Kratos Defense & Security Solutions Q3 2024 Earnings Report

Kratos Defense & Security Solutions EPS Results

• Actual EPS: $0.07
• Consensus EPS: $0.08
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: $0.08

Kratos Defense & Security Solutions Revenue Results

• Actual Revenue: $275.90 million
• Expected Revenue: $278.47 million
• Beat/Miss: Missed by -$2.57 million
• YoY Revenue Growth: N/A

Kratos Defense & Security Solutions Announcement Details

• Quarter: Q3 2024
• Date: 11/7/2024
• Time: After Market Closes
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 5:00PM ET

Kratos Defense & Security Solutions (NASDAQ:KTOS) is a technology company that develops products and systems for national security, defense and commercial applications. The company primarily serves the U.S. Department of Defense and other government agencies, while also supporting allied governments and selected commercial customers.

Its offerings include unmanned aerial and ground systems, target drones, tactical drones, satellite communications systems, space-related products, missile defense technology, hypersonic and high-speed systems, radar and command-and-control solutions, and microwave electronics. Kratos also provides engineering, integration, testing and other technical services for complex defense and space programs.

The company traces its history to the former Wireless Facilities, Inc., which adopted the Kratos name following a series of acquisitions and strategic repositioning in the defense technology sector. Kratos is headquartered in the United States and operates through facilities supporting customers across the country, with its technologies also used in international defense and security programs. Eric DeMarco serves as the company’s president and chief executive officer.

Kratos Defense & Security Solutions Q3 2024 Earnings Call Transcript

Key Takeaways

• Kratos affirmed its full-year 2024 financial guidance and reiterated a 10% organic revenue growth forecast for 2025, with potential upside above 10% in 2026 if large program awards are secured.
• The company is making significant internally funded bid and proposal investments for potential $1.5 billion and $100 million+ awards, which will pressure near-term profitability but could substantially boost future growth.
• Kratos’ Microwave Electronics segment logged record backlog and results supporting systems like Iron Dome, and plans to expand manufacturing in both Israel (opening new facilities by Q2 2025) and India amid strong global air defense demand.
• Investments in jet propulsion capacity—including a Michigan facility capable of 10,000 small turbofan engines annually and a planned turbofan plant with GE Aerospace—position Kratos to capitalize on growing demand for drone and missile engines.
• The commercial satellite business continued to be impacted by OEM delays and industry disruption, prompting resource reallocations and targeted investments in software-defined modems and SATCOM products to mitigate ongoing headwinds.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to Kratos Defense & 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 raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Marie Mendoza, Senior VP and General Counsel. Please go ahead.

[Marie Mendoza, SVP and General Counsel at Kratos Defense & Security Solutions]

Thank you. Good afternoon, everyone, and thank you for joining us for the Kratos Defense & Security Solutions' Third Quarter 2024 Conference Call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential 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 as that term is defined in Regulation G.

[Marie Mendoza, SVP and General Counsel at Kratos Defense & Security Solutions]

Non-GAAP financial measures should not be considered in isolation from or to substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Good afternoon. For the third quarter, Kratos continued to execute, demonstrating the success of our strategy of making internally funded investments to rapidly develop and be first to market with relevant hardware and software for our national security customers. 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, including delays in delivery by the manufacturers of software-defined satellites, which I have discussed in detail previously. The ongoing generational recapitalization of strategic weapons systems, including strategic satellite, air defense, radar, and missile systems, continues to be a catalyst to the current and expected future Kratos financial performance, including our affirmation today of our 2024 financial guidance and our 2025 base case financial forecast expectation of 10% YoY revenue growth.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

As I mentioned on our previous call, in Q3 and Q4 2024 and in Q1 of 2025, Kratos is expected to continue to make significant internally funded bid, proposal, and other expenditures in pursuit of certain new large single award programs, 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 several orders of magnitude greater than that. We are closely managing these B&P 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, President and CEO at Kratos Defense & Security Solutions]

Though these investments have been and are expected to continue to impact Kratos' near-term profitability and EBITDA, if we are successful, based on the potential size of certain of these opportunities we expect to win, we are looking to potentially increase Kratos' future YoY planned revenue growth rate above the current 10% base case forecast in 2026. Virtually every Kratos division has exposure to the rapidly growing air defense systems area, including Kratos microwave electronics, our rocket systems, C5ISR, space and satellite, target drones, turbine technologies, and our ballistic missile target business, each of which Kratos is the industry leader.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Kratos' microwave electronics business, where we support Iron Dome, Arrow, Litening, Iron Sting, and other systems, has a record backlog and is generating record financial results, which are expected to continue into 2025, including in support of the Israel Defense Forces and our important partners, including Rafael, Elbit, and Israel Aerospace Industries. To address our Israeli business's record backlog and opportunity pipeline and demonstrating Kratos' commitment to Israel, Kratos 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. Additionally, due to customer demand, including as related to missile and radar systems, 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, President and CEO at Kratos Defense & Security Solutions]

Kratos Turbine Technologies and 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. As a result of the investments we have made, Kratos' small, low-cost turbojet engine facility in Michigan is now capable of producing approximately 10,000 engines annually, as we expect to receive engine production contracts for drones, missiles, and loitering munitions programs next year. 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, President and CEO at Kratos Defense & Security Solutions]

The demand for jet engines is rapidly growing, and we expect small jet engines, including Kratos TDI Spartan family of small but mighty first-to-market turbojets that are in production and operational today, to be a future growth catalyst and contributor for Kratos. Kratos' C5ISR business supports air defense, counter-UAS, radar, missile, and strategic programs, including Patriot, Integrated Battle Command System or IBCS, indirect fire as Enduring Shield or IFPC, short-range air defense or SHORAD, Sentinel or GBSD, THAAD or Terminal High Altitude Area Defense, and many others. Since our last quarterly report, Kratos has received a new hypersonic system-related program award, which is expected to be one of Kratos' largest programs over its expected future multi-year period of performance. Additionally, we were just recently informed that Kratos has been downselected on another new major weapon system program hardware opportunity that we also hope to be successful on in 2025.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Kratos' 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 Kratos' largest programs and future year growth contributors. Key Kratos C5ISR partners and customers include Northrop Grumman, Lockheed, Raytheon, and Leidos Dynetics. Kratos' rocket systems business also has several important growth-related program areas, including Aegis, hypersonics, ballistic missile defense targets, suborbital vehicles, strategic and nuclear systems, and space-related systems. Expected future year growth contributors for Kratos in our rocket system area include our first-to-market Erinyes and Dark Fury hypersonic glide vehicles, the DART hypersonic system with our partner Hypersonix, our first-to-market Zeus 1 and Zeus 2 solid rocket motor or SRM systems, and our Oriole SRM system, and also the Terrier and target mission-related systems with our government partners.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Since our last quarterly report, and as we announced today, Kratos' Zeus 1 and Zeus 2 solid rocket motor stack successfully executed its initial flight, achieving every mission objective with our government partner. Kratos' Zeus is a recent example of the value Kratos' business model brings to every Kratos stakeholder, with Kratos making the internally funded investments to rapidly develop, field, and be first to market with affordable, relevant systems for U.S. national security. We have also recently executed a contract related to certain other Kratos flight vehicle system production and integration, including up to 60 Kratos solid rocket motors. These are different and in addition to Zeus, as Kratos' expected future mission launch manifest continues to significantly grow for many different types of SRMs and missions. We have also now identified the site for Kratos' new large hypersonic system franchise production and integration facility.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

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. We expect Kratos' rocket systems, SRMs, and missile defense-related systems business to be a future year-over-year growth contributor for Kratos. Kratos' 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 OpenSpace software is a clear competitive differentiator for Kratos. Additionally, Kratos' 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.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

We believe that Kratos' SDA system is well positioned to take advantage of the large number of satellites currently being and expected to be placed into orbit. As was discussed on the Q2 call, the commercial satellite industry and Kratos' commercial satellite business continues 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. 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. Importantly, Kratos will continue to make targeted investments, including in our proprietary 5G, virtualized modem software, SATCOM-related, and other products, where Kratos is first-to-market and we have a substantial intellectual property position.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

In space and satellite communications, Kratos has the customers. 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. The global demand for air defense systems is driving demand for Kratos' threat representative target drones, which are used to exercise and test these systems and their crews, and we expect our target drone business to be a future grower. Since our last quarterly report, the United States Marine Corps announced that Kratos Valkyrie successfully completed a test flight on September 20, 2024, at Eglin Air Force Base in Florida. This flight was conducted in partnership with the Office of the Undersecretary of Defense for Research and Engineering, the United States Navy Air Warfare Center Aircraft Division, and other industry partners.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Additionally, as reported in a 17 October Marine Corps press release, Kratos' recent Valkyrie flights with the Marine Corps in cooperation with the United States Air Force and at a United States Air Force base, the Valkyrie successfully demonstrated tactical data link integration and closure of the kill chain. The manned-unmanned teaming concept with Valkyrie and a four-ship of F-35Bs was pushed even further in the recent Emerald Flag exercise. I refer you to the Marine Corps release for full details and photographs on this incredibly successful and relevant mission. This joint collaboration event is part of the Penetrating Affordable Autonomous Collaborative Killer, or PAACK, program. As you can see, Kratos Valkyrie continues to successfully fly, evolve, missionize with operational relevance, with manned fifth-generation and other aircraft and systems, with multiple DOD customers and participants, including the Air Force.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Also in our tactical drone business, Kratos' Athena drone program is under contract and expected to contribute in Q4 and into 2025, and Kratos has been informed that our Apollo drone has been selected, and we are on final contract documentation with Apollo expected to begin contributing in 2025. Both the Athena and Apollo opportunities have come in later in 2024 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 them both under contract or soon to be. 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, and I hope by our next report I can provide an additional update on the Valkyrie selection here.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

On the second Valkyrie opportunity I previously mentioned, we remain in source selection with the selection anticipated for Q1 next year. Additionally, there are also now two new tactical jet drone opportunities Kratos is evaluating for potential pursuit, one of which we have just recently submitted a response. Based on the recent events and communications, we remain confident that Kratos' Valkyrie, the lowest cost, most affordable, runway-flexible, actual flying today, obviously has been flying since 2019, high-performance jet-powered tactical drone will successfully get to production. Kratos' Ghostworks has made rapid progress on the conventional takeoff and land Valkyrie capability, which development Kratos is internally funding and which we expect to fly in the second half of 2025. The complete Valkyrie system is a runway-flexible, runway-independent system. We are also on track with our customer to fly a new fifth-generation aerial drone in 2025.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Kratos' Ghostworks has also made progress with our customer in integrating Kratos' jet engines into Kratos' tactical and target drones with initial flights of Kratos' jet engines in Kratos' drones planned for the second half of 2025. Kratos' mill-spec turbojets, part of our Spartan family of engines, which are manufactured in Michigan, are some of the highest performance per cost in the world, being significantly lower in cost than anything else available in the industry, of which there's very little. As is represented in my update, we believe that the market momentum for low-cost jet-powered drones 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 in this market now and today, not five or 10 years from now.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

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 and options to quickly increase jet drone production to approximately 400 drones a year, including Valkyrie, when requested. We expect Kratos' target drone business to be a contributor to Kratos' future organic growth, and we expect Kratos' tactical drone business to potentially be transformational for Kratos' business and our stakeholders in the future. 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 Congress is in place, and hopefully when we have better clarity on the current continuing resolution authorization situation.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

We are internally focused on executing on our record backlog and opportunity pipeline with no significant acquisitions anticipated, only potential small tuck-ins. 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, and also the current disruption in the commercial satellite industry. As we have previously discussed, our base case forecast does not include any production orders for Kratos' tactical drones, only continued research development, test and evaluation, or RDT&E, or S&T, science and technology and similar-type sales. Irrespective of the administration and U.S. government funding timing issues, with the current geopolitical landscape and threat environment, we believe that we are in the early stages of a Reagan-like defense buildup with increased U.S. and allies' defense and national security budgets for the foreseeable future.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

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 and 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. Revenues for the third quarter were $275.9 million in our estimated range of $265 million-$280 million, which includes notable strength and organic revenue growth in virtually all of our businesses, including our unmanned systems, turbine technologies, microwave products, C5ISR, defense rocket support, and training solutions businesses, offset by the expected industry-related impact from OEM delays in the manufacturing delivery of software-defined satellites.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Adjusted EBITDA for the third quarter of 2024 was $24.6 million, exceeding our estimated range of $20 million-$23 million, reflecting a more favorable mix of higher margin revenues offset partially by increased bid and proposal costs associated with a large potential opportunity. Unmanned systems organic revenue growth was 8.7% 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. 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 advance payments required by key suppliers and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Once these motors and engines are completed and delivered to Kratos, the related prepaid deposits will be transferred to our inventory balances. These prepaid assets are investments for inventory we are making for programs either under contract or based upon customer indications of demand and future production and/or deliverables. Free cash flow used from operations was $9.2 million after funding capital expenditures of $15.3 million. 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 in related new machinery, equipment, and systems. We are also continuing to manufacture the two production lots of Valkyries prior to contract award.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

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 uses related to increases in advance payments and deposits required for long lead production items, which has been more than $10 million for two programs in the first nine months of 2024. Consolidated DSOs, or day sales outstanding, increased from 103 days in the second quarter to 105 days in the third quarter based upon milestone payment schedules. Our contract mix for the third quarter of 2024 was 69% of revenues generated from fixed-price contracts, 25% from cost-type contracts, and 6% related to time and material contracts. Revenues generated from contracts with the U.S.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

federal government during the third quarter of 2024 were approximately 67%, including revenues generated from contracts with the DOD, non-DOD federal government agencies, and FMS contracts. In the third quarter of 2024, we generated 12% of revenues from commercial customers and 21% from foreign customers. An operational priority remains hiring and retention of skilled technical labor across the company, with total Kratos headcount of 4,047 at the end of the third quarter as compared to 4,012 at the end of the second quarter and 3,986 at the end of the first quarter of 2024. 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.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

We have also taken into consideration in our affirmed fiscal 2024 guidance a federal fiscal year 2025 continuing resolution, or CRA, commencing on October 1st, which it has, and under such CRA, no new program contract awards, no increases in existing production contract funding, and no transition from program development to production. Eric.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Thank you, Deanna. We'll turn it over to the moderator for questions.

[Operator]

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Ciarmoli from Truist Securities.

[Michael Ciarmoli, Senior Research Analyst for Aerospace and Defense at Truist Securities]

Hey, good evening, guys. Nice results. Thanks for taking the questions.

[Michael Ciarmoli, Senior Research Analyst for Aerospace and Defense at Truist Securities]

Eric, just, I mean, we've got holidays and stuff here, not a lot of time for the rest of the year. What's the driver in the wide range for the fourth quarter? And then I guess just on the 2025 initial outlook, can you give us any color or maybe some detail by end market? What are the leading growth engines? What's kind of lagging?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep. Yes, sir. Hey, Mike. So on the range in the fourth quarter, every year it starts around September 30 with the government fiscal year, and there's sweep-up money, and a lot of customers have some money that they have some priorities on. And this is in particular in our space and satellite business and data purchases, including off of our space domain awareness network, which we've seen virtually every year for the past several years.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

It's very possible that we're going to get several of those this year. We just can't plan on them. They can come with one week's notice. That's the biggest driver on the range are these data sales off the Space Domain Awareness network. Okay?

[Michael Ciarmoli, Senior Research Analyst for Aerospace and Defense at Truist Securities]

Got it. That's the big. That's that one. On the other one, the big drivers for next year.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

All right. Number one is going to be the air defense system work that's going on. It's incredible. I went through some of the air defense systems we're on, and these are all counter-UAS systems. These are big hardware programs. That's really going to be a driver for us. The next one, Mike, and I can't emphasize how important Zeus was. This is a major catalyst for Kratos.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Our solid rocket motor launch business next year is going to be it's forecast to be several tens of millions of dollars greater than it was in 2024. And then again in 2026, I think it's going to be several tens of millions of dollars greater than it's going to be in 2025 based on the launch manifest we're looking at. It's that significant. Okay? And the third one is engines and propulsion systems. Us being first to market with this engine technology where we're designed in and we're actually flying is turning out to be a big winner for us, which is why we've spent the money to get the turbojet production facility ready to go up to 10,000 units annually, and we've identified the location for the turbofan, the bigger jet engine one with our partner GE.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Those are the big catalysts that we have high confidence in just based on what we've got.

[Michael Ciarmoli, Senior Research Analyst for Aerospace and Defense at Truist Securities]

Got it. And then just a bigger picture question. You mentioned the Reagan-like buildup. Obviously, it's super early days here post-election. I mean, if Musk is serious about gutting government spending, how do you think this plays out for defense? He's obviously got the track record with SpaceX. Does this put the old defense guard at risk? Does it favor new startups? I know you're working with BlueHalo or Anduril. And where does that leave you guys?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yeah. I think that for non-traditionals like Kratos, Anduril, Shield, BlueHalo, I can go on and on. I don't see a better setup for guys like us than the ones I just named. If you recall, a couple of three years ago at an Air Force conference, Mr.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Musk actually said, "I envision a future five years from now where jet drones are going to start replacing the manned aircraft," and he's also looking laser-focused on affordability and getting more for your money, which is, as everyone knows, that's what Kratos has done with the drones and the hypersonics and the solid rocket motors. At worst, this is neutral, but most likely, this is going to be a very big benefit for the new entrants and the non-traditionals like Kratos.

[Michael Ciarmoli, Senior Research Analyst for Aerospace and Defense at Truist Securities]

Got it. Perfect. I'll jump back in the queue. Thanks, guys.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Thank you.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Peter Arment from Baird.

[Peter Arment, Senior Analyst Aerospace & Defense at Baird]

Yeah. Thanks. Good afternoon, Eric and Deanna. Hey, Peter. Hey, Eric. It's the first time I think I've ever heard you talk about foreign source selection when you're talking about for your tactical drones.

[Peter Arment, Senior Analyst Aerospace & Defense at Baird]

Is this a firm commitment from the customer, or do you know the potential quantity? Any more color on that that would be helpful?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yeah. One of the reasons I mentioned that today, Peter, is it's possible in the next few months, not by us, but because of the nature of this, it could become public. I wanted to make sure you all at least were informed on this. I can't say a lot. I can't get ahead of myself on this, but if you recall, in the last earnings call, I made some comments that on one or two of these new opportunities we're pursuing, as a result of them, we were lining up our supply chain for a third lot of 12 Valkyries. This ties into this. We're cautiously optimistic. We have been downselected. We're getting there.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

That's all I want to say. We have not included any of this in 2025. None. God willing, if it comes through, this could be a big binary for us.

[Peter Arment, Senior Analyst Aerospace & Defense at Baird]

Right. Then, you've given us a lot of information in this release regarding kind of where all the growth can come from in terms of capacity and growth in drones and engines. On the drone side, the tactical drone, well, I guess the Firejet, there's opportunities with the Navy on the tactical side. Can you give any more color there on how that's progressing?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Okay. Apollo and Athena are very, very relevant relative to tactical drones, one of them relevant to a non-Air Force customer. I have to choose my words carefully here. We continue to make. I don't talk about it a lot because I can't.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

We continue to make progress with Airwolf, including internationally, the tactical Firejet. One of the primary reasons for that is because a Valkyrie can go several thousand miles. A tactical Firejet cannot. From political and policy purposes, it's more palatable. One of these jet drones that our engines are going to be in flying is going to be tactical Firejet next year, which is significantly increasing performance in the electrical area for certain subsystems that are going to be very relevant. That ties into your question. I can't be more direct than that.

[Peter Arment, Senior Analyst Aerospace & Defense at Baird]

Got it. Yeah. Just lastly, you mentioned the turbojet development and TDI, and it sounds like the outlook there, certainly the capacity is in place. How do you anticipate kind of production ramping up now that you've kind of made that significant investment there?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

So I think that probably in the first quarter and first half, the continuing resolution is directly impacting a couple of three of these programs. Can't get the money because it's in the 2025 budget. We're going to get some initial LRIP orders. Okay? And late next year, second half next year, we could get a couple more LRIP orders. And based on what we're designed in on these systems. Based on what it looks like, we have a new president now. He's going to have a lot of say in the 2026 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 in the small jet engine production.

[Peter Arment, Senior Analyst Aerospace & Defense at Baird]

Got it. I'll jump back in queue. Thanks, Eric.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Okay. Thanks.

[Operator]

Thank you. One moment for our next question.

[Operator]

Our next question comes from the line of Ken Herbert from RBC Capital Markets LLC.

[Ken Herbert, Aerospace & Defense Analyst at RBC Capital Markets LLC]

Hey, good afternoon, Eric. And Deanna.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Hey.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Hi, Ken.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Hi, Ken. Good afternoon.

[Ken Herbert, Aerospace & Defense Analyst at RBC Capital Markets LLC]

Yeah. Hey, Eric. We've obviously got a new administration coming in. As we think about where we see some leadership changes in Congress and what would likely be sort of a greater push for higher defense spending, I know it's obviously early, and it sounds like you're alluding to this, and 2025 is probably not where we necessarily see this relative to 2026 and beyond. But are you prepared now to think about 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, what that means to your long-term 10% top line outlook that you've been delivering to over the last several years

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

So Senator Wicker of Mississippi very well may be the chairman of the Senate Armed Services Committee. And that gentleman is a 100% Patriot through and through. And if you Google it, you can probably see $1 trillion defense budgets under Wicker. I know he was looking for that recently, which are needed because of the threat profile. And I can go down the list on what people are speculating are going to have some of these important roles. It looks like for United States national security, it's going to be a grand slam, which we need right now for the country's sake. Now, having said that, affordability is going to be very, very important. It's just going to be irrespective if defense budgets go up to $950 billion or $1 trillion. Again, I'm the CEO. I drink the Kool-Aid.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Based on the programs we've won, the ones that we're going to win in the next three, six months, we know we're going to win. We've been told. And based on the opportunity pipeline, where this is strategic systems, nuclear systems, air defense systems, where we're basically sole source, this is one of the reasons I mentioned that probably in 2026, we're going to take up our 10% YoY growth number. We're going to. I don't believe it's going to be lack of winning the work. The constraint or the restraint we're going to have is getting the qualified people, primarily manufacturing people, including those that can get security clearances. Because you can imagine with what's going on in the industry, these people are in incredible demand right now by all of us. And that's going to be it.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

But that's kind of why I made the comments on we're looking to potentially take it up in 2026 because of what you just alluded to.

[Ken Herbert, Aerospace & Defense Analyst at RBC Capital Markets LLC]

And if I could, it looks like in terms of profitability within the unmanned segment, this year on an EBIT level, you probably end the year in low single digits in terms of margin. You're outlining, again, significant investments within that segment to support, obviously, the planned growth. Do we see or should we expect much margin expansion within the unmanned segment in 2026 or in 2025, I'm sorry? Or can you provide any additional commentary around that?

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

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 up production and move from development into production. So we would expect to see some expansion.

[Ken Herbert, Aerospace & Defense Analyst at RBC Capital Markets LLC]

Perfect. Thanks, Deanna. I'll pass it back.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Thanks. Thanks, Ken.

[Operator]

Thank you. One moment for our next question. Our next question goes in the line of Mike Crawford from B. Riley Securities.

[Mike Crawford, Senior Managing Director at B. Riley Securities]

Thank you. Given the increasing proliferation of space-based architectures, could you give us a sense of what your satellite business historically has looked like, broken down between LEO and GEO, maybe historically today and where that might be in the future?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

So the satellite business heretofore has been substantially GEO-focused, which heretofore, the vast majority and the vast number of satellites that went up, they went 22,500 miles up, and they were in geosynchronous orbit. That was before Elon, and that was before anti-satellite weapons that Russia and China have. Now we're going to distributed constellations in LEO and MEO orbit that can be kind of sort of augmented by GEO, but the vast number of satellites that are going up are going up into LEO. And then we can get into these that if they're over the ocean, they can't communicate unless they have laser crosslinks, etc. So we continue to be, as of right now, because of the legacy systems and these software-defined satellites that Airbus and Thales and Boeing are putting up, our business is predominantly still GEO.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

But because the market, especially in the tracking network areas, has 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 GEO to the LEO and the MEO as a result of the systems that are going up.

[Mike Crawford, Senior Managing Director at B. Riley Securities]

And then thank you, Eric. And then just related, the single award, $100 million plus space opportunity that could expand from there, can you say whether that's commercial or sovereign?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

It's not commercial.

[Mike Crawford, Senior Managing Director at B. Riley Securities]

Okay. And then separately, you had this successful joint exercise at Eglin Air Force Base, Emerald Flag. And we know Marines is a customer, but I mean, the Air Force, I mean, they're there in the joint exercise, and they have the CCA program. We're now, it's unsure.

[Mike Crawford, Senior Managing Director at B. Riley Securities]

It looks like the exquisites are never going to go into volume production, but it's unclear whether the next increment is going to be for more attritable aircraft, or is it something that's more related to counter UAS, or can you not comment on that either?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

My opinion on this, Mike, is the United States Air Force responsibilities are massive, and they're increasing. They're just massive what they're responsible for. Their resources, financial and otherwise, are not adequate for them because of these massive responsibilities. So they, in my opinion, the Air Force is very smart. They're going to be looking for areas where they can augment systems with lower-cost systems that may not be exquisite, but they're very, very capable, very capable. I believe Kratos drones, runway capable, runway independent, etc.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

I sincerely believe we're going to be part of helping the Air Force solve their drone issues from a resourcing standpoint. I believe that. And I'll leave it at that.

[Mike Crawford, Senior Managing Director at B. Riley Securities]

Okay. Thank you.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Seth Seifman from JPMorgan.

[Seth Seifman, Executive Director at JPMorgan]

Hey. Thanks very much, and good afternoon.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Hi, Seth.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Hi, Seth.

[Seth Seifman, Executive Director at JPMorgan]

Hi. Apologies if I missed it. Is there any update on Prometheus?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

I'm smiling. The last time we talked, I said we were in the red zone. We are on the five-yard line. I truly believe that at our next earnings report, if not sooner independently because of the significance of this to Kratos and the United States industrial base, that we are going to be able to announce something. Either we got it in the end zone or otherwise.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

I believe we're going to get it in the end zone. This could be one of the biggest catalysts for Kratos ever. So we're almost there.

[Seth Seifman, Executive Director at JPMorgan]

And is that-oop, sorry.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

No, I was just going to say we're almost there, but I don't want to jinx anything.

[Seth Seifman, Executive Director at JPMorgan]

Oh, of course, of course. And when you think about that kind of 10% next year and what we discussed a little bit earlier about the drivers of that, is that something where there's-is not factored in, and maybe there's upside related to that?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

It is factored at zero. This is so significant to future years and so binary. We're not factoring it at all. It's zero. It is zero in our forecasts.

[Seth Seifman, Executive Director at JPMorgan]

Okay. Okay. Got it. Got it.

[Seth Seifman, Executive Director at JPMorgan]

And then maybe just to follow, I feel like I should know this, but when we think about the producing at the scale of the turbines that you're talking about, what would be the primary destination for kind of for that level of production or the kind of top groups of programs that would be the customers for that scale of production?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Low-cost cruise missiles. There are a handful or two of brand new low-cost cruise missile or similar programs that are underway. They're underway. They're happening. There's not a lot of publicity on them, but they're happening. And these are orders of magnitude. Orders and orders of magnitude less costly than existing exquisite cruise missiles. This is clearly affordability, quantity, affordable mass that the military several branches are looking at, and they're doing it. This is going to happen. This is happening.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

So it's low-cost cruise missiles, why we built this family of engines specifically for this application because we saw it coming.

[Seth Seifman, Executive Director at JPMorgan]

Excellent. Thanks very much.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Sheila Kahyaoglu from Jefferies.

[Conor Walters, US Aerospace & Defense and Airlines Equity Research Associate at Jefferies]

Hi, guys. Conor on here for Sheila. Thanks so much for taking my question. Your commentary around the hypersonics pursuits is clearly very positive, and I think you previously called out it could be a $1 billion opportunity over the next five years. Can you just give us an update on where the broader hypersonic business stands today and how you think about that trajectory?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yeah. Okay. So Kratos' legacy in the hypersonic area is significant. I'll give you some programs. HIFiRE, HyCAUSE, FAST. Those were Kratos launch systems, and Kratos was involved in those.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

As you may have saw last year, France launched a hypersonic glider. Kratos launched it for them. Kratos system. Hypersonic, too, and also our ballistic missile targets, ballistic missile reentry vehicles, they routinely go over Mach 5, 5,000 miles an hour, excuse me, 5,000 miles an hour, so they're hypersonic, so we're an expert in the field. We just don't propagate it a lot. Our sweet spot in drones right now, contractually, is target drones. In solid rocket motors, it's ballistic missile targets, and so one would think that where would we be? We would be in hypersonic targets. We would be in hypersonic test vehicles. We would be in things like that right now as we speak.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

And also, similar to what we've done with the target drones, where we've now transitioned, augmented to tactical, we also very well may take a look at that in the hypersonic area because we can do things orders of magnitude less costly and faster than anybody else out there.

[Conor Walters, US Aerospace & Defense and Airlines Equity Research Associate at Jefferies]

Got it. That's very helpful. And then maybe for my second one, just to look at the microelectronics business in a little bit more detail. It's clearly been a strong driver for you guys this year given the demand in the region. But with all that capacity coming online next year, any way you can frame the growth opportunity for 2025 and beyond?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

This business should be a 15%-20% grower, if not more, for the foreseeable future to replenish the stocks, the inventories that have been expended over the last 13 months.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

And then, in addition to that, I mentioned the facility we're standing up in India with partners, with customers. This is not a build. We don't build it, and they will come. We have programs. Because of everything that's going on in Russia and the Ukraine and what's going on with Israel and Hamas and Hezbollah, India has not talked a lot about relative to China and 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 in a couple of years as we get online supporting them.

[Conor Walters, US Aerospace & Defense and Airlines Equity Research Associate at Jefferies]

Perfect. Thanks so much.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Operator]

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.

[Operator]

Our next question comes from the line of Andre Madrid from BTIG.

[Andre Madrid, Vice President and Aerospace and Defense Analyst at BTIG]

Eric, Deanna, thanks for the time. I wanted to talk on labor. I know you guys have cited this in the past as kind of being a hurdle to really be able to scale the propulsion business, especially at KTT. Can you highlight any progress on recruiting and retaining talent?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

I'm sorry. We have dozens and dozens of open recs right now, especially in the turbomachinery area. And as we've talked about before, the competition is not just only your traditional aerospace guys, but it's these new space companies like SpaceX and others. And I mean, it's just this is business. We make progress, but as we talk about, it's costly. And good for the people, good for them, but it's costly. So it's challenging. It's remaining challenging. I didn't talk about this in our prepared remarks.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

I believe we're going to receive another very large propulsion system contract on the military side that's going to get going in January for us. It's not under contract yet, but it's coming, and we're going to be sole source. And we're going to get it staffed, but the margins won't be as strong as we thought because we're going to have to pay to get these experts, and we're going to need like 50 of them to do this new program. So it's hard.

[Andre Madrid, Vice President and Aerospace and Defense Analyst at BTIG]

That's fair. No, I totally feel for you there. It's pretty industry-wide. But I guess pivoting again, I know somebody had mentioned it on the space side. I wanted to drill and look at it more at a BU level, space training and cybersecurity.

[Andre Madrid, Vice President and Aerospace and Defense Analyst at BTIG]

It's pretty broad, but it seems like what's happening on the commercial space front is when you think about contract mix, it seems like this is a bigger one. I mean, considering though the breadth of that portfolio, it is the largest on a BU basis of the entire company. What opportunities are there to kind of offset and expand in other areas, be it defense, be it cyber?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep. So something I haven't talked about for the past several quarters in detail is our training business, training systems, and these are virtualized training systems. These are augmented reality training systems, and it's also hardware training systems, so for example, we're involved with the M1 tank. You can imagine what's going on with that. We do the Bradley. You can imagine what's going on with that. We do multiple helicopters.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

As the weapon systems are being produced, including as they're going internationally, training systems, the demand today is probably better in this area than it's been in the last 10 years. No kidding. We have out there two or three bids right now, and we got another one we're getting ready to submit where our training business could literally double in size over the next two years. Literally. It could go 40 to 80. And then it could go, no kidding, if we hit two of these, one or two, if we hit one of them, it could go 40 to 80 to 150.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

And so those are heavily factored, but the training area where we're only one of two or three guys that can do this, you're going to be hearing us talk more and more about this next year because it's going to be a major contributor to us, and it's going to offset what's going on on that commercial space side.

[Andre Madrid, Vice President and Aerospace and Defense Analyst at BTIG]

Awesome. Looking forward to hearing about it. Thanks, Eric.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep. You got it.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Joe Gomes from Noble Capital.

[Joe Gomes, Senior Research Analyst at Noble Capital]

Good afternoon, and thanks for taking my questions.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Hey, Joe.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Hi, Joe.

[Joe Gomes, Senior Research Analyst at Noble Capital]

Eric, I wanted, see, maybe you could talk a little bit about the international target drone opportunity. Haven't heard a whole lot about that lately. What, if anything, is going on there that could be exciting for the company?

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

So back to air defense systems. You read about the U.S. allies, NATO, other allies acquiring air defense systems. So think systems like Patriot or SHORAD, even the old Hawk systems that are out there. And I can go on. They all need to be exercised. In addition to that, international customers are now taking F-35s. Those systems, those air-to-air missiles need to be exercised. Our international target drone business is experiencing very significant growth, but it's a small piece because the biggest target drone guys in the world are the U.S. Navy, the U.S. Air Force, the U.S. Army. Okay? So it's like $20 million a year, but it's growing very significantly. Here's the important part. Because they're international, the margins are much, much higher than with the U.S. government.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

And so I would expect for the next several years, and you follow the air defense systems, follow the F-35s where they're going, those are the countries that are buying our target drones. And very importantly, they have to put the infrastructure in to launch them, to fly them, to recover them. It's the razor and the razor blade. Then they get the target drones, and they shoot them down, and we ship them more. And so it will be one of our strongest growers for the foreseeable future for the reasons I just explained.

[Joe Gomes, Senior Research Analyst at Noble Capital]

Okay. Thanks for that. And one other one. We're going to kind of switch gears away from all the military. And one of the items we've talked a little bit about in the past is your driverless vehicle solutions. And just wondering what is going on in that sector these days.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

I'm smiling. It's doing great.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

The trucking shortage, the driving shortage, and I've learned more about this in the past several years, is acute, and it's expanding. I think over the next few years, like a million truck drivers are retiring, and they're not going to be replaced. And so we continue to make incredible progress: sales, revenue, profit, sugar beets, soybeans, minerals. These are on big agro complexes in states, on state roads where we have unmanned vehicles driving. It's incredible. And our differentiator here is we developed this for tanks. We have a kit that we put into a truck, and we turn it into a robot. So it's very cheap, very low cost. And that's our angle because we're not going to compete against guys that are building unmanned cars. So this business will probably be materially financially positive for us. In other words, big enough for us to start talking about in 2026.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

It's growing. It's a few several millions of dollars in revenue right now. Very profitable. And it's scaling. I don't talk about it much because it just hasn't been significant to the whole thing. 2026, it's probably going to be to a point where we're going to be talking with you about it routinely because it's going to be in the—it could be in the tens of millions.

[Joe Gomes, Senior Research Analyst at Noble Capital]

Great. Look forward to it. Thanks for taking my questions.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Pete Skibitski from Alembic Global.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

Hey, good afternoon, Eric and Deanna.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Hi, Pete.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Good afternoon.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

Hey, Eric, I just wanted to see if we can kind of wrap our hands around this commercial space area just a little bit more because it was down a chunk this quarter.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

Just wondering, what's it down here to date? What's your expectation for the full year? And sort of when do you think it'll bottom?

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

Yeah. Pete, I'm glad you asked the question because it's going to give me an opportunity to highlight how strong the rest of the company is doing. It's going to be down this year on the commercial satellite side, $30 million-$35 million in revenue. Down. Because the operators are not taking receipt of the satellites from - we know who these guys are, which means they're delaying the ground equipment deployments, which contracts we've already won. So it's down $30 million or $35 million. And Pete, think about it. The rest of the business has completely offset it. So it shows you that if this had not happened with these software-defined satellites, we would be blowing every financial metrics away, blowing it away.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

And which is why I'm so confident next year we're going to do so, so good is because at worst, that business is going to have stabilized. I actually think it's going to start going up again. I don't want to get into the details on that right now. Every other business that Deanna and I have talked about today, it's either at or near record backlog and record opportunity pipelines. So thank you for asking that question.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

Yeah. Yeah. I mean, it was down. It says $24 million this quarter. And I thought it was down previously as well. So that would seem to indicate it's already bottomed or maybe bottomed this quarter, and there's not really further meaningful headwind ahead.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

I think that's fair.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

Okay. Okay.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

That's fair. Yeah. Yeah.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

And sorry if I missed this, but the revenue guidance for KGS for this year, is it still $860-$875?

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

That's correct, Peter. Yes.

[Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global]

Okay. Okay. Sounds great. Thanks so much, guys.

[Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions]

Thank you.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Yep. Thank you.

[Operator]

Thank you. At this time, I would now like to turn the conference back over to Eric DeMarco for closing remarks.

[Eric DeMarco, President and CEO at Kratos Defense & Security Solutions]

Great. Thank you all for joining us. Our next planned chat will be when we report Q4 at the end of February, and that's when we'll put the meat on the bone on the financial guidance. Thank you.

[Operator]

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

Participants

Executives

• Marie Mendoza, SVP and General Counsel
• Eric DeMarco, President and CEO

Analysts

• Deanna Lund, EVP and CFO at Kratos Defense & Security Solutions
• Conor Walters, US Aerospace & Defense and Airlines Equity Research Associate at Jefferies
• Ken Herbert, Aerospace & Defense Analyst at RBC Capital Markets LLC
• Mike Crawford, Senior Managing Director at B. Riley Securities
• Michael Ciarmoli, Senior Research Analyst for Aerospace and Defense at Truist Securities
• Joe Gomes, Senior Research Analyst at Noble Capital
• Andre Madrid, Vice President and Aerospace and Defense Analyst at BTIG
• Seth Seifman, Executive Director at JPMorgan
• Peter Arment, Senior Analyst Aerospace & Defense at Baird
• Pete Skibitski, Director of Aerospace & Defense Equity Research at Alembic Global