Q1 2025 Kratos Defense and Security Solutions Inc Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Kratos Defense and Security First Quarter 2025 earnings conference call.
At this time, all participants are in a listen, only mood.
Speaker Change: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again! You'll need to press star 2-1 again!
Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand the conference over to Marie Mendoza, Senior Vice President and General Counsel. Please go ahead. Thank you. Good afternoon, everyone. Thank you for joining us for the Chris Defense and Security Solutions' first quarter 2025 conference call.
Speaker Change: With me today is Eric DeMarco, Kratos' President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer.
Speaker Change: Before we begin the substance of today's call, I'd like everyone to please take note of a safe harbor pair graph that is included at the end of today's press release.
Speaker Change: This paragraph emphasizes the major insurgencies and risks inherent in the forward looking statements we will make this afternoon.
Speaker Change: Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance and other forward-looking statements during today's call.
Speaker Change: Today's call will also include a discussion of non-GAAP financial measures as that term is defined in regulation G.
Speaker Change: non-GAAP financial measures should not be considered in isolation from or in the substitute for financial information presented in compliance with GAAP.
Speaker Change: Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial result prepared in accordance with Gap's [inaudible]
Speaker Change: that I will now turn the call over to Eric. Thank you, Marie. Good afternoon.
Eric DeMarco: Both the industry and Kratos have received a significant amount of positive news since our last report to you, increasing our confidence for 2025, 2026, and the future.
Eric DeMarco: The Defense and National Security funding and priorities environment has become much clearer, including a full-year government fiscal 2025 CRA and funding now being in place.
Eric DeMarco: A potential additional 150 billion defense-related reconciliation bill progressing and the potential for a $1 trillion 2026 U.S. National Security budget.
Eric DeMarco: All increasing our confidence in Kratos' 2025 and 2026 full-year financial forecasts, including approximately 10% 2025 and 13% to 15% 2026 year-over-year organic revenue growth.
Eric DeMarco: Further supporting both our 25 and future organic growth outlook confidence, Kratos Q1 book to bill ratio was 1.2 to 1.
Eric DeMarco: and Kratos' last 12 months' book to build a ratio was also 1.2 to 1.
Eric DeMarco: and even after all of these Q1 bookings and LTM bookings and conversion from opportunities to backlog, Kratos' opportunity pipeline stands at approximately 12.6 billion and all-time high for the company.
Eric DeMarco: This is representative of the large and increasing number of opportunities that continue to be available to and that are approaching Kratos from both our customers and our partners, which is accelerating.
Eric DeMarco: It appears that certain of Kratos' customers have made the decision to go with smaller technology-based companies like Kratos, including in the prime position on large programs if we are a viable, capable, incredible alternative to a traditional approach.
Eric DeMarco: Additionally, as related to government fiscal realities, it appears that companies like Kratos have made the upfront investment and have real working relevant products and systems.
Eric DeMarco: that certain customers will procure those existing products rather than incur millions or billions in customer-funded R&D over extended periods of time for the so-called maybe Sunday perfect system.
Eric DeMarco: We are also seeing this congressionally where the questions are now being asked if we have something that is working production-ready and good enough, why should we be funding this new program
Eric DeMarco: We are seeing this trend and it appears to be accelerating which may and part also be related to certain aspects of executive orders the president has signed and possibly even doge [inaudible]
Eric DeMarco: We're inefficiency and waste is being targeted. For example, if something already exists and is working or flying, why are we spending tons of money to recreate the wheel?
Eric DeMarco: including International and in the drone area which has increased our bid proposal and related efforts in Q2 and we expect to hear on certain of these opportunities later this year.
and also related to recent events.
Kratos being a military-grade hardware and software company
Eric DeMarco: with substantially all our vendor-based and supply chain being US-located and sourced. We expect little impact from existing or any currently contemplative tariffs.
Eric DeMarco: Integrated Air and Missile Defense and Counter UAS are areas where Kratos is an acknowledged industry leader and where we are seeing substantial new and increased opportunities across our entire company including system hardware, microwave electronics for missiles radars and counter UAS systems.
Eric DeMarco: target drones to test, exercise and train the war fighters on these systems, space and satellite systems related to tracking, and hypersonic and related propulsion systems.
Eric DeMarco: Air Defense is also an area where Kratos is uniquely qualified to support the new Golden Dolem opportunity.
Eric DeMarco: Importantly, just under 20% of the DOD's $150 billion reconciliation bill is focused on integrated air and missile defense.
Eric DeMarco: which has expected to add to this already large and growing market opportunity for Kratos and approximately 27 billion is just the initial proposed funding for Golden Dome.
Eric DeMarco: Expected near and mid-term future growth areas for Kratos also include our hypersonic franchise, jet drones, jet engines and propulsion systems for missiles and drones, microwave electronics and C5 ISR systems for missiles, radar and counter UAS systems.
Eric DeMarco: Expected mid and longer-term growth areas include the Golden Dome Initiative, Strategic Systems and our Prometheus, Anaconda, Helios, Vulcan, Aries and other initiatives, the majority of which are with customers, or partners, and are not, build it and hope they'll come.
Eric DeMarco: on Prometheus. We are progressing on schedule with our outstanding partner, Raphael.
Eric DeMarco: and also with potential third party customers with the opportunity, including Rafael's intention for tens of thousands of SRMs and energetics to be manufactured for Rafael by Prometheus, increasing since our last report to you.
Eric DeMarco: Anaconda and Helios are each initial multi-hundred million dollar single award opportunities for Kratos and both of which we now believe Kratos is in the lead position to be successful on with notification potentially by the end of this year.
Eric DeMarco: Accordingly, we have now down-selected the site location for Anaconda and we are working through the site location process for Helios assuming ultimately we are successful.
Eric DeMarco: Vulkan is also progressing, including with our partner, and I hope to be able to share additional information on each of these with you in the fourth quarter.
Kratos is affordable hypersonic franchise.
including our first-to-market operational and in-production Zeus hypersonic rocket motors.
Eric DeMarco: and our first-to-market operational and in-production arenis and dark fury hypersonic flyers are also expected to be key contributors to Kratos' future financial performance.
Eric DeMarco: Kratos' hypersonic franchise includes certain of the highest performance hypersonic systems and vehicles of their type, inexistence, flying today at a fraction of the cost of any other systems that we are aware of that are actually available flying products for relevant
and not just a concept or a PowerPoint. [inaudible]
Eric DeMarco: Accordingly, I am reporting today that Kratos' dark fury hypersonic vehicle has successfully flown its initial mission at hypersonic speed, achieving all expectations under a customer
Eric DeMarco: Dark Fury is truly an incredible system, including its speed, range and precision characteristics and at its extremely low cost point, which is positioning Kratos, similar to Kratos' Jet Drone family to provide affordable math and quantities.
We now have an order.
Eric DeMarco: We now have on-order long leads for several erroneous and dark furies and approximately 70 SRMs, including Zoops related to upcoming and expected hypersonic related and other missions.
Eric DeMarco: substantially all of which are targeted to a specific customer or program.
Eric DeMarco: Kratos' air gap, hypersonic development team Aerobus, is now focused on Kratos' fury's family of a new low-cost hypersonic systems, including additional low-cost flight vehicles and drones for certain relevant mission profiles we are targeting, including, of course, in coordination with certain customers.
Eric DeMarco: The newest of these flight vehicles of Kratos' Fury's family is under the project ARIES which is now in development and similar to Kratos' aeronies and dark fury we expect our ARIES system to be first to initial flight and to market. The next flight is now in development and similar to Kratos' aeronies and dark fury.
Eric DeMarco: We expect our forecasting Kratos' company-wide hypersonic franchise to be one of our fastest growers, including certain of our highest margins for the foreseeable future.
Eric DeMarco: Kratos' target journal business is performing as expected, including with our U.S. Air Force Navy and Army customers, and also with our international customers.
Eric DeMarco: with demand for target drones directly related to the increased global demand for air defense, counter UAS, missile radar tracking and other systems.
Eric DeMarco: All of which need to be exercised, tested and the respected operators trained.
Eric DeMarco: Kratos' tactical drone business is also tracking as expected, including Valkyrie, Thanatos, and our Apollo, Athena, and other programs.
Kratos' decision to make the internal investments.
including beginning serial production of 24 Valkyries.
Eric DeMarco: Prior to contract award has been invaluable for our company and even though the details are not able to be publicly disclosed, Kratos' valkyrie continues to routinely fly with multiple customers, expanding mission capabilities and other criteria as we progress towards hope for production.
Eric DeMarco: Importantly, Valkyrie customers and partners can come to Kratos' factory, walk the manufacturing floor.
Eric DeMarco: See their respective tail numbers in production, see the actual costs for their jet drone system, take the delivery fly and operate the system.
Eric DeMarco: Kratos, the tactical jet drone customers don't have to imagine anything from power points or idle robots sitting around an idle factory.
Eric DeMarco: We recently unveiled the version of our Valkyrie featuring internal landing gear with our Valkyrie family's objective to provide runway flexibility and runway independence to our customers.
Eric DeMarco: With the Valkyrie, you can do rocket launch for complete runway independence where fixed airfields or runways are threatened.
Eric DeMarco: You can do conventional takeoff and land for training or where traditional airfields can be used or you can use a trolley launch offer runway also for training and which also allows maximum payload capability to the war fighter.
Eric DeMarco: Fanatos Apollo and Athena are each under customer-funded contract and each currently have their next series of flights planned, beginning in the second half of this year.
Eric DeMarco: Also in the second half of 25, we expect to receive certain new tactical drone-related program and contract awards.
including potentially the most important ever for KUAS.
Eric DeMarco: and we remain confident that Kratos' tactical drone business will be an important future and value creator for our company.
Eric DeMarco: Kratos' air gap to ghost works is currently working on the integration of Kratos' jet engines into certain Kratos jet drones which we expect to fly this year and on an additional fifth generation drone, which we expect to fly in 2026.
Eric DeMarco: and the most brilliant drone engineer in Kratos and probably the world is now working on a Mach 5 plus capable drone.
Eric DeMarco: KTT and our engineering propulsion system business are well positioned to take advantage of the DOD's plans for new lower cost cruise missiles drones, lordering munitions, hypersonic space and other systems at scale produced in mass.
Eric DeMarco: Similar to Kratos' drones and hypersonic systems, Kratos' jet engines are running and flying today. They are not PowerPoints, models or renditions, and we are currently tracking to our plan to produce several hundred small jet engines in the second half of this year, with production quantities expected to substantially ramp in 26 and then again in 27. We are now at the end of this year. We are now at the end of this year.
Eric DeMarco: KTT's air gap development group Blade Works is working closely with General Electric Aviation on the GEDK partnership's family of low-cost turbofan jet engines, where we are making rapid progress and we are tracking to our joint production plan.
Eric DeMarco: GE, similar to Northrop, Blocky, Rafael, Raytheon, Dynetics and others, is an outstanding partner of Kratos.
Eric DeMarco: Kratos' Blade Works is also working on a new propulsion system for a classified drone program.
Eric DeMarco: on a new engine for a next-generation aircraft and on certain hypersonic program for propulsion systems.
Thank you very much.
Speaker Change: Kratos' Blade Works has been invaluable to Kratos' overall hypersonic franchise and initiatives.
Speaker Change: Kratos' National Security Focus Space and Satellite Business continues to receive additional funding, program and contract awards, and along with resource management steps.
Speaker Change: Kratos' national security space and satellite offerings, including our open space software system, is clearly a technological and value at differentiator for our partners and customers that's represented by additional and new contract and program awards.
Speaker Change: We expect our commercial satellite-related business to continue to be adversely impacted by certain macro-level industry issues we have discussed in detail previously and we have and will continue to aggressively manage our low-cost structure across our entire satellite group to address the impact from this issue and increase our company's margins.
Speaker Change: Kratos' Space, Satellite Training and Cyber Division is our company's largest business.
Speaker Change: and we expect this business is margins to significantly increase in 26, which would lift the margins of all of Kratos, which is a top priority for our corporation.
Speaker Change: Kratos' Israeli-based microwave electronics business has a record backlog and a near-record opportunity pipeline, both of which are expected to continue to grow, including as we support our key partners, Israeli aerospace industries, Rafael and Elbitt in the Israeli M.O.D. and the State of Israel.
Speaker Change: as we have been communicating to you over the past few quarters.
Speaker Change: We will be moving our Israeli microwave production operation into a new and expanded facility over an approximately three week period beginning in June of this year, which once complete positions this business for continued expected strong organic growth.
with certain of the highest EBITDA margins in Kratos.
Speaker Change: Our US-based microwave business is on track to be one of Kratos' future shining stars.
Speaker Change: with multiple new organic program opportunities and we are now positioning to take advantage of what we see as one of our company's largest relative total addressable market opportunities with potentially the highest margins among our businesses.
Speaker Change: The recapitalization of strategic weapons systems and the U.S. Defense Industrial Base is providing significant generational opportunities for Kratos to build one of the most important and valuable national security companies for the United States and for our shareholders.
Speaker Change: Accordingly, we are focused on making the required investments in our existing core business areas.
in close coordination with our customers and partners.
Speaker Change: to increase our market share, drive future revenue growth, increase margins, and position the company for sustainable future pre-cash flow generation.
Importantly.
Speaker Change: As I mentioned before, the vast majority of the property, plants, equipment and other investments that Kratos makes are not build it and hope they come type investments.
Speaker Change: But, rather, are made in close coordination with the funded customer, partner, or targeted program, where Kratos' upfront capital investment is expected to be recovered via the future program, contract industrial real-based partner or other funds.
at an acceptable rate of return for the investment made.
Speaker Change: This is why Kratos' production, manufacturing, test, integration and other facilities are planned and constructed with specific customers, partners, programs, products, and systems identified and funded.
Speaker Change: which is obviously the most cost-effective and efficient way to establish a military weapons-grade facility that may also include certain special customer specific related security and facility-related requirements.
Speaker Change: With Kratos' current and existing unique Milksback hardware and software offerings, capabilities and positioning, now is the time to build and create long-term, sustainable value for United States National Security and for our stakeholders.
Deanna
Deanna Lund: Thank you, Eric. Good afternoon. And we have included a detailed summary of the first quarter financial performance as well as the initial second quarter.
Deanna Lund: The affirmation of 4-year 2020-5 financial guidance in the press release we published earlier today. I will focus on the highlights in my remarks today.
Deanna Lund: Revenues for the first quarter were 302.6 million, above our estimated range of 285 to 295 million, which includes strength and organic revenue growth across each of our businesses, with the most notable increases in our microwave products.
T5 ISR and Defense Rocket Support Businesses.
Deanna Lund: with organic revenue growth rates ranging from 13% to over 18%.
Deanna Lund: Adjusted EBITDAW for the first quarter of 25 was 26.7 million, also above our estimated range of 20 to 24 million, reflecting a more favorable mix of higher margin revenues offset partially by continued increased subcontractor and material costs on certain multi-year fixed price contract in our unmanned systems business.
Deanna Lund: On Man Systems, Organic Revenue Growth was 6.2 percent for the first quarter, and KGS Organic Revenue Growth was 7.8 percent for the first quarter, excluding the impact of the recent acquisition of certain assets of northern millimeter 8, which closed during the first quarter of
Deanna Lund: First quarter, 25 cash flow use and operations was 29.2 million, primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately thirty-seven million.
Deanna Lund: Increases in inventory and other assets of over 19 million, primarily reflecting increases in our microwave electronics and rocket systems businesses which are for anticipated future deliveries and ramps in production.
Deanna Lund: as well as investments we are making related to certain development initiatives in our unmanned systems business.
Deanna Lund: Re-cacheflow used in operations for the first quarter of 25, with 51.8 million after re-blessing funding of 22.6 million of capital expenditures.
Deanna Lund: 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 systems and hypersonic businesses to meet existing and anticipated custom orders and requirements and investing in related new machinery, equipment and systems.
Deanna Lund: Consolidated DSOs or day sales outstanding, increased from 104 days in the fourth quarter to 109 days in the first quarter, reflecting the revenue growth and the timing of milestone buildings.
Deanna Lund: Our contract meant for the first quarter of 25 was 73% of revenues generated from mixed price contracts, 22% from cost plus contracts and 5% from time immaterial contracts.
Deanna Lund: Revenue is generated from contracts with the U.S. federal government during the first quarter of 25, was approximately 68 percent, including revenues generated from contracts with the DOD, non-DOD federal government agencies and FABMAS contracts.
Deanna Lund: In the first quarter of 25, we generate 12% of revenues from commercial customers and 20% of foreign customers.
Deanna Lund: An operational priority remains the hiring and retention of skilled technical labor across the company with total Kratos headcount of 4,226 at the end of the first quarter as compared to 4,067 at the end of the fourth quarter. Now moving on to financial guidance.
Deanna Lund: Our financial guidance we've provided today includes our expectations and assumptions for our supply chains execution and for employee sourcing, hiring retention and the related cost.
Deanna Lund: Our second quarter forecasted financial performance takes into consideration the expected several week downtime related to our microwave products facility move in Israel.
Deanna Lund: As this business generates some of the highest margins in our company, the expected down time has impacted our estimated shipments and Q2 margins.
Deanna Lund: As we have discussed in the past, these production lots are typically negotiated and awarded in five-year contracts with certain of these having been negotiated in 2020 and 2021
Deanna Lund: As a period of performance of these contracts spans over a multi-year period, we do not expect to complete deliverables under these contracts until the next few years.
Deanna Lund: We are continuing to take action where possible to aggressively manage costs and to mitigate the continued future impact of cost growth on these materials and labor as much as possible.
Deanna Lund: As we mentioned on our last earnings call, we are making investments for capital spenders for property plant and equipment including the expansion of our manufacturing and production facilities, or a microwave product, high-personic, ANC-5 ISR businesses, and related inventory bills in our rocket systems and high-personic businesses
Deanna Lund: primarily related to the recent mock TV 2.0 contract award and continued manufacture to production lots and calories prior to contract award to meet anticipated customer orders and requirements.
Deanna Lund: We will continue to provide updates on the estimated timing of the procurement and build process of these capital outages as appropriate. Eric?
Thank you, Deanna.
Speaker Change: We'll turn it over to the moderator now for any questions.
Speaker Change: As a reminder, if you'd like to ask a question at this time, please press Star 1-1 on your telephone, and wait for your name to be announced.
Speaker Change: Our first question comes from a line of Peter Arment with Baird
Peter Pune, Eric Deanna
Hi Peter.
Speaker Change: Congrats on all the developments that are going on. We need to start on Golden Dawn, the PWA kind of program is pretty out there. Space Force is transport and technology layer. Kratos is obviously involved in the ground segment of that program. How do you expect to kind of see the benefits under this program moving forward as Tronch three progresses and you are going to see the benefits under this program moving forward as Tronch three progresses and
Speaker Change: We recently heard that the PDVSA is going to form part of Golden Dome, just how does Kratos Defense know that?
Yes, as we've tried to communicate before [inaudible]
Speaker Change: and that you were alluded to. We're on the ground, command and control, telemetry tracking and control and moving into SATCOM.
Speaker Change: and the more assets that are up in space, whether it be Leo, Mio, or Geo, the more ground equipment is needed, the more ground software and open space, which is needed as many of the satellites that are going up there have software to find capabilities.
Speaker Change: and this is one, this is an area, Peter, where we clearly have the wind in our sails and the boats are arriving with the tide.
Speaker Change: and Space Domain Awareness in addition to the Golden Dome is another area.
where there is incredible funding coming in to here.
Speaker Change: relative to what China and Russia are doing. You may have seen that it was announced it was reported in the last couple of weeks.
a Chinese Space Vehicle, excuse me, a Russian Space Vehicle, deployed three or four additional vehicles.
Speaker Change: There's a lot going up there in the Chinese, we identified the Chinese doing some dog fighting up there with their satellites.
Speaker Change: There's a lot going on. We got to put up systems that can protect themselves, that can defend themselves, and that can maneuver all of which requires ground equipment, ground systems, and that's where we are in industry leader.
Speaker Change: That's helpful. And then, just, you mentioned the Valkyrie and obviously, including new variants with the landing gear. When would we expect to see any commencement of any test flights with the landing gear? And is this kind of preparation for increment two or with CCA or any kind of thoughts there? Thanks.
Speaker Change: Yeah, obviously we moved out on the landing gear capable, balkyrie, in conjunction and in communication.
Speaker Change: with several customers. And for security reasons and other reasons I can't talk about which ones but there are, are several.
that aircraft is tracking to fly this year.
Speaker Change: soon this year. And that's really all I'm going to say about it right now, Peter.
Speaker Change: Got it, I'll jump back into Q. Thanks guys. Thank you.
Speaker Change: Our next question comes from Mike Crawford with B. Riley's Securities
Mike Crawford: Thank you. Regarding TurboJet Engine, you can mention expectation to produce several hundred this year and with rapid expansion there from them. And so, like what specific missile programs would support production in those quantities?
So just mentioning missile programs, generically, that are engines.
could be involved with our power JDAM.
Mace.
Franklin.
Mike Crawford: and there are a couple of classified ones. So those are just some to come to the top of my head.
Okay, thanks and then just...
Mike Crawford: Back to the Valkyrie, can you just remind us how when these 24 units that are being manufactured on these two production spirals, once you do get a contract, how that hits your financials?
Whatever value has been already built.
Mike Crawford: In our inventory or a capital, it would be moved to inventory. So let's say there are five aircraft that we receive a contract for, those five aircraft, whatever percent complete they are, would transfer to inventory and revenue would be recorded.
Mike Crawford: at the time of the contract. So, if there are five that are completed in this example, then it would be the full revenue that would be recorded at the time of the contract award.
Speaker Change: Okay, great. And then Prometheus, that's just going to be the level of the line, right?
Speaker Change: That's correct. It will be reported in interest and investments below the line.
Thank you.
Thank you.
Speaker Change: Our next question comes from Ken Herbert with RBC Capital Markets
Good afternoon, Eric Deanna.
Thank you.
Speaker Change: Yeah, hey, maybe just to start on unmanned systems, as you look across this year...
Speaker Change: How do we think about the profit contribution from unmanned this year, maybe relative to last year with all the investments?
Speaker Change: Could the segment be profitable this year on a recorded basis and maybe what's the expectation in the back half of the year?
Speaker Change: So we expect from an either dark perspective that it will continue to be profitable this year.
Okay, we're...
and can we, as we've talked about before.
Speaker Change: that we bid on thick firm fixed price, we bid on in 2018, around 2019.
Speaker Change: So we're producing those out the rest of this year and the rest of next year.
Speaker Change: And we all know what happened over the past few years relative to inflation and labor and you know we built some of our target drones in California.
Speaker Change: The minimum wage went up, which raised things. So we're managing on typically fixed price contracts are great. You come down to learning curves and make more money in a normalized environment. Well obviously any contractor that had a fixed price contract in this non-normal environment, we have to either absorb these costs or we have to manage our way through it.
Speaker Change: We are working with our customers to see if we can get alternatives qualified, which is not an easy thing to do.
Speaker Change: We're doing everything we can. I think we're going to see some relief and some benefit later this year and into next year because of the efforts that we're taking.
but the real step up here.
Speaker Change: will be 27, 28, something like that, on the new fixed price contracts where we take actual nor sole source, and we have the design.
Speaker Change: where we take the actuals, because that's what the government looks at, so these will be very high cost actuals, present them to the government, and that's what they agree on. So that's the dynamic we're navigating through here on two contracts.
Mike Crawford: Okay, that's awful, Eric. And I think you mentioned the facility move in Israel is going to happen over three weeks and obviously the...
Speaker Change: The Guidance for the Second Quarter reflects that. I mean, that sounds, it sounds ambitious to be honest, considering customer certification and everything else you have to go through. Can you just talk through sort of confidence in...
Speaker Change: keeping that disruption to a minimum and maybe where some of the risks could be as you think about that facility move.
Speaker Change: Yep, that's actually an excellent question, so you've been through this before with companies, so we have obviously worked incredibly closely, not just with our prime, also with the Israeli government because what we're doing is mission critical.
Speaker Change: So relative to approvals and qualifications, we've got them all already.
We've got him.
Speaker Change: and so we're going to do it in a phased approach over the three weeks.
Speaker Change: The test equipment, the engineering stands and the setter will be relatively simple.
Speaker Change: and then the manufacturing equipment, the robots will have to go, that'll occur over two weeks, again hand in hand with our customers and with the government.
Speaker Change: So we have done everything that we practically can do here. We've done this before. I've personally done it before many many many times
Speaker Change: That doesn't mean there's no risk, but we believe we've mitigated it and we feel very confident what the conservatism we've taken in our few two guidance.
Speaker Change: and also as I said and or Deanna said July and August so if everything doesn't go perfectly so July might be down a little bit from when we expect but we would fully expect to catch it back up in August so we feel August of September Q3 will be back on track.
Speaker Change: Great. Thanks, Eric. Good luck with the move. Thank you. Thank you. Thank you very much.
Our next question comes from Joe Gomes with Noble Capital
Good afternoon. Thank you for taking my questions to Eric and Deanna.
Hi, Joe. Hi, Joe.
Speaker Change: So Eric, I want to start out on the tactical drones. I haven't really heard a whole lot on the competitive front and you just wonder if you give us kind of maybe an overview. Is there anything that the competitors are doing or saying they're going to do that?
Speaker Change: If not, keep you up at night, at least make sure you shake your head and say, maybe we should take a look into that. Anything there? New on that front.
Speaker Change: Any of our tactical drone competitors or wannabe competitors are doing?
that is keeping me up at night.
nothing
We have...
The best aircraft at the best price.
that are in production and that are flying today.
and this isn't just Valkyrie. [inaudible]
This is Thana Toes
This is Mako.
This is Apollo, this is Athena.
and this is Eric Wolf.
We are going to win because of that.
That's how I see it.
Okay, thanks for that.
Speaker Change: And then you guys put out a press release a couple of weeks ago about expanding your truck up, platooning technology into new areas
Speaker Change: and, you know, in the press release you talk about, again, repurposing technologies for the commercial use, and you got me thinking you'll...
Speaker Change: I don't know if you can provide this at this point, but what other technologies are you looking at for repurposing for commercial applications?
Speaker Change: Right, so the ones we've got going that are significant and you ask about our robotic trucks and vehicles a lot, I'm glad you are because
This could be a needle move or next year.
in the truck area.
because...
Speaker Change: And we've got the data. There are tens of millions obviously of trucks that are relative trucks that are on the road, that have been built since the 60s, 70s and 80s, and our kit converts them to autonomy.
Speaker Change: It's right up Kratos' alley, low cost, smart, don't recreate the wheel.
Speaker Change: Something that's effective with an eye on betters the enemy of good enough [inaudible]
Okay.
Speaker Change: Open Space. This is one of the reasons why Open Space is doing so so well on the government side because it's dual use on the commercial side so we lever the research and development.
Speaker Change: The research and development group is levered which drives the cost down. We have two sets of customers, commercial and government. It drives the cost down.
Engines
Speaker Change: We have a number of military engine programs we're on and we're also on commercial turbofan engine programs.
Speaker Change: which once again we lever off the R&D, we lever off the engineering team, it brings value to both sets.
Walk in Engine Programs
Speaker Change: for very high profile rocket spaceship companies that want to go to Mars and the moon and all these places. So we're getting the leverage off of that commercial application of our technology.
Speaker Change: and I'll give you a specific on the jet engine side.
Speaker Change: You know, as people know, our engineering group was involved in the development.
of the jet engines for F-22 and F-35.
Well, that group is what's supporting boom supersonic.
Speaker Change: Which, which, which that business plan is coming together very, very nicely for Blake.
So those are the four or five that are... [inaudible]
Speaker Change: that come to mind that are actually out there and that they're not on a whiteboard.
Speaker Change: Great. Thanks for that. Very, very exciting in my view, especially all the dual use, as you mentioned.
Speaker Change: And last one for me, I know you've talked in the past, you're not looking to do anything big in terms of the M&A but if you were out there looking at some tuck-in M&A, what areas would be top of the list for you that you would want to target?
Microwave Electronics
would be one.
Speaker Change: would be at the top of the list, everything needs microwave electronics. [inaudible]
Speaker Change: It would have to be the right flavor, the right size, the right fit, the right culture, the right everything.
Turbo Machinery
and that would primarily be to get access to resources.
People and the very specialized equipment.
for Engines and Propulsion Systems.
Speaker Change: which the demand for us is incredible, it's incredible, right Mendoza?
Speaker Change: It's incredible. It's going to be one of our primary growth drivers this year, Terp Engens, Jets, other types of propulsion systems, and in 26, and in 27. We have a supply-demand imbalance. There's too much demand. It's not enough to supply a loss.
for those of the areas.
Speaker Change: Great. Thanks for that. I'll get back in queue. Thank you again.
Yes, sir. Thank you
Our next question comes from Michael Ciarmoli with Truist Securities
Good evening, Eric Deanna, thanks for taking the questions.
Speaker Change: Hey, just to stay on that topic, Eric, with the demands and need for propulsion and engines, you know, we obviously heard a lot about that over the past 12, 24, 36 months, but it doesn't seem like there's a lot of...
Speaker Change: missiles, or whether it is smaller, you know, unmanned systems that require, you know, those types of engines. Could you get any more color there?
Speaker Change: Absolutely. And your question is a very relevant question for a lot of what we do.
Our Primate Creators, Our Primary Opportunity in the Engine Area.
Speaker Change: is Greenfield new programs where we're going to get designed in the development of the engine, or the development of the missile system or the drone system. Our engine is an integral part.
of that system.
Speaker Change: And this is why the fact that we have a family of engines already running and flying, the guys we're working with on new missile programs.
Speaker Change: on new drone programs and on new loitering munition programs are literally designing their system around our engine and as I've talked before it's not what I talk power it's not just thrust it's the electrical power that's where we excel. Thank you for your time.
to power all the sub-systems
Eric DeMarco, Marie Mendoza
Speaker Change: There are a couple three customers that have come to us not recently over the past few years that we are working with, where they want, they must have a second source.
Speaker Change: Must, because the quantities that are coming are staggering and there can't be a single point of failure, and I am confident
Speaker Change: I'm confident in the next 12 to 18 months we're going to be able to announce this.
and it's going to be significant. Thank you for your time.
Okay, okay, you know, that leads into my... [inaudible]
Speaker Change: Sparks the growth and flexion, or as your company continues to evolve.
Speaker Change: You know, how does the revenue mix look? And, you know, I think we always just sit here and think it was going to be a big ramp and the unmanned tactical. But I mean, if we look out 24, 36 months in your view, what has the potential to be the biggest revenue growth contributor? You know, you talked...
Speaker Change: Pretty enthusiastically, Dalkyrie, Thanatos, but then you got Prometheus, you've got the engines with GE in targets, I mean what is the biggest revenue driver as you see it over the next two to three years?
Okay, and Michael Arment, I'm going to talk clarity.
and then I'll reiterate. Our hypersonic franchise.
is absolutely going to be the number one growth driver.
for the foreseeable future unless global peace breaks out.
Speaker Change: Though our hypersonic franchise across the board, virtually every aspect including space-related
Speaker Change: and tracking things, think HGTSS, think Titans, think those programs which we don't talk a lot about, so it's the biggies or erroneous.
Dark Fury, Zeus,
Speaker Change: Boreal, Darts coming, we have another one coming that I have alluded to, it's coming, all of which...
Speaker Change: We have a customer. Customers. So the hypersonic franchise is the number one. Okay, number two.
Engines
Speaker Change: Propulsion Systems, Across the Board, TurboJets, TurboFans, Hypersonic Engines, Back to Hypersonics, Space Propulsion Systems.
No question, this is going to be our number 2.
Growth Driver in this company for the foreseeable future.
Number 3, Microwave Electronics
Speaker Change: particularly internationally out of Israel. And as I know many of you know a lot of those Israeli systems or Israeli systems with their prime goes to India. For example, I see no let up here.
Not at all
When Slash If Our Tactical Drone An Issue Of Hits
Speaker Change: That is going to be one of the, if not the biggest needle mover for the company.
Speaker Change: But I'm putting that as a call option because I've been burned before and we're not counting those chickens.
Speaker Change: until the little eggies hatch. And so that's how we see it. Got it. Helpful. Thanks, guys. Appreciate it. Yep.
Our next question comes from Andre Madrid with BTIG
Eric Deanna, good afternoon, how are you?
Hi. Good. Hiya, Andre.
Outlook
Last.
Speaker Change: Florida, when you first provided it, you said they'd assumed a mid-March CR resolution. Obviously, it doesn't happen, but the outlet was kept intact. Could you maybe just walk us through what's baked into the outlet now and how we should be thinking about the potential impact of a four-year CR? [inaudible]
Speaker Change: Yeah, so the CR that happened, if you will, is not really a CR [inaudible]
Speaker Change: This is very very good for us and that's not that that's through talking with program offices.
This has brought incredible clarity.
to us.
for 2025, calendar 2025.
The only thing that's slowing us down.
Speaker Change: April , May, June is something I've talked about before. The government program offices and contract to you offices, I've got to get, I'm not saying it's likely, got to get the paperwork done.
Speaker Change: got to get the money obligated, got to get it under contract and got to get it out to industry including Kratos and even though I'm CEO and I drink the Kool-Aid and I like to think we're number one. There are a lot of priorities out there with a lot of contractors. [inaudible]
Speaker Change: and so we feel orders of magnitude more confident and we felt confident before in our 2025 plan.
Speaker Change: because of what's come out in this 2025 CRA, which isn't really a CRA.
Jare, Jare, and then…
Speaker Change: If we move against, if we zero land on unmanned systems, not the, you know,
Peter Deanor Scherbott
Speaker Change: Can you maybe give us a split of just how much bookings in the quarter were tactical versus target because I do understand that things are continuing to accelerate on the tactical front, so I guess just to get a sense of the magnitude. Thank you.
Speaker Change: Yeah, Andre, the lion chair of the bookings were target drones.
Some tactical, but the light.
target.
Speaker Change: and when might we expect an inflection point where tactical might take the lead in terms of being that the main demand driver?
Speaker Change: Right. And so as I mentioned, the Mr. Tremali, I don't want to- [inaudible]
Speaker Change: to count the ducks until they're hatched. I don't, we're not going to get ahead of ourselves here. So for our big growth drivers, with their surety, focus on hypersonic, focus on microwave and focus on engines.
Speaker Change: and our target drone business is just doing fantastic. Of course, why? Because all these air defense systems that are being bought globally need to be exercised against what Kratos target drones?
Speaker Change: and God willing, when if we hit it on the tactical side, it will be a step-function inflection point for the company.
Speaker Change: Got it. Got it. Not that that's very helpful. And then if I could just ask one more, could you maybe just get a little bit deeper on the commercial space side. So I do realize that some of the, you know,
Speaker Change: Downstream customers have started to launch finally. Some of those big launches that I think were kind of bottled up. We're finally getting through. Has that provided any relief or are we still seeing a prolonged impact here? And maybe can we get it for us around timing?
Yep, so... so...
Speaker Change: I say this very literally, anything that goes up in space...
for the Free World.
Speaker Change: Command and control it, track it, our Space Domain Awareness Network is going to track it for the customer, et cetera, et cetera. So it's good. Okay, however.
The launchers that you're talking about.
Speaker Change: have not been for large geosynchronous orbit software to find satellites specifically the Airbus,
they have issues.
Speaker Change: I'm not going to interrupt issues, this is well publicized now.
Speaker Change: This is one of the reasons why Airbus and Talis, and I think Leonardo or somebody, they're looking to...
to come back to emerge.
This is a real issue.
Speaker Change: They need to get those up to compete with SpaceX, and we can get into a big long, how all that works. I don't know how long it's going to take for these OEMs to address these issues and get these things up there.
Speaker Change: I have to assume that it's going to be more of the older bent pipe, they call them bent pipe types of satellites that are more of a broadcast than have spot beams.
As you can imagine, we're also now working with…
Speaker Change: Virtually every one of the new microgeo satellite manufacturers. This is significant. I'm not going to get into it a lot because we're going to sneak up on somebody here.
Speaker Change: But all those guys, they don't have ground equipment and they need ground equipment and they're typically VC or PE back. They like working with us. That's going to be an opportunity for us. That's where we're focused and of course the military and national security side where we have an incredible amount of opportunities that are coming at us.
Speaker Change: We're going to wait and see on these these these big software fine Geos until they get up there and they work
Speaker Change: Got it, got it, Subaru for Eric, I'll jump back in the queue, thanks. Yep, yep.
Our next question comes from Peter Skibitski with Olympic Global [inaudible]
Hey, good afternoon, Eric Deanna.
Thank you.
Speaker Change: I'll just stick with the space theme, just maybe to delve a little bit deeper. So space as a whole was down again in the first quarter, is that right? And then what's your assumption for 25 in terms of space growing or not?
Speaker Change: It was actually up about 2% organically and we expect it to be up for the year.
Okay, great thing for that.
Speaker Change: Peter the last, on the last call, a senate boarded it bottomed out.
in Q4.
Speaker Change: for us, for us. There are others, it's not bottomed out yet, but it's bottomed out for us, and so I see it's stable to up.
Speaker Change: and we're seeing up and I think we're going to see even more up because the government side, the national security related side is doing so so well.
Speaker Change: and so it's slowly turning around but not because of the commercial software-based satellites.
Speaker Change: by the book to Bill, that was over two to one last quarter, so that was all predominantly federal.
Speaker Change: National Security Type Space Awards, and that's the visibility we have for the organic growth that we expect for 25.
for space, largely driven by the fed side.
Speaker Change: God, it's not very helpful. Thank you. And just maybe on mock TV just to...
Speaker Change: It sounds like the full year CR isn't going to impact that program ramping, but can you remind us, is that not generating to the second half of the year? Is it kind of a half year this year and a full year next year? Is that still on track? That profile?
Speaker Change: Yeah, so there is some contribution in the first half but not as much as we expected to ramp in the second half.
and then expect further round into 26.
Got a big, yeah, a big, a big part of that.
Speaker Change: is, you know, some of the launches we've been doing under mock TV and some of these other hypersonic things. We lean forward without a contract in a program, and we've ordered the long leads for rocket motors and aeronies and dark fury, which I can talk about now.
Speaker Change: We've now ordered, as I mentioned in my prepared remarks, I think we've got 70 rocket motors.
Speaker Change: Underwater right now that are going to be coming and a lot of erroneous and dark
Speaker Change: As soon as we get those we get those integrated we get them up and we launch them that's when the revenue starts so that that's what's holding it back right now I also want to remind
Speaker Change: that on mock TV we're the prime, so on certain launches that you see guys like Strato launch do, or Rocket Labs do all of which are phenomenal partners with Kratos. That flows up through us.
Speaker Change: So we get a portion of that, and that's part of our global teaming agreement to further hypersonic testing for the U.S. Defense Industrial Base. So please keep that in mind, we're not going to tout that, we want them to do it, but those typically are going to roll up under our mock TV program.
Okay, great. Thanks so much, guys.
Thank you.
Our next question comes from Rustam Kenga with Citizens.
Speaker Change: Good afternoon, Eric and Deanna. This is Russ on for Trevor Walsh. Just one zooming out here.
Speaker Change: Eric, any thoughts or red comes, you can provide us around thinking through the Navy CCA, understand that's a low cost opportunity and
Certainly a critical aspect of maritime warfare.
My friend, I cannot say anything.
about...
Speaker Change: CCA programs, that all right now. I can't do it, I apologize.
Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com.
Speaker Change: Okay, great. One more on, can you just help reconcile the comment on the U.S. supply base being sold source alongside the target growing, the cost elevation, what's the driver there?
Speaker Change: Yeah, I will absolutely, and I touched about this either on the last call or the other call.
There are...
two suppliers that we have.
Speaker Change: that they're the only ones that are qualified to make these things for our target rounds.
Speaker Change: And you guys are all very well aware of certain of them because they've been called in front of Congress before for their pricing.
And so they're jacking the prices up.
And we're on a fixed price contract
We don't have anybody else qualified yet.
and so there's no way for us to mitigate it.
and so we eat it.
and that's what's happening.
Speaker Change: I appreciate the reminder on that. Last one, you kind of alluded to on the microwave electronics piece, a lot of the Israeli systems when prime go to India any comment on if a conflict in that region versus how that would affect that business. [inaudible]
Yep.
Take a look at the Baroque missile systems.
It is one of our primary programs [inaudible]
They go to India. Yeah.
Speaker Change: You know we've had incredible demand obviously relatives in the state of Israel because of what's been going on in Gaza and La Tomasana's Bola and Iran and the Boothies etc etc etc. Well now of course we have another conflict
Speaker Change: and conflict. Unfortunately, I look at it fortunately as long as people don't get hurt. It's good for our demand, and so I see no respite in the demand that we are seeing from our customers relative to air defense systems.
Speaker Change: As a reminder, if you'd like to ask a question at this time, please press star 111 on your touchdown phone.
Our next question comes from Greg Conrad with Jeffries.
Good evening.
Good evening.
Speaker Change: Maybe just to circle back to a previous question, appreciate the biggest growth drivers as you look forward.
Speaker Change: But, you know, there seems to be a lot of programs maybe within those [inaudible]
when you think about accelerating growth next year.
How much of that business is one versus competitive?
Speaker Change: How does supply chain unlock play into this? And then...
Speaker Change: You know, when you think of all those, are there any must-win programs, you know, competitively, to kind of see that accelerating growth? Yeah. Okay, so I'll take them in reverse. There are zero must-win programs for us to achieve that growth. We've already won them.
We've won them, sole source. [inaudible]
Go to Beadaholique.com for all of your beading supply needs!
Number two
Speaker Change: I'm not going to say every because I don't know, but I'm going to say virtually every partner, supplier, element, component on these programs is mills back in its US sourced.
Speaker Change: Relative to these hypersonic programs. So that's not an issue, and obviously it's one of the largest, if not the largest program in the company, mock debate, so we're all over that.
We're all over it.
Speaker Change: So we are, as I think I alluded to a few minutes ago, unless global peace breaks out.
are hypersonic franchise across Kratos.
will be the number one growth driver for this company.
Kifar
Speaker Change: if we don't receive one of the call options on the tactical turn side.
Speaker Change: And then maybe within that, I mean, I think Kipersonics is probably spread out throughout the business, I mean T5 ISR.
Speaker Change: What was pretty strong in the corridor? I think we saw a good award activity.
Speaker Change: in April around a couple of key awards. I mean, how do you think about the biggest drivers of C5 ISR, how much is hypersonic, and how are you kind of thinking about, you know, that reportable segment going forward?
Yep, so we support C5 ISR.
supports virtually every.
Air Defense System of the United States does.
IBCS
Patriot
if
Long-range hypersonic weapon and derivatives.
Okay, there are many radars that we're under NDA.
Thank you. Thank you.
Speaker Change: RC-5 ISR business, which is 100% mill-spec hardware for missiles, radars and air defense systems.
is ramping rapidly.
We just received another.
Speaker Change: Opportunity in the directed energy area which is related to air defense that I believe we're going to get.
this
This business is one of a kind in the United States. It's one of a kind.
Speaker Change: and we support virtually if not every prime because we are a merchant supplier. We know how to do it.
We're not going to compete with them.
Speaker Change: since we're working with four or five of these primes and their air defense systems.
Speaker Change: They get the leverage off of us doing it for all of them which reduces their cost so they can sell more of them.
Thank you.
Thank you.
Speaker Change: That concludes today's question and answer session. I'd like to turn the call back to Eric DeMarco for closing remarks.
Excellent. Thank you for joining us this afternoon.
Speaker Change: and we will chat with you on the second quarter report. I think the first week in August . Thank you.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.