Q3 2024 Kratos Defense & Security Solutions Inc Earnings Call
Good day, and thank you for standing by welcome to Cray Gels Defense and security solutions third quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during.
The session you will need to press star one one on your telephone you will then hear an automated message advising your hand is rage to withdraw your question. Please press star one one again please.
Be advised that today's conference is being recorded I would now.
Like to hand, the conference over to your Speaker today, Marie Mendoza Senior VP and General Counsel. Please go ahead.
Marie Mendoza: Thank you good afternoon, everyone and thank you for joining us for the Crystal fence and security solutions third quarter 2024 Conference call with me today is Eric Demarco, President and Chief Executive Officer, and Deanna Lund Kratos Executive Vice President and Chief Financial Officer Bill.
Marie Mendoza: 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.
Marie Mendoza: Paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements we will make this afternoon.
Marie Mendoza: Please keep these uncertainties and risks in mind as we discuss future strategic initiatives potential.
Marie Mendoza: Market opportunities operational outlook financial guidance and other forward looking statements during today's call.
Today's call will also include a discussion of non-GAAP financial measures and that too is defined in regulation G. non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly at the end of today's press release, we have provided a rare.
Marie Mendoza: Conciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.
Speaker Change: I'll now turn the call over to Eric Demarco.
Eric DeMarco: Good afternoon.
Eric DeMarco: For the third quarter creative continue to execute demonstrating the success of our strategy, making internally funded investments.
Eric DeMarco: Rapidly developed and be first to market with relevant hardware and software for our national security customers.
Eric DeMarco: In Q3 every kratos business unit substantially achieved or exceeded its objectives with the exception of our commercial satellite business, which continues to be impacted by new entrants industry disruption and delays.
Eric DeMarco: Including delays in delivery by the manufacturers of software defined satellites, which I have discussed in detail previously.
Eric DeMarco: The ongoing generational recapitalization of strategic weapon systems, including strategic satellite ear defense radar and missile systems.
Eric DeMarco: <unk> to be a catalyst to the current and expected future <unk> financial performance.
Eric DeMarco: Including our affirmation today of our 2024 financial guidance and our 2025 base case financial forecast expectation of 10% year over year revenue growth.
Eric DeMarco: As I mentioned on our previous call in Q3, and Q4 'twenty. Four ended Q1 of 'twenty five credo is expected to continue to make significant internally funded bid proposal and other expenditures in pursuit of certain new large single award programs.
Eric DeMarco: One of which with a potential value of approximately $1 5 billion, we hope to be selected on by the end of Q1 of next year.
Additionally, we are also hoping to hear on a new single award space opportunity with an initial value in excess of $100 million and a potential future value of several orders of magnitude greater than that.
Eric DeMarco: We are closely managing these BNP investments related to our financial guidance that we affirmed today and the opportunities we are pursuing to ensure that we can make these investments pursue these opportunities and also achieve our expected financial guidance range.
Eric DeMarco: Though these investments have been and are expected to continue to impact craters as near term profitability on EBITDA.
If we are successful.
Eric DeMarco: Based on the potential size of certain of these opportunities we expect to win.
Eric DeMarco: We are looking to potentially increase create OS as future year over year planned revenue growth rate above the current 10% base case forecast.
Eric DeMarco: In 2026.
Eric DeMarco: Virtually every Kratos division has exposure to the rapidly growing air defense systems area, including <unk> microwave electronics are rocket systems C. Five ISR space and satellite target drones turbine technologies, and our ballistic missile target business.
Eric DeMarco: Each of which create us as the industry leader.
Eric DeMarco: <unk> microwave electronics business, where we support iron.
Eric DeMarco: Era lightning iron staying in other systems has a record backlog and is generating record financial results, which are expected to continue into 2025, including in support of the Israeli defense forces and are important partners, including Rafael Elbit and Israeli Aerospace industries.
Eric DeMarco: To address our Israeli business has record backlog and opportunity pipeline in demonstrating <unk> commitment to Israel.
<unk> is on schedule to open a new manufacturing facility expand our current manufacturing facility and complete our space qualified facility capability in Israel in Q2 2025.
Eric DeMarco: Additionally, due to customer demand, including as related to missile and radar systems.
Eric DeMarco: We are now also planning to open an additional microwave products facility in India in close coordination with both our customers and our partners.
Eric DeMarco: <unk> turbine technologies at our engine business is also generating record results, including having a record opportunity pipeline with hypersonic supersonic cruise missiles, loitering munitions drones and space systems, all being expected future growth areas.
Eric DeMarco: As a result of the investments we have made great OS is small low cost turbo jet engine facility in Michigan is now capable of producing approximately 10000 engines annually.
Eric DeMarco: We expect to receive engine production contracts for drones missiles, and loitering munitions programs next year.
Eric DeMarco: Additionally, we have now identified the site for an additional new small turbofan engine production facility, including as related to our partner GE aerospace for larger drones missiles air vehicles and systems.
Eric DeMarco: The demand for jet engines is rapidly growing and we expect small jet engines, including Kratos TDI Sparkman family of small, but mighty first to market Turbo jets that are in production and operational today to be a future growth catalyst and contributor for creators.
Eric DeMarco: <unk> is C. Five ISR business supports air Defense counter UAS radar missile and strategic programs, including Patriot integrated Battle command system or IPC S. Indirect fires enduring shield or if Pik short range Air defense, our shore Red Sentinel or <unk>.
Eric DeMarco: <unk> D.
Eric DeMarco: Fad or terminal.
Eric DeMarco: Altitude area defense and many others.
Eric DeMarco: Since our last quarterly report Kratos has received a new hypersonic system related program award, which is expected to be one of <unk> largest programs over its expected future a multi year period of performance.
Eric DeMarco: Additionally, we were just recently informed the credo has been down selected on another new major weapon system program hardware opportunity that we also hope to be successful on a 2025.
Eric DeMarco: <unk> New Sentinel program dedicated facility is planned to be operational mid to late next year and we expect the Sentinel program to be one of <unk> largest programs in future year growth contributors.
Eric DeMarco: Key Credo C five ISR partners and customers, including Northrop Grumman Lockheed Raytheon in light of those dynamics.
Eric DeMarco: <unk> rocket systems business also has several important growth related program areas.
Eric DeMarco: <unk> aegis hypersonic ballistic missile defense targets sub orbital vehicles strategic nuclear systems and space related systems.
Eric DeMarco: Expected future year growth contributors for Credo set our rocket system area include our first to market <unk> Dark Fury hypersonic glide vehicles the.
Eric DeMarco: The dark hypersonic system with our partner hypersonic <unk> are.
Eric DeMarco: Our first to market Zeus wanted Zeus, two solid rocket motor or SRM systems.
Eric DeMarco: In our Oreo Srs system and also the Terrier and target mission related systems with our government partners.
Eric DeMarco: Since our last quarterly report and as we announced today <unk> Zeus wanted Zeus two solid rocket motor stack successfully executed its initial flight.
Eric DeMarco: <unk> every mission objective with our government partner.
Speaker Change: Great Olson's Zeus is a recent example of the value of <unk> business model brings to every creative stakeholder with credo is making the internally funded investments to rapidly develop field and be first to market with affordable relevant systems for U S National security.
Speaker Change: We have also recently executed a contract related to certain other cradles flight vehicle system production and integration.
Speaker Change: <unk> up to 60 Credo solid rocket motors.
Speaker Change: These are different and in addition to Zeus.
Speaker Change: <unk> is expected future mission launch manifest continues to significantly grow for many different types of srm's ambitions.
Speaker Change: We are also now identified the site for <unk>, new large hypersonic system franchise production and integration facility.
Speaker Change: This will be located in the United States, which site, we expect to break ground on by the end of this year and to have operational capability in 2026.
Speaker Change: We expect Kratos as rocket systems, SRM and missile defense related systems business to be a future year over year growth contributor for Kratos.
Speaker Change: <unk> satellite business on the defense and National Security side is performing as expected and we received and are bidding on several new national security related opportunities, including where we believe that our first to market open space software is a clear competitive differentiator for creators.
Speaker Change: Additionally, Kratos is owned and operated space domain awareness system, where we provide and sell data and information to our partners and customers is performing well, including the announcement just yesterday by the customer of an approximate $48 million sole source award.
Speaker Change: We believe that Kratos has FDA system is well positioned to take advantage of the large number of satellites currently being and expect it to be placed into orbit.
Speaker Change: As was discussed on the Q2 call the commercial satellite industry and cradle since commercial satellite business.
Speaker Change: Tenuous to face disruption and challenges, including those directly related to the new software defined satellite system issues. The Oems are currently experiencing which are now well publicized and which are expected to continue for the foreseeable future.
Speaker Change: As a result of these industry related commercial satellite issues, we have been reallocating and are addressing our overall satellite business resources to ensure that we execute as efficiently and cost effectively as possible.
Speaker Change: Importantly, <unk> will continue to make targeted investments, including at our proprietary five G. Virtualized modem software satcom related and other products, where kratos is first to market and we have a substantial intellectual property position.
Speaker Change: In space and satellite communications Credo as has the customers.
Speaker Change: The total addressable market opportunity, both commercial and government is large and expected to rapidly grow and we expect future year organic revenue growth and margin expansion from the business.
Speaker Change: The global demand for Air Defense systems is driving demand for <unk> threat representative target drones, which are used to exercise and test. These systems out of their crews and we expect our target drone business to be a future grower.
Speaker Change: Since our last quarterly report the United States Marine Corps announced that Credo Valkyrie successfully completed a test flight on September 22024 at Eglin Air Force base in Florida.
Speaker Change: The flight was conducted in partnership with the office of the under Secretary of Defense for Research and Engineering, United States Navel Navy Air Warfare Center aircraft Division and other industry partners.
Speaker Change: Additionally, as reported in our 17 October Marine Corps press release Cradles.
Speaker Change: <unk> recent valkyrie flights with the Marine Corps in cooperation with the United States Air Force and out of United States Air Force base.
Speaker Change: The Valkyrie successfully demonstrated tactical data link integration and closure of the kill chain.
Speaker Change: The manned unmanned teaming concept with Valkyrie and they for ship of F. 35 bees was pushed even further than the recent emerald flag exercise.
Speaker Change: I refer you to the Marine Corps release for full details on photographs on this incredibly successful and relevant mission.
Speaker Change: This joint collaboration event as part of the penetrating affordable autonomous collaborative killer portfolio or Pac P program.
Speaker Change: As you can see creative Valkyrie continues to successfully fly evolve missionize with operational relevance with manned fifth generation on other aircraft and systems with multiple D O D customers and participants, including the Air Force.
Speaker Change: Also in our tactical drone business Kratos is Athena drone program is under contract and expected to contribute in Q4 and.
Speaker Change: 2025 and.
Speaker Change: And <unk> has been informed that our Apollo drone has been selected and we are in final contract documentation with the pollo expected to begin contributing in 2025.
Speaker Change: Both the Athena and Apollo opportunities have come in later in 2004 than we had initially forecast and as a result, the contributions from these programs will be less in Q4 than we had originally planned but the good news is we now have the both under contract or soon to be.
Speaker Change: On one of the Valkyrie opportunities, which we were in source selection on which is international we have been recently informed that we were successful.
Speaker Change: And I hope by our next report I can provide an additional update on the Valkyrie selection here.
Speaker Change: On the second Valkyrie opportunity I previously mentioned, we remain in source selection with the selection anticipated for Q1 next year.
Speaker Change: Additionally.
Speaker Change: There are also now two new tactical jet drone opportunities credo is evaluating for potential pursuit, one of which we have just recently submitted a response.
Speaker Change: Based on the recent events and communications, we remain confident that Kratos is valkyrie, the lowest cost most affordable runway flexible actual flying today, obviously, you've been flying since 2019 high performance jet powered tactical drone will successfully get to production.
Speaker Change: <unk> Ghost works has made rapid progress on the conventional takeoff and land Valkyrie capability, which development Credo says internally funding and which we expect to fly in the second half of 'twenty five.
Speaker Change: The complete Valkyrie system is a runway flexible runway independent system.
Speaker Change: We are also on track with our customer to fly a new fifth generation aerial drone in 2025.
Speaker Change: <unk> Ghost works has also made progress with our customer and integrating credo says jet engines into credo is tactical and target drones with initial flight of Kratos as jet engines in Kratos drones planned for the second half of 'twenty five.
Speaker Change: Great OS as 1000 spec Turbo jets part of our Spartan family of engines, which are manufactured in Michigan.
Speaker Change: Some of the highest performance per cost in the world being significantly lower in cost than anything else available in the industry.
Speaker Change: Of which there's very little.
Speaker Change: As is represented in my update we believe that the market momentum for low cost jet powered drone is increasing and that kratos, which currently manufactures approximately 165 jet drones annually and has approximately 10 different jet drones flying today is uniquely positioned to address and be successful.
Speaker Change: In this market now and today, not five or 10 years from now.
Speaker Change: Related to drone manufacturing capacity Kratos is currently positioned with the internally funded investments we have made and are making and along with our established and qualified vendor base supply chain and our existing facilities adoptions to.
Speaker Change: To quickly increased jet drone production to approximately 400 drones, a year, including Valkyrie when requested.
Speaker Change: We expect kratos as target drone business to be a contributor to <unk> future organic growth and we expect <unk> tactical drone business to potentially be transformational for credo business and our stakeholders in the future.
Speaker Change: As I mentioned as we look towards 2025, we remain confident in our long term base case, 10% organic revenue growth rate objective and forecast, which for 2025, we expect to provide the details on when we report Q4 after the new administration and.
Speaker Change: Congress is in place and hopefully when we have better clarity on the current continuing resolution authorization situation.
Speaker Change: We are internally focused on executing on our record backlog and opportunity pipeline with no significant acquisitions anticipated only potential small tuck ins.
Speaker Change: Operational challenges include obtaining retaining and the related cost of qualified personnel, which continues to be a headwind to certain of our operations and profit margins due to the increased personnel related costs and scarcity of resources.
Speaker Change: And also the current disruption in the commercial satellite industry.
Speaker Change: As we have previously discussed our base case forecast does not include any production orders for Kratos tactical drones.
Speaker Change: Only continued research development test and evaluation or our <unk>, our S&P science and technology of similar type sales.
Speaker Change: Irrespective of the administration and U S government funding timing issues with the current geopolitical landscape and the threat environment. We believe that we are in the early stages of our Reagan like defense buildup with increased U S and allies defense and National security budgets.
Speaker Change: For the foreseeable future.
Speaker Change: The scanner.
Speaker Change: Thank you Eric Good afternoon, as we have included a detailed summary of the third quarter financial performance as well as the initial fourth quarter, an affirmation of the full year 2024 financial guidance in the press release, we published earlier today I will focus on the highlights in my remarks today.
Speaker Change: Revenues for the third quarter with $275 9 million in our estimated range of $265 million to $280 million, which includes notable strength in organic revenue growth in virtually all of our businesses, including our unmanned systems turbine technologies microwave products C. Five ISR defense rocket support.
Speaker Change: And training solutions businesses.
Speaker Change: Offset by the expected industry related impacts from OEM delays in the manufacture and delivery of software defined satellite.
Speaker Change: Adjusted EBITDA for the third quarter of 24, with $24 6 million exceeding our estimated range of $20 million to $23 million, reflecting a more favorable mix of higher margin revenues offset partially by increased bid and proposal costs.
Speaker Change: Associated with the large potential opportunity.
Speaker Change: Unmanned systems organic revenue growth was eight 7% for the third quarter, including the impact of the Sierra Technical services or STS acquisition on a pro forma basis as if acquired at the beginning of 2023.
Speaker Change: Cash generated from operating activities was $6 1 million, which includes the impact of working capital requirements related to increases in prepaid assets, primarily resulting from deposits required for long lead motors and engines related to expected ramps in production as well as advanced payments required by <unk>.
Speaker Change: Key suppliers and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered.
Speaker Change: Once these motors and engines are completed and delivered to creators the related prepaid deposits will be transferred to our inventory balances. These prepaid assets or investments for inventory, we are making per programs either under contract or based upon customer indications of demand and future production and ore deliverables.
Speaker Change: Free cash flow used from operations was $9 2 million after funding capital expenditures of $15 3 million.
Speaker Change: As we planned we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products rocket system, and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing and related new machinery equipment and systems.
Speaker Change: We're also continuing to manufacturer the two production lots of Valkyrie is prior to contract award.
Speaker Change: Based on our current build and construction schedules approximately 10 million of capital expenditures that were initially expected to be incurred in 2024 are now expected to carry over into 2025. This is offset by the working capital usage related to increases in advanced payments and deposits required for long lead production.
Speaker Change: <unk> items, which has been more than $10 million for two programs in the first nine months of 2024.
Speaker Change: <unk> Dsos or days sales outstanding increased from 103 days in the second quarter to 105 days in the third quarter based upon milestone payment schedules.
Speaker Change: Our contract mix for the third quarter of 24 was 69% of revenues generated from fixed price contracts, 25% from cost type contracts and 6% related to time and material contracts.
Speaker Change: Revenues generated from contracts with the U S. Federal government during the third quarter of 24 were approximately 67%, including revenues generated from contracts with the Dod non Dod federal government agencies and Fms contracts.
Speaker Change: In the third quarter of 'twenty, we generated 12% of revenues from commercial customers and 21% from foreign customers.
Speaker Change: And operational priority remains hiring and retention and skilled technical labor across the company with total creators head count of 4047 at the end of the third quarter as compared to 4012 at the end of the second quarter and $39 86 at the end of the first quarter of 'twenty four.
Speaker Change: Now moving on to financial guidance, our financial guidance. We provided today includes our expectations and assumptions for our supply chain execution and for employee sourcing hiring retention and the related cost. We have also taken into consideration in our affirmed fiscal 'twenty guidance, a federal fiscal year 'twenty five.
Speaker Change: Continued continuing resolution or CR, a commencing on October <unk>, which it has and under such TRA No New program contract awards increases in existing production contract money and no transition from program development to production.
Speaker Change: Eric.
Thank you Deanna.
Speaker Change: And I'll turn it over to the moderator for questions.
Speaker Change: 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 towards the draw. Your question. Please press star one one again please.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Michael <unk> from <unk> Securities.
Speaker Change: Hey, good evening, guys nice results, thanks for taking the questions.
Speaker Change: Eric just a I mean, we've got no holidays and stuff you are not not a lot of time for the rest of the year, what what's the driver.
Speaker Change: A wide range for the fourth quarter, and then I guess just on the 25 initial outlook can you can you give us any color or.
Speaker Change: Maybe some detail by end market what are the leading growth engines.
Speaker Change: Kind of lagging.
Speaker Change: Yes, Sir Hey, Mike So on the on the range in the fourth quarter every year.
Speaker Change: It starts around September 30, with the government fiscal year end.
Speaker Change: There is a leap up money.
Speaker Change: And a lot of customers have some money that they are they.
Speaker Change: They have some priorities are and this is in particular in our space and satellite business and data purchases, including off of our space domain awareness network.
Speaker Change: Which we've seen.
Speaker Change: Virtually every year for the past several years.
Speaker Change: And it's very possible that we're going to get several of those this year and we just can't plan on them. They can come with one week notice. That's the biggest driver on the range are these data sales office space demand awareness network.
Okay got it that's a big eclipsed that one on.
Speaker Change: The other one.
Speaker Change: The big drivers.
Speaker Change: Corn for next year.
Speaker Change: Alright.
Speaker Change: Number one it's got to be the air Defense system work that's going on.
Speaker Change: Yes. It is.
Speaker Change: Incredible I went through some of the air Defense just some of the air defense systems, rather than these raw counter UAS systems. These are big big hardware programs.
Speaker Change: That's really going to be a a a driver for us.
Speaker Change: X one Mike and I can't emphasize how important.
Speaker Change: Zeus was.
Speaker Change: This this is a major catalyst for kratos.
Speaker Change: Our our solid rocket motor launch business.
Speaker Change: Next year.
Speaker Change: He is going to be it's forecast to be several tens of millions of dollars of greater.
Speaker Change: Then it was in 2024.
Speaker Change: And then again in 2026.
Speaker Change: I think it's going to be several tens of billions of dollars greater than its got to be in 2025 based on the launch manifest we're looking at it's that significant.
Speaker Change: Okay.
Speaker Change: The third one is.
Speaker Change: This engine and propulsion systems.
Speaker Change: US being first to market with this engine technology, where we're designed in and we're actually fly.
Speaker Change: Is turning out to be a big winner for US, which is why we spent the money to get.
Speaker Change: Turbo jet production facility ready to go up to 10000 units.
Italy, and where where we've identified the location for the turbofan the bigger jet engine, one with our partner GE K. Those are the big catalysts that we have high confidence that just based on what we've got.
Speaker Change: Got it and then just just a bigger picture question you mentioned the Reagan like buildup, obviously, it's super early days here post election, I mean, if Moscow serious about getting government spending how do you think this plays out for for defense. He's obviously got the track record with <unk>.
Speaker Change: <unk> does this put you know the <unk>.
Speaker Change: Old defense scored at risk does it favor new startups like you know I know youre working with Bill pay lower enduro, and where does that leave you guys.
Speaker Change: Yeah.
Speaker Change: I think that for non traditional like gray dose.
And are all <unk>.
Speaker Change: Sealed.
Speaker Change: Blue Halo I can go on and on.
Speaker Change: I don't see a better setup for guys like us are the ones that I just named if you recall a couple or three years ago at an Air Force Conference Mr. Musk.
Speaker Change: Actually said I envision a future five years from now.
Speaker Change: Our jet drones are going to start replacing the manned aircraft.
Speaker Change: And he's also looking laser focused on affordability and getting more for your money.
Speaker Change: <unk> is as everyone knows that's what credo has done with the drones and the hypersonic X and the solid rocket motors.
Speaker Change: Sure.
Speaker Change: This at worst this was neutral but most likely this is gonna be a very big benefit for the new entrants in the non traditional like write offs.
Speaker Change: Got it perfect I'll jump back in the queue. Thanks, guys. Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Peter Arment from Baird.
Peter Arment: Yes. Thanks.
Peter Arment: Eric and Deanna.
Peter Arment: Later.
Peter Arment: Eric.
Speaker Change: It's the first time I think I've ever heard you talk about foreign source selection when you're talking about.
Speaker Change: You know for for your tactical drone business.
Speaker Change: Firm commitment from the customer or do you know the potential quantity any more color on that that would be helpful.
Peter Arment: Yeah. So one of the reasons I mentioned that today Peter.
Peter Arment: Is it possible in the next few months not by us, but but because of the nature of this it could become public.
Peter Arment: And I wanted I wanted I wanted to make sure you all at least four informed all of us.
Peter Arment: Hi.
Peter Arment: I can't say I can't say a lot I can't get ahead of myself on this but if you recall on the last earnings call I made some comments on one or two of these new opportunities. We're pursuing as a result of them. We were we were aligning up our.
Peter Arment: Supply chain for a third lot of 12 Valkyrie.
Well this ties into this.
Peter Arment: And so where we're cautiously optimistic we have been down selected we've we're getting we're getting there.
Peter Arment: That's all I want to say and we have not included any of any of this.
Peter Arment: In 2025.
Peter Arment: And so God willing if it comes through this this could be a big binary for us.
Speaker Change: Great and then on your.
Speaker Change: You've given us a lot of embracing this release regarding you know kind of the where all the growth can come from in terms of capacity growth in drones and engines on the on the drone side the tactical drone, while I get the fire jet.
Theres opportunities with the Navy on the tactical side can you give any more color there on how that's progressing.
Speaker Change: [laughter].
Speaker Change: Yeah.
Speaker Change: Apollo and Athene.
Speaker Change: Our very very relevant.
Speaker Change: Relative to tactical drones.
Speaker Change: One of them relevant to a lot of air force customer.
Speaker Change: The.
Speaker Change: I have to choose my words carefully here.
Speaker Change: We are we continue to make I don't talk about a lot because I can't we continue to make progress with air Wolf.
Speaker Change: Including internationally the tactical fire jet.
Speaker Change: And one of the primary reasons for that is because it's a.
Speaker Change: Valerie can go several thousand miles.
Speaker Change: Tactical fighter jet cannot.
Speaker Change: And so from political and policy purposes, it's more palatable.
Speaker Change: And what of these jet drones that are engines are going to be in flying it's gotta be tactical via chat next year, which is significantly increasing performance and the electrical area for certain sub systems that are going to be very relevant.
Speaker Change: That ties into your question I can't be more direct than that.
Speaker Change: Got it Yeah, and then just lastly, you mentioned.
Speaker Change: The turbo jet development.
Speaker Change: And it sounds like the outlook there certainly the capacities in place how do you how do you anticipate kind of.
Speaker Change: Production ramping up now that you've kind of made that significant investment there.
Speaker Change: Yeah.
Speaker Change: So I think that probably in the first quarter note first half the continuing resolution is directly impacting a couple of three of these programs.
Speaker Change: They have kept the money because it is in the 2025 budget, we're going to get we're going to get some initial L. Rep orders.
Speaker Change: Okay.
Speaker Change: And.
Speaker Change: Waived late next year or second half next year, we could get a couple more L rep orders.
Speaker Change: Based on what you know we're designed in on these systems based on what it looks like we have a new president now.
Speaker Change: He's going to have a lot of sag in the 2026.
Speaker Change: Budget request, so assuming there aren't any draconian changes there, which I don't believe there will be 2026 could be a breakout year for us.
Speaker Change: And the small jet engine production.
Eric DeMarco: Got it I'll jump back in queue. Thanks, Eric.
Eric DeMarco: Okay. Thanks.
Speaker Change: Thank you one moment for next question.
Speaker Change: Our next question comes from the line of Ken Herbert from RBC capital markets L. L C.
Ken Herbert: Hey, good afternoon, Eric and Deanna.
Speaker Change: Hey, Kevin good afternoon.
Yeah, Hey, Eric you know you.
Speaker Change: We've obviously got a new administration coming in as we think about.
Speaker Change: Where we see some leadership changes in Congress and what would likely be.
Speaker Change: Greater sort of a greater push for higher defense spending.
Speaker Change: I know, it's obviously early and it sounds like Youre alluding to this in 25 is probably not where we necessarily see this relative to 26 and beyond.
Speaker Change: But are you prepared now to think about it if we're in a situation where we do see call. It sort of mid single digit real growth in at least U S defense spending.
Speaker Change: That means to your long term, 10% top line outlook that you've been referring to over the last several years.
Speaker Change: Yep.
Speaker Change: So.
Speaker Change: Senator Wicker.
Speaker Change: Mississippi very well may be the.
Speaker Change: The chairman of this out of our services Committee.
Speaker Change: And that that gentleman is a 100% patriot through and through.
Speaker Change: And if you're a Google and you can probably see one trillion dollar defense budgets under Wicker I know he was looking for that recently.
Speaker Change: Which are needed because of the threat profile.
Speaker Change: And I can go down the list on what the what the the what people are speculative people are speculating or are going to have some of these important roles.
Speaker Change: It looks like for <unk> for United States National Security, It's gonna be a grand Slam, which we need right now for the country's sake.
Speaker Change: Now, having said that affordability is going to be very very important.
Speaker Change: Theres, just going to be irrespective of defense budgets go up to 950 or or or Trillium.
Speaker Change:
Speaker Change: Again, I'm, the CEO I drank the Kool aid.
Speaker Change: But based on the programs we've won the ones that we're gonna win in the next six next six months, we know we're going to win we have been told.
Speaker Change: And based on the opportunity pipeline.
Speaker Change: Sure.
Speaker Change: Strategic systems nuclear system their defense systems, where we're basically sole source.
Speaker Change: This is one of the reasons I mentioned that probably 26, we're going to take up our 10% year over year growth number.
Speaker Change: We're going to.
Speaker Change: I don't believe it's got to be lack of winning the work.
Speaker Change: The constraint or the restraint. We're gonna have is getting the qualified people primarily manufacturing people, including those that can get security clearances.
Speaker Change: As you can imagine with whats going on in the industry. These people are in incredible demand right now.
Speaker Change: All of us.
Speaker Change: And and that's gonna be it.
Speaker Change: That's why I made the comments on we're looking to potentially take it up in 26 because of what you just alluded to.
Speaker Change: Okay, and if I could it looks like in terms of profitability within the unmanned segment.
Speaker Change: This year on an EBIT level, you probably end the year in low single digits in terms of margin.
Speaker Change: You're outlining again significant investments within that segment to support obviously the plant growth do we see or should we expect much margin expansion within the unmanned segment in 2025, I'm, sorry, or can you provide just some commentary around that.
Speaker Change: Obviously, I don't want to get ahead of ourselves since we're not giving guidance yet Ken but we would expect to see some margin expansion just with the leverage off of our fixed infrastructure as we move also up does it move up production and.
Speaker Change: Move from development into production. So we would expect to see some expansion.
Speaker Change: Perfect. Thanks, Deanna I'll pass it back thanks, Thanks, Ken.
Speaker Change: Thank you one moment far next question.
Speaker Change: Our next question comes from the line of Mike Crawford from B Riley Securities.
Mike Crawford: Thank you given the increasing proliferation of space based architectures could you could you give us a sense of what.
Mike Crawford: Your.
Speaker Change: Satellite business historically has looked like broken down between Leo and Geo, maybe historically today and where we are.
That might be in the future.
Speaker Change: Yep. So the satellite business heretofore has been substantially GL focused.
Speaker Change: Which heretofore the vast majority of the vast number of satellites that went up.
Speaker Change: 22500 miles up than they were in geosynchronous orbit.
Speaker Change: That was before Elon and that was before.
Speaker Change: Antisatellite weapons that Russia, and China have.
Speaker Change: Now, we're going to distributed constellations in Leo and MEO orbit that kind of that can be kind of sort of augmented by GL, but the vast number of satellites that are going up.
Speaker Change: Got one up until here and then we can get we can get into visa, but if they're over the ocean. They can't communicate unless they have they have their own laser cross links et cetera. So we continue to be as of right now because of the legacy systems and the software defined satellites at Airbus in towers, and Boeing are putting up.
Speaker Change: Our business is predominantly still geo, but because the market, especially in the tracking network areas.
Speaker Change: Have been moving to distributed Leos, we are moving there with them, we're moving right along with them. So expect our mix to continue to move more and more away from the G O to the Leo and MEO as a result of the systems that are going up.
Speaker Change: And then thank you Eric and then just related the single award 100 million plus based opportunity that could it could expand from there.
Speaker Change: Can you say, whether that's commercial or sovereign.
Speaker Change: It's not commercial.
Okay.
Speaker Change: And then.
Separately.
Speaker Change: The successful do you want to exercise and the Air Force base and more fun and we know <unk> is a key.
Speaker Change: Customer.
Speaker Change: But I mean, the air force I mean, they're there and they joined exercise and they have the CCA program, where now it sounds it looks like exquisite never going to go into.
Speaker Change: Production, but it's unclear whether the next increment is going to be for more attributable.
Speaker Change: Kraft or is it something that's more related to counter UAS are or can be not comment on that either.
Mike Crawford: My my opinion on this Mike.
Speaker Change: Is.
Speaker Change: The United States Air Force responsibilities are massive and they're increasing.
Speaker Change: There are just massive what they're responsible for.
Speaker Change: And and.
Speaker Change: The there their resources.
Speaker Change: <unk> financial that otherwise are not adequate for them because of these massive responsibilities.
Speaker Change: And so that they in my opinion, the Air Force very smart they are going to be looking for areas, where they could augment systems.
Speaker Change: With lower cost systems that may not be exquisite, but theyre very very capable very capable.
Speaker Change: And I believe credo 12 credo drones.
Speaker Change: Runway capable.
Speaker Change: Runway independent et cetera.
Speaker Change: I sincerely believe we're gonna be part of helping the air force solve their drone.
Speaker Change: Issues from a resourcing standpoint, I believe that.
Speaker Change: And I'll leave it at that.
Speaker Change: Okay. Thank you.
Yep.
Speaker Change: Thank you one moment for next question.
Speaker Change: Our next question comes from the line of Seth <unk> from J P. Morgan.
Speaker Change: Hey, thanks, very much and good afternoon.
Speaker Change: Hi, Seth.
Speaker Change: Hi.
Speaker Change: Apologies if I if I missed it is there.
Speaker Change: Is there any update on <unk>.
Speaker Change: Prometheus.
Speaker Change: Yeah.
Speaker Change: Smiling.
Speaker Change: We are the last time, we talked I said, we were in the Red zone.
Speaker Change: We are on the five yard line.
Speaker Change: I.
Speaker Change: I truly believe.
Speaker Change: That at our next earnings report.
Speaker Change: If not sooner independently because of the significance of.
Speaker Change: Of this to Kratos.
Speaker Change: In the United States Industrial base.
Speaker Change: That we're gonna be able to announce something either we got it in the end zone or.
Speaker Change: Or otherwise I believe we're going to get it in the end zone.
Speaker Change: This this this could be one of the biggest catalyst.
Speaker Change: Four credo as ever.
Speaker Change: So where all that.
Speaker Change: Sorry.
Speaker Change: So we're almost there, but I don't want to Jinx cinema.
Speaker Change: Of course of course and.
Speaker Change: Is that when you think about that kind of 10% next year and.
Speaker Change: What we discussed a little bit earlier about the the drivers of that.
Speaker Change: Is that something that were there.
Speaker Change: Is not factored in and maybe there's upside related to that.
Speaker Change: It is factored at zero this is so.
Speaker Change: Difficult.
To future years.
Speaker Change: So by Mary.
Speaker Change: Not factoring it at all zero it is zero and our forecasts.
Speaker Change: Okay. Okay got it got it and then maybe just a follow up I feel like I should know this but when we think about the.
Speaker Change: Producing at the scale of that.
The turbines that you are talking about what would be the primary.
Speaker Change: Destination for kind of for that level of production or the kind of top groups out of.
Speaker Change: Programs that would be the customers for that scale of production.
Speaker Change: Low cost cruise missiles.
Speaker Change: Okay.
Speaker Change: There are.
Speaker Change: A handful or two of brand new low cost cruise missile or similar programs that are underway.
Speaker Change: There are underway.
Speaker Change: They're happening theres not a lot of publicity on them, but they are happening.
Speaker Change: And these are orders of magnitude less orders and orders of magnitude less costly than existing exquisite cruise missiles.
Speaker Change: This is clearly.
Affordability quantity of affordable mass at the military several branches are looking at and they're doing this is going to happen. This is happening.
Speaker Change: So it's a it's low cost cruise missiles, why we built this family of engines specifically for this application because we saw it coming.
Speaker Change: Okay.
Speaker Change: Excellent thanks very much.
Speaker Change: Yep.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Sheila <unk> from Jefferies.
Speaker Change: Hi, guys Conor on here for Sheila Thanks, So much for taking my question.
Speaker Change: Your commentary around the hypersonic pursuits is clearly very positive I think you've previously called out it could be a $1 billion opportunity over the next five years could you just give us an update on where the broader hypersonic business stands today and how you think about that trajectory.
Speaker Change: Yeah, Okay. So we create us as legacy in the hypersonic area is significant.
Speaker Change: We're all getting some programs high fire.
Speaker Change: Hi cause fast.
Speaker Change: Those were credits launch systems and create a force involved in those.
Speaker Change: As you May have saw last year, France launched a hypersonic glider cradles launched it for credo system.
Speaker Change: Here to four Oh, and also our ballistic missile targets ballistic missile reentry vehicles. They routinely go over Mach five 5000 about 75000 miles an hour so they're hypersonic.
Speaker Change: So we're an expert in the field, we just don't propagate it a lot.
Speaker Change: Our sweet spot.
Speaker Change: And drove right now contractually its target drones.
Speaker Change: Solid rocket motors, it's bullish stick missile targets and so one would think that where would we be we would be at hypersonic targets. We would be at a hypersonic test vehicles, we would be and things like that right now as we speak.
Speaker Change: And also similar to what we've done with the target drones, where we've now we.
Speaker Change: Transit transitioned.
Speaker Change: Our method of tactical.
Speaker Change: We also are very well may take a look at that.
In the hypersonic area.
Speaker Change: We can do things orders of magnitude less costly and faster than anybody else out there.
Speaker Change: Got it that's very helpful. Maybe for my second one just to look at the microelectronics business and a little bit more detail. It's clearly been a strong driver for you guys. This year given the demand in the region with all of that capacity coming online next year any way you can frame the growth opportunity for 2025 and beyond.
Speaker Change: This this business.
Speaker Change: Should okay should be a 15% to 20% grower.
Speaker Change: If not more for the foreseeable future to replenish the stocks the inventories that have been expanded over the last 13 months.
Speaker Change: And then in addition to that I mentioned the facility, we're standing up in India with partners with customers. This is not a bit we don't build it and they will come.
Speaker Change: We have programs.
Speaker Change: You know because of everything that's going on in Russia, and the Ukraine, and what's going on with Israel at our Boston is bola.
Speaker Change: India is not talk a lot about relative to China.
Speaker Change: What's going on relative to rearming there we are embedded in there and we see the opportunity there and that could be the next step function for us and a couple of years as we get online supporting them.
Speaker Change: Perfect. Thanks, so much.
Speaker Change: Yep.
Speaker Change: 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 toward the draw. Your question. Please press star one one again.
Speaker Change: Our next question comes from the line of Andre My Dream from B T I G.
Speaker Change: Eric Deanna thanks for the time.
Speaker Change: I wanted to talk on Labor I know you guys have side of this in the past as kind of being a hurdle to really be able to scale. The propulsion business, especially at <unk> can you highlight any progress on recruiting and retaining talent.
Speaker Change: [noise] Si.
Speaker Change: We have dozens and dozens of open racks right now, especially on the turbo machinery area.
Speaker Change: Okay.
Speaker Change: And as we've talked about before the competition is not just only our traditional aerospace guys.
Speaker Change: But if these new space companies like Spacex and and.
Speaker Change: And others. So I mean it just this is business.
Speaker Change: We make progress.
Speaker Change: But as we talk about it's costly.
Speaker Change: Good for the people you know good for <unk>, good for them, but it's costly.
Speaker Change: So it's it's challenging it's remaining challenging we are about I didn't talk about this in our prepared remarks, I believe we're going to receive another very large.
Speaker Change: Propulsion system contract on the military side, that's got to get going in January for us, it's not under contract yet, but it's coming and we're gonna be sole source.
And we're going to we're going to get it staffed but the margins won't be as strong as we thought because we're gonna have to pay to get these experts and what we're gonna need like 50 of them to do this new program. So it's hard.
Speaker Change: That's fair no I.
Speaker Change: Totally a feel for you there.
Speaker Change: Pretty industry wide, but.
Speaker Change: I guess pivoting again, I know somebody had mentioned it on the space side I wanted to drill in looking at more at Bu level space training and cyber security, it's pretty broad, but it seems like what's happening on the commercial space front as you know when you think about contract mix. It seems like this is a bigger one I mean <unk>.
Speaker Change: Considering the breadth of that portfolio you know it is the largest set of Oh.
Speaker Change: On a btu basis of the entire company what opportunities are there to kind of offset and expand into other areas be it defense be at Ciber.
Speaker Change: Yep, so something I I.
Speaker Change: I haven't talked about for the past several quarters in detail.
Speaker Change: As our training business.
Speaker Change: Training systems.
Speaker Change: And these are these are virtualized training systems. These are augmented reality training system. Then it's also hardware training systems. So for example, we are where we are involved with the M. One tank you can imagine what's going on with that word when we do the Bradley you can imagine what's going on with that we do multiple helicopters.
Speaker Change: As the weapon systems.
Speaker Change: Our are being produced including as Theyre going internationally training systems. The demand today is probably better in this area that are spent in last 10 years no kidding.
We have out there.
Speaker Change: Two or three bids right now and we got another one we're getting ready to submit.
Speaker Change: Where our training business could.
Speaker Change: Could literally double in size over the next two years.
Speaker Change: Literally.
Speaker Change: You know it could go 40 to 80 and medical go no kidding, if we hit two of these one or two if we hit one of them.
Speaker Change: It could go $40 to $80 150.
Speaker Change: And so those are heavily factored.
Speaker Change: But the training area, where we're only one of one of two or three guys that can do this.
Speaker Change: You're going to you're gonna be hearing us talk more and more about this next year, because it's got to be a major contributor to us and it's got offset what's going on back of that commercial space side.
Eric DeMarco: Awesome looking forward to hearing about it thanks Eric.
Speaker Change: You got it.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Joe Gomes from Noble capital.
Speaker Change: Okay.
Joe Gomes: Good afternoon, and thanks for taking my questions.
Joe Gomes: Joe Hi, Joe.
Eric DeMarco: Eric I wanted to see if maybe you could talk a little bit about the international target drone opportunity I haven't heard a whole lot about that lately, what if anything is going on there that could be exciting for the company.
Speaker Change: Yeah, So back to Air Defense systems, you read about the U S allies NATO other allies acquiring air Defense systems.
Speaker Change: Thanks, Thanks systems like Patriot or shore at even the old Hawk systems that are out there and I can go on and they all need to be exercised in addition to that international customers are now taken F 30 fives.
Speaker Change: Those systems those air to air missiles need to be exercised.
Our international.
Speaker Change: Our target drone business is experiencing very significant growth, but it's a small piece because you know the biggest target drone guys in the world of U S. Navy U S Air Force the Western Army, Okay. So, it's like $20 million a year.
Speaker Change: But it's growing very significantly here's the important part because their international the margins are much much higher than with the U S government.
Speaker Change: And so I would expect for the next <unk>.
Speaker Change: Several years and you follow the Air Defense systems, followed the F 30, fives, where theyre going those other countries that are buying our target drones and very importantly, they have to put the infrastructure and to launch them to fly them to recover them. It's the razor and Razorblade then they get the target drones, they shoot them down.
Speaker Change: And we shipped them more.
Speaker Change: And so it's a.
Speaker Change: It will be one of our strongest growers for the foreseeable future for the reasons I just explained.
Speaker Change: Okay. Thanks for that and one other one I'm going to kind of switch gears away from all of the military and you know one of the items, we've talked a little bit about in the past your driver.
Speaker Change: Vehicle solutions.
Speaker Change: And just wondering what is going on in that sector. These days.
Speaker Change: It's.
Speaker Change: Small I'm smiling, it's doing it's doing great. The the trucking shortage the dry hang shortage I've learned more about this in the past several years is acute that's expanding.
Speaker Change: Over the next few years like $1 million Tuck truck drivers are retiring and they're not going to be replaced.
Speaker Change: So we continue to make incredible progress sales revenue.
Speaker Change: <unk>.
Speaker Change: Sugar beets.
Speaker Change: Soybeans.
Speaker Change: Our minerals these are on big Agra complexes.
Speaker Change: In states on state roads, where we have unmanned vehicles driving it's it's incredible and our differentiator here.
As we you know we we developed as for tax we have a kit.
Speaker Change: We put into a truck and we turned it into a robot.
Speaker Change: So it's very cheap very low cost and thats, our ankle because we're not going to compete against guys that are building unmanned cars. So this business will probably be.
Speaker Change: Materially financially positive for us in other words big enough for us to start talking about in 'twenty six.
Speaker Change: You know it's growing it's a few several millions of dollars in revenue right now very profitable.
Speaker Change: And it's it's scaling I don't talk about it much because it just hasn't been significant to the whole thing 26, its probably going to be to a point, where we're gonna be talking with you about it routinely because it's gotta be it could be in the tens of millions.
Speaker Change: Great look forward to it thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Pete Skibinski from Alembic Global.
Speaker Change: Hey, good afternoon, Eric and Deanna.
Speaker Change: Hi, Good afternoon, Hey, Eric I just wanted to.
Speaker Change: See if we can kind of wrap our hands around this commercial space area, just a little bit more.
Down a chunk this quarter I was just wondering what is it down year to date, what's your expectation for the full year and sort of when do you think it will bottom.
Speaker Change: Yeah.
Peter Arment: Peter I'm glad you asked the question because it's Gotta give me an opportunity to highlight how strong the rest of the company is doing.
Peter Arment: It's going to be down this year on the commercial satellite side $30 million to $35 million in revenue.
Peter Arment: Down.
Peter Arment: Because the operators are not taken receipt of the satellites from we know who these guys are which means they are delaying the ground equipment deployment, which contracts we've already won.
Peter Arment: So, it's down 30, or 35% and think about it.
Peter Arment: The rest of the business has completely offset it so.
Peter Arment: So.
Peter Arment: It shows you that if this had not happened with the software defined satellites.
We will we would be blowing every financial metric away blowing it away.
Peter Arment: And which is why I'm. So confident next year, we're going to do so so good.
Peter Arment: Is because because.
Peter Arment: At worst that business is going to have stabilized.
Peter Arment: I actually think it's going to start going up again, I don't want to get into the details on that right now.
Speaker Change: And every other business is deanna and I have talked about today is it's either at or near record backlog and record opportunity pipelines.
Speaker Change: So thank you for asking that question yeah.
Yeah, Yeah, I mean, it was down.
Speaker Change: $24 million this corner and I thought it was done previously as well.
Speaker Change: That would seem to indicate it's already bought them there maybe bought them this quarter and there is not really further meaningful headwind added.
Speaker Change: I think that's fair okay, Okay, yeah yeah.
Speaker Change: Sorry, if I missed this but the revenue guidance for kgs for this year is it still 860 to 875.
Speaker Change: That's correct Peter.
Speaker Change: Okay sounds great. Thanks, so much guys.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: This time I would now like to turn the conference back over to Eric Demarco for closing remarks.
Alright. Thanks. Thank you all for joining us and we will our next plan chat will be when we report Q4 at the end of <unk>.
Speaker Change: February and that's when we'll put the meat on the bone on the financial guidance. Thank you.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Okay.
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