles C. Five ISR as the go to relevant hardware product and system provider in the.
Tree.
Past performance qualifications are incredibly important in the national security software systems and product business and <unk> provide a significant barrier to entry.
To new or startup startup potential entrants.
There are also a number of cross Credo division programs, including where our <unk> ISR team and our space defense rocket and hypersonic businesses together are providing a complete integrated system solution to the customer.
We're focused internally on organic growth and an increased profit margins with no significant acquisitions planned.
We are balancing our increased future EBITDA profit objectives against a significant number of new program opportunities that we are and expect to pursue.
Many of which are right in <unk> wheelhouse.
That have recently presented themselves.
Now is the time to win these and get designed in.
These new significant opportunities.
Deanna.
Thank you Eric good afternoon.
<unk>, a detailed summary of the third quarter financial performance.
Fourth 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.
Revenues for the third quarter were $274 6 million up from $2 $28 6 million in the third quarter of 2002, reflecting a 21% organic.
Increased revenues came in above our forecasted range of $240 million to $260 million with organic growth in our space and satellite turbine technologies microwave products. She five ISR training solution and unmanned systems businesses.
Our kgs and unmanned systems segment.
<unk>, 22% and 13, 4% respectively.
Cash flows used from operations for the quarter of 100000 included in working capital requirements associated with funding the sequential revenue growth of $17 7 million from the second quarter.
<unk> days sales outstanding continued to improve.
Mm 120 days in the second quarter to 117 days in the third quarter with the increase in receivable balance in the third quarter of $2014 $8 million driven by the sequential increase in revenues.
In addition, advanced purchases of inventory to mitigate potential supply chain disruption and delay.
<unk> continued as well as increased production to fulfill scheduled future deliveries, resulting in an increase of $3 7 million and inventories for the quarter, representing a reduced pace from the first half of 2023 with a total use of working capital for the nine months of $23 $7 million related to increased increased.
<unk> levels.
Free cash flow used from operations was $14 3 million after funding capital expenditures of $14 2 million.
Our contract mix for the third quarter of 2023 was 72% from fixed price contracts, 22% from cost plus fixed fee contracts and 6% generated from time and material contracts.
Revenues generated from contracts with the U S government during the quarter were approximately 68% which include.
Revenues generated from contracts with the D O D. Non Dod federal government agencies, and Fms contracts at 12%.
Revenues generated from commercial customers and 20% going forward.
Customers.
Moving on to financial guidance, our fourth quarter and updated full year 2023 financial guidance. We provided today includes our current forecasted business mix and current delivery schedules and our assumptions related to the expected impact of our continued operating challenge related to obtaining and retaining qualified tactic.
Personnel and the related increased cost for these employees and across our labor base as well as the continued impact of supply chain disruptions inflation and related expected constant price increases, including increased personnel costs associated with hiring new qualified technical personnel that are currently and expected to continue impacting.
But the industry and traders.
Our revised full year 2023 cash flow guidance reflects the ongoing impact of working capital requirements to fund revenue growth.
Including the continued increase in inventory balances, which was previously expected to begin reducing and converted into cash in the second half of 2023 as well as the shift of certain milestones on a handful of projects primarily in our training solutions and <unk> ISR businesses, which has impacted expected cash receipts of.
$16 million to $17 million shifting into 2024.
Alright, great.
Thank you Diana.
I'll turn it over to the moderator now for questions.
Thank you at this time, we will conduct a question and answer session.
Minder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.
Yeah.
Our first question comes from Seth Sigman with Jpmorgan. Your line is open.
Okay. Thanks, very much good afternoon and nice.
Nice quarter.
I guess, one thing that stood out to me is as we look at the at the rest of the year and we look at what the guidance is for the fourth quarter and whats implied with regard to.
Sales and EBITA margin versus versus Q3.
What accounts for the step down there and what's usually a pretty seasonally.
Seasonally strong quarter.
Primarily this year.
<unk>.
The CRA, which we.
We have built into our plan as you know from from the beginning and we anticipated we would have won at least for the quarter.
And we sell as we've discussed previously a lot of software.
That comes in either Q3 <unk> Q4.
We received several of those orders in Q3, we may not get them in Q4, that's number one.
Number two I mentioned there are a number of new opportunities that we are pursuing where we are incurring very significant bidden proposal.
Non recurring engineering and other costs were actually building some things that have to go into the air.
And that's also something thats been factored into Q4, so we're trying to balance work, making sure we meet or beat our numbers. While also positioning ourselves to go after and win some of these new opportunities.
Alright, great. Thanks.
And then.
And then when we think about where things are ending up for the year on an open space versus kind of what you thought coming in and then the prospects enter into 'twenty four and beyond if you can update us there that would that would be great.
Yes, absolutely.
Open space as I said continues to make progress.
It is not making faster progress as I'll speak about me personally as I had hoped but my expectations as you know on the CEO are very very high.
But the business is killing it.
Literally killing it.
And as I mentioned.
Even though the remarks or in the at least for us or in source selection of a very large opportunity right now.
And there are a number of very large opportunities that we're pursuing that we believe we're going to win because we're the only one that has the virtualized software element.
So.
We believe we've got a tiger by the tail here. So we've got a tiger by the tail.
And we're going to hit an inflection point.
It's either going to be in late 'twenty My opinion late 'twenty four 'twenty five and that inflection point is when we cross the lines of development.
Against production and deployment and sales.
And the production deployment and sales aspect of that curve are rapidly going up and when they cross that development cost and maintenance cost.
A number that we have to maintain that we're going to see significant margin expansion.
And that's what's coming.
So the business is doing it's doing phenomenally well I mean, they are first to market with new technology the.
The leaders he has focused the whole team is focused.
And they're doing it.
And thank God it crate OS we have we've got a number of other things that are that are coming up that are hitting all cylinders and so if it's a little if it's a quarter or two later than I hoped all it's going to be fine.
Okay very good thanks very much.
Yes.
One moment for our next question.
Our next question comes from Michael Mueller with Travis Your line is open.
Hey, good evening, guys nice quarter, thanks for taking my questions.
Hey, Eric.
You had good margins in the quarter, especially adjusted EBITDA margins I think highest since maybe maybe second half 'twenty, one or are you starting to see or get that expected pricing flow through from some of these newer contracts that you had kind of anticipated.
Okay.
We are starting to.
We're starting to.
But Michael.
The cost of labor.
Continue to be significant, especially in the specialty areas.
Think turbo machinery engineers Saul.
Software engineers and system engineers.
As I mentioned, we have we have about 400 open reqs.
On a 3800 person basin, if we're a product company. So that tells you the amount of revenue we've got sitting there ready ready to convert those are expensive people.
So.
Good news, we're growing and at some point the growth irrespective of what the.
The cost.
Increases are the gross growth has got to overcome it and we're really going to have a step function in margin increases.
But it's not going to be for the next few quarters because of the reasons I said.
Okay.
Got it.
And then.
Good color on on 24 in the 10% growth can you give us maybe.
Your underlying assumptions you know I know, it's hard but the budgeting.
You know, whether we get sort of a full year kind of the sequestration and then and then maybe even just some some directional growth within your different lines of business.
Thank you said you didn't really include didn't include any <unk>.
Technical drones in there.
Yep Yep.
So.
If we obviously if we have a the industry has a full year CRA, we're not going to we will not hit 10%.
It's not going to happen.
No it's not really the no new contract awards, the no new no new increases in existing production.
Because we have a number of programs that were in production on that are ramping.
Alright, assuming.
We get something by the end of the year January February I feel pretty good we can hit the 10%.
With some of the big drivers Traject projection Holly as you as you asked.
<unk>, our <unk> ISR business.
We are in production on a number of programs and we are entering production on programs like <unk> and.
In short we're at.
Sentinel ESD phase is ramping that's going to significantly ramp this year and we're following our great partner Northrop Grumman.
One of the best partners, we have on that.
Enduring shield or if pik with our partner Dianetics.
We're expecting significant activity with that program I think it was.
Publicly reported that the units that we're building are all going to be delivered next year.
Our our engine business, our turbine business Michael.
<unk> is doing phenomenally, well that is where a significant number of those open reqs are.
And those are programs in space propulsion.
Turbo fans and turbo jets.
And hypersonic systems and also the Big B 52 re Edison program, So our engine business.
Is definitely going to have an uplift to the right trajectory next year.
Our microwave electronics business as.
As you know it's in Israel.
And God bless them help them all the whole country.
But that business as rapidly as you can imagine.
We are on we are on Iron dome, we are on Aero you've been reading about these in the paper we are on the radar.
Sure.
So our microwave business.
Is going is going to continue to be up into the right.
Significantly our rocket system business.
Okay ballistic missile targets and hypersonic system testing.
Those are incredibly well funded and the launch manifest is very robust for us.
Next year.
And we're going to see an uptick in the drone.
Our drone business next year, primarily driven by target drones.
All of the weapon systems that the primes are selling right now our partners the prime like.
Like Lockheed Martin.
There are another outstanding partner and it was their systems that was involved in vigilant wyvern on the weekend test.
They have to be exercised against target drones, the ballistic missile targets. So that's driving our target drone business.
So literally across the board, we're expecting and have the programs.
Significant growth and margin expansion, we are being very cautious and tactical drones.
We are not going to assume anything until it happens, but I hope you can see by my commentary.
God willing we're almost there.
Got it got it.
Just one other one.
The downward revision to cash flow.
It sounded like just the working capital to support growth, but I think he also talks about some milestone collections may be slipping out.
I guess, you don't want to talk to next year, but I think we've been all of us have been waiting for some cash generation, what sort of thoughts around cash flow.
Yeah.
I don't want to comment about next year at this point, Michael but the milestones.
They were about $16 million to $17 million on.
A small number of projects, but they obviously were fairly significant in our training solutions in our modular systems business, we expect to collect those in 2024.
Okay. Okay.
Let me give bill yes.
Mike Let me give you a little more a little more color on that I want to we.
We're standing up an engine production line.
We're gonna be standing that up it'll be done by the middle of next year.
Because we're anticipating going into production.
And at least one engine so we're standing that lineup.
We've stood up a new line in the tactical drone area for some time.
That'll be stood up by the end of Q1 Middle of Q2. These are for programs that are funded.
So we're spending some money to get with one of the programs, we've won development and other going into production.
Standing standing these up and Thats going to take some capital as well.
Got it.
The second the second line of the Valkyrie production that we announced that we started earlier this year, so that will be ongoing throughout 2024 as well.
Got it.
Alright, thanks, guys I'll jump in the queue.
Okay.
Our next question.
Yeah.
Our next question comes from Mike Crawford with B Riley Securities. Your line is open.
Thank you.
Thanks for providing some color on some of these other drones under development. In addition, the Valkyrie like Santos and Athena.
Other one.
You won a couple of years ago F. R L.
Word for that.
<unk> board incentives based on the <unk> contract, which is that I think that derivative drone or does your demo Gorgon is that one thats still.
Featuring in your brains.
It is we are not we're not involved with obs's at this point Mike.
Yes.
You also mentioned.
Three years 77 million five GAAP contract.
I imagine that.
There's no reason you wouldn't.
To execute on the same playbook, you views with targets in the past and develop a fifth generation actual tactical drone out of the five <unk> is that a process that's already starting or something you're gonna have decided on next year.
I am sorry, Mike.
No I can't comment on that I'm sorry, okay.
That's fine just maybe switching gears to open space. So you are.
First to market with this virtual.
Networking solution that goes way beyond just tracking commentary.
Control and.
Are there any.
Bottlenecks that you see with your so the Anderson will be a data radio or something else that when you're trying to U K.
All of these disparate networks.
I don't I do not believe so the team.
The president of that fills pulled.
Pulled together and created.
They are incredible.
These are some of the if not the greatest technologists not only in the company, but in the entire industry.
And the speed.
That they have developed open space to address existing hardware elements on the ground to virtualize them to interface with space.
The speed of which they have mastered the technology of the RF for analog signal coming down.
<unk> at the IP, So now it's virtualized.
Which means the entire backbone can be virtualized.
It is incredible to me.
And I do not believe there is an issue Mike relative to what you asked.
Okay.
Thanks, Eric and then.
Maybe.
Just Uh huh.
Hum.
I'm going to leave it there thank you.
Okay. Thank you.
One moment our next question.
Our next question comes from Ken Herbert with RBC capital markets. Your line is open.
Hey, good afternoon, Eric and Deanna, a nice nice results this quarter.
Good afternoon, Sir Hey, Eric maybe just to start off I wanted to see if you could.
Level set us on on maybe the revenue run rate for the turbine technologies business and.
How much of <unk> growth in 2004 can that perhaps contribute and then maybe more importantly, you've had some nice wins there recently, but can you talk about the pipeline in that business in particular, because it sounds like it's expanding pretty rapidly.
Right.
So level setting that business.
Think of it going from approximately 70 or $75 million to over $100 million.
And 24.
So that's the type of trajectory that it's on.
Programmatically.
Big programs are in no particular order, but these are the big ones.
Our with our partner Rolls Royce on the B 52 Reengine.
I'm not allowed to say the name, but we are involved with companies that are doing lunar lunar landing.
And and maybe beyond the moon those types of engines those companies.
We're involved with with with agencies.
For engines for drones, and <unk> engine, certainly <unk> engines right now are being integrated into drones. All of this I can't talk about other than what I just said.
We are.
We have the program with boots.
So we're designing a supersonic engine.
For for boom supersonic.
That's a big one.
And then we have.
A number of programs with the Air force and or the Air Force Research lab.
That we are working on turbo Jetson turbo fans for drones and cruise missiles and loitering munitions.
And we are.
We are very we have a very specialized aspect of that business. That's in MRO for helicopter engines.
That is doing phenomenally.
But if you're designed in on legacy systems right now.
There are very few new starts in certain areas, which means the legacy systems have to have to survive and keep flying for years and years and if you're in some of those niches on certain helicopters that we are that business is very powerful because there are no replacements coming.
Okay very helpful.
I could just one follow up on the on sort of the slower pace of EBIT growth in the next year and obviously the margin pressure you talked about from from staffing and specifically the specialized people you need it.
Seems like this has obviously been going on for quite a while as the industry's going through some pretty substantial growth.
How much are you looking at maybe other geographic locations or maybe sort of significantly.
Changing maybe the.
Are you recruiting or other maybe approaches to that because it seems like that's clearly holding you back a little bit it has for quite a while in terms of some of the opportunities.
Yeah. So on the first part of your question I.
I want to make sure I clarified that I was clear.
Our base case.
Assuming we get we get a budget in a reasonable amount of time, and we do 10% year over year growth, we're going to expect our EBITDA margins to increase at a greater rate than that.
So we're expecting significant EBITDA margin growth I'm, saying, it's being held back.
By the cost inputs, including labor got it.
Okay. So I want to make sure I'm very I'm very clear okay.
<unk>.
We are absolutely. We are we are studying everything that you mentioned different geographics.
Educational areas technical schools.
Mike This is a supply demand problem.
There is account excuse me CAD Theres no.
The supply of qualified people or people that want to get qualified people that want to get a security clearance Ken.
It's not there.
And there is a recapitalization of strategic weapon systems occurring for the obvious reasons.
And in addition to that we have new space companies that are hiring these people because they want to go to Mars or Venus.
There's just an incredible demand and theres not enough of them and they are being bid up which is why we are now going back to Mr. A question. Mr. Turmoil. They cannot really glad you asked us we.
We are putting a significant amount of money in.
And robotic machinery.
Three D printing.
Automation, we're standing up et cetera have excellent produce.
Very very.
Unique elements for our engines.
We're making significant capital investments to address that we can't get the people. So we're going to automate the heck out of it.
I would say we are on the leading edge in the industry, including the big guys on a relative basis of course.
Robotics three.
Three D printing.
Automotive automated manufacturing we're doing all those things that is another reason why our capex and our other stuff is going to remain up because we're trying to offset the labor issue we have.
Great Eric I appreciate the color and good luck there.
Yes. Thank you.
One moment our next question.
Our next question comes from Peter Arment with Baird. Your line is open.
Yes, thanks, good afternoon, Eric and Deanna.
Eric.
Okay.
Where are you in the development of <unk>.
Engines for your own drones have you I know you had talked about you know that was one of the areas that you would focused on way back when.
Can you say on that.
Well, let me.
So we have now received a contract.
From a U S government agency and.
And we are integrating running credo citizens.
And to certain of our tactical drones, and our target drones, we're doing it right now.
We're going to be doing that throughout 'twenty, four and hopefully this time next year or shortly thereafter, we will be I believe the only company in the world top vert totally vertically integrated air frame.
Electric electronics et cetera, and engine with flying aircraft.
So we I'm glad Pete I'm glad I'm glad you asked we've made the team has made significant progress we're under contract we're integrating <unk> engines into credo aircraft.
Okay. That's helpful I'm sorry.
And then on just in general on Valkyrie, and maybe I will just focus on Valkyrie.
Do we do you still anticipate that this is just going to be another year of a lot of test flights I mean, you still continue to be.
This lead position, but.
Just like the Marine program Pack program.
That's a new development and obviously, they're going to continue to test flight how do you how do you see this kind of playing out.
Hi.
I learned my lesson.
In 2019, and the 2020, even when the customers came out publicly and they said, we're going to start ordering valkyrie or other cradles claims in quantity and because of either change in personality, if the government or change in policy it didn't happen.
I'm going to pay down going to be very cautious.
I don't know.
But on.
On the optimistic side of the point you made.
We are flying with multiple customers right now we're the only one plant we're the only one with aircraft.
We're doing all types of mission systems, including with artificial intelligence.
I believe that this will happen I mean replicator I think is just another indication this is going to happen.
And then we're going to be there when it happens and we're going to participate with them and I'm sorry, I've just got to be cautious brother on this one yes mountain nowhere, so I figured I'd ask but on the targets on the target side.
Yeah.
Should this business be ramping up further just given all the sort of national security implications that we're seeing on missile defense and other activities.
Do you have that.
It should be a bigger bed yes.
You will see 2024.
We will be a significant increase in our unmanned systems revenue.
Primarily from target drones.
At multiple customers that are ramping up their.
Their utilization and also Pete and our rocket business ballistic missile targets and other rocket propelled targets youre going to see a significant increase there at <unk>, we have the orders in 'twenty, four which again ties into my.
My optimism that we're going to generate the growth we have our targets business says.
Our rhythm.
And obviously, it's because of what's going on geopolitically in the world.
Makes sense. Thanks, thanks for the thanks for the comments.
Yes, Sir.
One moment our next question.
Our next question comes from Josh Sullivan with the Benchmark Company. Your line is open.
Hey, good evening.
Good evening sorry.
Just as far as the the Sierra acquisition, how much of the 77 million five get contract is yet to be consumed as the deal closes here.
Okay.
As yet to be incurred yes, yes, yes exactly.
The vast majority they received the contract approximately two months 60 days prior to us acquiring them.
As I mentioned and as I think you know we have been partners with Sierra.
And the family that owns it for a long time.
And so the significant majority of that program, we will execute with the Sierra team.
Got it.
And then just as far as the new tenneco's or in a customer that you mentioned in the opening remarks are you able to say if their customers are government service branch or another defense contractor.
I am not able to say I am sorry.
Got it alright.
Alright, Thank you for the time.
Alright.
One moment for our next question.
Our next question comes from Joe Gomes with Noble capital. Your line is open.
Congrats on the quarter and thanks for taking my questions.
Hey, Joe good afternoon.
Good afternoon, Eric you just <unk>.
Previous question you were talking about geopolitically.
And I'm just wondering.
Great quarter, you just posted.
Yeah.
In the event that we're in.
Ukraine is that helping boost the revenues for you guys have you seen anything material coming from there.
Okay.
I can't comment on what we're doing over there I'm sorry.
No worries.
And then.
If we if we put aside the.
The continuing resolution and the labor issues for a moment.
What else do you see as kind of the biggest challenges to achieving the growth youre, hoping for in 'twenty four.
Put putting aside.
Tactical drones, so just talking our base our base case.
And putting aside people, which is app, which is not number one two and three are operational challenge right now.
It's <unk>.
We have to build a lot of stuff.
Our space team has to do a lot of software delivery of open space.
It's just a lot we are ramping across the company.
And with the ramp.
<unk> risk and challenge and so just the ramping we have to get those engine factory setup.
Got to do that we've got to do it seamlessly efficiently we've got to make sure. We do it in conjunction with the applicable program office. So just those types of operational execution types of things.
Are the biggest drivers and then I'll say this one.
Youll see it being an issue, but I want to mention it specifically in our space business.
That's an international business.
And they've got some very big well known customers across the globe that are existing customers that we have some large and mid sized proposals in on <unk>.
Get delayed two.
Two or three months here, two or three months there that could move some things out of next year into 25.
That could be a risk to totally outside of our control, but that kind of stuff happens internationally.
Right.
And one last one.
For me.
Sierra acquisition I think.
There.
<unk> added.
And air.
Airport and California there.
I'm wondering.
Is there opportunities to do some of the same thing there as you do in Oklahoma is that could be.
A potential additional benefit to that acquisition.
Yes.
Joe that's a great question.
The facility isn't atropine is it is actually on the runway it's.
On the air base with the hangers.
Absolutely unequivocally.
That was a strategic element of our plan here.
Great. Thanks, Eric I appreciate it.
Thank you.
Our next question.
Okay.
Yeah.
Our next question comes from Peter <unk> with.
Alembic Global your line is open.
Hey, good afternoon guys.
Yeah.
Eric can you help me understand the nuances to the extent you are able to replicate or a little bit more because you mentioned in your remarks replicate or being distinct from air for CCA.
Thought replicated wasn't really a funded program of record I thought it was more so kind of a I don't know concept.
Brown our program.
What's the right way to think about that.
Right.
Replicator is not a program of record.
Replicator is.
The initiative that is what.
Secretary Hicks calls and shoe I'd issue and initiative.
It is it is part of the office of the Secretary of Defense.
It is going to be managed by the defense innovation unit out of Silicon Valley.
And who is in charge of it I believe is the vice chair of the joint Chiefs of staff.
That is the ultimate decision maker I believe that is what has been.
Reported.
I believe that Air force officials have have very clearly.
<unk>.
Replicator as completely separate.
From their CCA program I believe Thats better reported these are too.
Complete initiatives.
And.
I believe it's been publicly reported also.
So people involved with replicator have said that that they've identified that the funding I know something about this that's why I'm choosing my words very carefully.
They've identified the funding.
And.
How they want to deploy thousands of these in the next few years.
That's how I would would frame it up.
They've talked about the radar funds I mentioned the radar funds. The Rd. Our funds you should take a look at that that's a tidbit that is out there on this and there are some other ones where you can connect the dots and I think you can see where the money is coming from.
Okay, well I guess, most importantly, it is not a program of record, but theres money behind it which is I guess is what matters.
That is what that is what OSB Esa absolutely okay. Okay.
Last one for me just on this power J dam.
I guess your press release was the first time I heard about that or are we kind of early days in development of power JDM and maybe it'll be a few years before our production would start is that the wrong way to think about that.
You can see if you could see me Buddy up smiling ear to ear.
I cannot get ahead of our Boeing partner.
I cannot however.
We're standing up a production factory as I mentioned to do some things and I'll leave it at that.
Okay.
Fair enough. Thanks, so much.
Okay.
One moment our next question.
A reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Our next question comes from Sheila <unk> with Jefferies. Your line is open.
Thanks again guys.
Thank you.
I know it was somewhat asked but I wanted to get into more detail.
Eric can you talk about the tactical John program selling some of them.
Its promise here Valkyrie, Mako and <unk> can you just talk about potential.
And for 'twenty for AMR program.
Yes.
The potential scenarios I'm comfortable talking about Sheila is we will continue to.
To work with our.
Customers.
Test and evaluation.
And mission development.
Flights.
In scenarios.
And that is what we modeled in for 2023, then it worked out and that is what we're gonna model and in our base case 2024 that we will continue to.
Sell drones to hear three their fourth year for test and evaluation of <unk> and SMT.
But no we will not assume any production until it happens.
Cool.
And then Jonathan.
And I mentioned the press release on that one and I think you brought back you haven't talked about since Q I think since August 2020.
Maybe just.
What brought those back into the fold and near term milestones.
Good question.
Customer interest.
Right.
Sheila it's that that's what it is its customer interest and customer funding.
And as I said, we're in contract negotiation slash discussions.
These will turn into contract awards mid next year or so confident.
And then we're going to we're going to go fly under funded contracts.
Awesome.
Your question is indicative of there.
There is a lot going on and it's accelerating.
Our low cost attributable drone area and I believe it's because of what's going on in the world.
<unk>.
Thank you Eric.
Yep.
Thank you that concludes the question and answer session. At this time I would like to turn it back to Eric Demarco for closing remarks.
We appreciate you all joining us this afternoon and your interest and support in the company.
And it will be.
Chatting with you after we close out the year.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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