Kratos Defense & Security Solutions Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2025
Skip to Participants
Operator

Good day, and thank you for standing by. Welcome to the Kratos Defense and Security First Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press 11 on your telephone.

Operator

You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

Marie Mendoza
Marie Mendoza
Senior Vice President and General Counsel at Kratos Defense & Security Solutions

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense and Security Solutions first quarter twenty twenty five 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.

Marie Mendoza
Marie Mendoza
Senior Vice President and General Counsel at Kratos Defense & Security Solutions

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. Non GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non GAAP financial measures to the company's financial results prepared in accordance with GAAP.

Marie Mendoza
Marie Mendoza
Senior Vice President and General Counsel at Kratos Defense & Security Solutions

With that, I will now turn the call over to Eric.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Thank you, Marie. Good afternoon. Both the industry and Kratos have received a significant amount of positive news since our last report to you, increasing our confidence for 2025, '20 '20 '6 and the future. 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, a potential additional 150,000,000,000 defense related reconciliation bill progressing, and the potential for a $1,000,000,000,000 20 20 6 US national security budget, all increasing our confidence in Kratos' twenty twenty five and 2026 full year financial forecasts, including approximately ten percent 2025 and thirteen percent to fifteen percent 2026 year over year organic revenue growth. Further supporting both our 25% and future organic growth outlook confidence, Kratos' Q1 book to bill ratio was 1.2 to one and Kratos' last twelve months book to bill ratio was also 1.2 to one.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And even after all of these Q1 bookings and LTM bookings and conversion from opportunities to backlog, Kratos' opportunity pipeline stands at approximately $12,600,000,000 an all time high for the company. 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. 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, and credible alternative to a traditional approach. Additionally, as related to government fiscal realities, it appears that if companies like Kratos have made the upfront investment and have real working relevant products and systems that certain customers will procure those existing products rather than incur millions or billions in customer funded r and d over extended periods of time for the so called maybe someday perfect system. 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 effort?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

We are seeing this trend, and it appears to be accelerating, which may in part also be related to certain aspects of executive orders the president has signed and possibly even Doge, where 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? As a result, Kratos is currently bidding on a number of large multi hundred million dollar single award opportunities, 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. Also related to recent events, Kratos being a military grade hardware and software company with substantially all our vendor base and supply chain being US located and sourced, we expect little impact from existing or any currently contemplated tariffs. 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, target drones to test, exercise, and train the warfighters on these systems, space and satellite systems related to tracking, and hypersonic and related propulsion systems.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Air defense is also an area where Kratos is uniquely qualified to support the new Golden Dome opportunity. Importantly, just under 20% of the DoD's one hundred and fifty billion dollars reconciliation bill is focused on integrated air and missile defense, which is expected to add to this already large and growing market opportunity for Kratos and approximately $27,000,000,000 is just the initial proposed funding for Golden Dome. 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 C5ISR systems for missiles, radar and counter UAS systems. Expected mid and longer term growth areas include the Golden Dome initiative, strategic systems, and our Prometheus, Anaconda, Helios, Vulcan, Ares, and other initiatives, the majority of which are with customers or partners and are not build it and hope they'll come. On Prometheus, we are progressing on schedule with our outstanding partner, Rafael, 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
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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. 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. Vulcan 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' affordable hypersonic franchise, including our first to market operational and in production Zeus hypersonic rocket motors and our first to market operational and in production Aeronis and Dark Fury hypersonic flyers are also expected to be key contributors to Kratos' future financial performance. Kratos' hypersonic franchise includes certain of the highest performance hypersonic systems and vehicles of their type in existence 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 missions and not just a concept or a PowerPoint.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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 funded contract. 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 mass and quantities. We now have an order. We now have on order long leads for several Aeronese and Dark Furies and approximately 70 SRMs, including Zeus, related to upcoming and expected hypersonic related and other missions, substantially all of which are targeted to a specific customer or program, including MachTB, which provides a data point on the off tempo and related revenue ramp we expect for Kratos' hypersonic franchise beginning later this year and accelerating into 2026. Kratos' air gapped hypersonic development team, Erebus, is now focused on Kratos' Furies 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
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

The newest of these flight vehicles of Kratos' Furies families is under the project Ares, which is now in development. And similar to Kratos' Aerenis and Dark Fury, we expect our Ares system to be first to initial flight and to market. We expect and are forecasting Kratos' company wide hypersonic franchise to be one of our fastest growers, including certain of our highest margins for the foreseeable future. Kratos' target drone business is performing as expected, including with our US Air Force, Navy and Army customers and also with our international customers with demand for target drones directly related to the increased global demand for air defense, counter UAS, missile radar tracking, other systems, all of which need to be exercised, tested, and their respected operators trained. Tactical drone business is also tracking as expected, including Valkyrie, Thanatos, and our Apollo, Athena, and other programs.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Kratos' decision to make the internal investments, including beginning serial production of 24 Valkyries 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. Importantly, Valkyrie customers and partners can come to Kratos' factory, walk the manufacturing floor, see their respective tail numbers in production, see the actual cost for their jet drone system, take delivery, fly, and operate the system. Kratos' tactical jet drone customers don't have to imagine anything from PowerPoints or idle robots sitting around an idle factory. 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
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

With the Valkyrie, you can do rocket launch for complete runway independence where fixed airfields or runways are threatened. You can do conventional takeoff and land for training or where traditional airfields can be used, or you can use a trolley launch off a runway also for training and which also allows maximum payload capability to the warfighter. Thanatos, 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. Also in the second half of twenty five, we expect to receive certain new tactical drone related program and contract awards, including potentially the most important ever for Kuas, and we remain confident that Kratos' tactical drone business will be an important future and value creator for our company. Kratos' air gapped Ghostworks 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
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And the most brilliant drone engineer in Kratos and probably the world is now working on a Mach five plus capable drone. KTT and our engine and propulsion system business are well positioned to take advantage of the DOD's plans for new lower cost cruise missiles, drones, loitering munitions, hypersonic space, and other systems at scale produced in mass. Similar to Kratos' drones and hypersonic systems, Kratos' jet engines are running and flying today. They are not PowerPoint's 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. KTT's air gapped development group BladeWorks is working closely with General Electric Aviation on the GEK 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
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

GE, similar to Northrop, Lockheed, Rafael, Raytheon, Dynetics, and others is an outstanding partner of Kratos. Kratos' BladeWorks is also working on a new propulsion system for a classified drone program, on a new engine for a next generation aircraft, and on certain hypersonic program propulsion systems. Kratos' blade works has been invaluable to Kratos' overall hypersonic franchise and initiatives. Kratos' national security focused space and satellite business continues to receive additional funding, program and contract awards and along with resource management steps we have and will continue to make is adding to our confidence for expected overall Kratos increased EBITDA margins in '26. Kratos' national security space and satellite offerings, including our open space software system is clearly a technological and value add differentiator for our partners and customers as represented by additional and new contract and program awards.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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. Kratos' space, satellite training and cyber division is our company's largest business and we expect this business' margins to significantly increase in '26, which would lift the margins of all of Kratos, which is a top priority for our corporation. 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 Elbit, and the Israeli MOD in the State Of Israel. As we have been communicating to you over the past few quarters, 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.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Our U. S.-based microwave business is on track to be one of Kratos' future shining stars 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. The recapitalization of strategic weapon systems and The US 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. Accordingly, we are focused on making the required investments in our existing core business areas in close coordination with our customers and partners to increase our market share, drive future revenue growth, increase margins and position the company for sustainable future free cash flow generation. Importantly, as I mentioned before, the vast majority of the property, plant, equipment, and other investments that Kratos makes are not build it and hope they come type investments, 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 based partner, or other funds at an acceptable rate of return for the investment made.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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, 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. With Kratos' current and existing unique mil spec 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. Tiana?

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Thank you, Eric. Good afternoon. As we have included a detailed summary of the first quarter financial performance as well as the initial second quarter and affirmation of full year 2025 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenues for the first quarter were $302,600,000 above our estimated range of $285,000,000 to $295,000,000 which includes strength in organic revenue growth across each of our businesses with the most notable increases in our microwave products, T5ISR and defense rocket support businesses with organic revenue growth rates ranging from 13% to over 18%. Adjusted EBITDA for the first quarter of twenty five was $26,700,000 also above our estimated range of 20,000,000 to $24,000,000 reflecting a more favorable mix of higher margin revenues offset partially by continued increased subcontractor and material costs on certain multi year fixed price contracts in our Unmanned Systems business.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Unmanned Systems organic revenue growth was 6.2% for the first quarter and KGS organic revenue growth was 7.8% for the first quarter, excluding the impact of the recent acquisition of certain assets of Norton Millimeter Inc, which closed during the first quarter of twenty twenty five. First quarter '20 '20 '5 cash flow used in operations was $29,200,000 primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $37,000,000 increases in inventory and other assets of over $19,000,000 primarily reflecting increases in our microwave electronics and rocket systems businesses, which are for anticipated future deliveries and ramps in production, as well as investments we are making related to certain development initiatives in our unmanned systems business. Free cash flow used in operations for the first quarter of twenty twenty five was $51,800,000 after reflecting funding of $22,600,000 of capital expenditures. 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. Consolidated DSOs or days sales outstanding increased from one hundred and four days in the fourth quarter to one hundred and nine days in the first quarter, reflecting the revenue growth and the timing of milestone billings.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Our contract mix for the first quarter of twenty twenty five was 73% of revenues generated from fixed price contracts, 22% from cost plus contracts, and 5% from time and material contracts. Revenues generated from contracts with the US federal government during the first quarter of twenty five was approximately 68%, including revenues generated from contracts with the DOD, non DOD federal government agencies, and FMS contracts. In the first quarter of twenty five, we generated 12% of revenues from commercial customers and 20% from foreign customers. 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
Executive Vice President and CFO at Kratos Defense & Security Solutions

Our financial guidance we provided today includes our expectations and assumptions for our supply chain's execution and for employee sourcing, hiring, retention and the related cost. Our second quarter forecasted financial performance takes into consideration the expected several week downtime related to our microwave products facility move in Israel. As this business generates some of the highest margins in our company, the expected downtime has impacted our estimated shipments and Q2 margins. Margins. We have taken into consideration the impact of increased material and subcontractor costs on certain of our multiyear fixed price contracts, specifically in our unmanned systems target business where we have experienced cost growth with certain ancillary materials on our targets and for which we are unable to seek recovery from the customer until the renewal of future production lot contracts occurs.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

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. As the period of performance of these contracts spans over a multiyear period, we do not expect to complete deliverables under these contracts until the next few years. 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. As we mentioned on our last earnings call, we are making investments for capital expenditures for property, plant and equipment, including the expansion of our manufacturing and production facilities for our microwave products, hypersonic and c five ISR businesses, and related inventory builds in our rocket systems and hypersonic businesses, primarily related to the recent Mach TV two point o contract award and continued manufacture of two production lots in Valkyries prior to contract award to meet anticipated customer orders and requirements. We will continue to provide updates on the estimated timing of the procurement and build process of these capital outlays as appropriate.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Eric?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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

Operator

Our first question comes from the line of Peter Arment with Baird.

Peter Arment
Senior Research Analyst at Robert W. Baird & Co

Good afternoon, Eric and Deanna.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Hi, Peter. Hi, Peter.

Peter Arment
Senior Research Analyst at Robert W. Baird & Co

Congrats on all the developments that are going on. Maybe need start on Golden Dome, PWSA kind of program that's already out there, Space Force Transport and Triangle Air, and Kratos is obviously involved in the ground segment of that program. You know, how do you expect to kinda see, the benefits under this program moving forward as tranche three progresses? And we recently heard that the PWSA is gonna form part of Golden Dome. Just how how does how

Peter Arment
Senior Research Analyst at Robert W. Baird & Co

does Kratos fit all that?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yes. As as as we've tried to communicate before and as you alluded to, we're on the ground command and control, telemetry tracking and control, and moving into SATCOM. And the more assets that are up in space, whether it be LEO, MEO, or GEO, the more ground equipment is needed, the more ground software in open space, which is needed as as many of the satellites that are going up there have software defined capabilities. And this is one this is an area, Peter, where we clearly have the wind in our sails, and the boats are arriving with rising with the tide.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And and space domain awareness in addition to the Golden Dome is another area where there is incredible funding coming into here relative to what China and Russia are doing. You you may have seen that, it was announced, it was reported in the last couple weeks, A Chinese space vehicle excuse me. A Russian space vehicle deployed three or four additional vehicles. There's a lot going up there. And the Chinese we identified the Chinese doing some dogfighting up there with their satellites.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

There's a lot going on. We gotta 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 an industry leader.

Peter Arment
Senior Research Analyst at Robert W. Baird & Co

That's helpful. And then just you mentioned the Valkyrie and obviously they're including new variants with the landing gear. When would we expect to see any commencement of any test flights with the landing gear? And do we and and and is this kind of in preparation for increment two or or with CCA or any any any kind of thoughts there? Thanks.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yeah. Obviously, we we moved out on the landing gear capable Valkyrie in conjunction and in communication with several customers. And for for security reasons and other reasons, I I can't talk about which ones, but there are are several. That aircraft is tracking to fly this year, soon this year. And that's really all I'm gonna I'm gonna say about it right now, Peter.

Peter Arment
Senior Research Analyst at Robert W. Baird & Co

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

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Okay. Thank you.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Thanks.

Operator

Our next question comes from Mike Crawford with B. Riley Securities.

Mike Crawford
SMD & Head of Discovery Group at B.Riley Securities

Thank you. Regarding turbojet engines, you you you mentioned expectation to produce several hundred this year and with rapid expansion there from. And so, like, what specific missile programs would support production in in those quantities?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yeah. So just just mentioning missile programs generically that that that our engines could be involved with our power JDAM, Mace, Franklin, and there are a couple of classified ones. So those are just some that come to the top of my head.

Mike Crawford
SMD & Head of Discovery Group at B.Riley Securities

Okay. Thanks. And then just back back to the Valkyrie, can you just remind us how when, these 24 units that are being manufactured under these two production spirals, if once you do get a contract, how that hits your financials?

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Yes, Mike. So once they are manufactured, once we receive the contract, if we value has been already built in our inventory or our capital, it would be moved to inventory. So let's say there 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 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.

Mike Crawford
SMD & Head of Discovery Group at B.Riley Securities

Okay. Great. And then Prometheus, that's just gonna be below the line. Right?

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

That's correct. It will be reported in interest and investments below the line.

Mike Crawford
SMD & Head of Discovery Group at B.Riley Securities

Alright. Thank you.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Thank you.

Operator

Our next question comes from Ken Herbert with RBC Capital Markets.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Yes. Hi. Good afternoon, Eric and Deanna.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Hi, Ken.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Yes.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Hey, maybe just to start on unmanned systems. As look across this year, I mean, obviously, a lot of the EBITDA is coming from government solutions. But how do we think about the profit contribution from unmanned this year? Maybe relative to last year with all the investments, could it could the segment be profitable this year on on a reported basis? And and maybe what's the expectation in the back half of the year?

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

So we expect from an EBITDA perspective that it will continue it will continue to be profitable this year.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Okay.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And we're and and, Ken, we we've as we've talked about before, we have a couple of target drone programs that are five year contracts that we bid on pick firm fixed price. We bid on and won them in 2018, around 2019. So we're producing those out the rest of this year and the rest of next year. 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. Like, the the minimum wage went up, which raised things.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

So we're managing on typically, fixed price contracts are great. You come down the learning curve, you 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. And so we we are continuing to take some steps to manage our way through it on the cost side, On certain suppliers, which I've I've I've discussed before, they have drastically increased their prices. We are working with our customers to see if we can get alternatives qualified, which is not an easy thing to do.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

So we're we're doing everything we can. I think we're gonna see some some relief and some benefit later this year and into next year because of the efforts that we're taking. But the but the real step up here will be '27, '20 '8, something like that, on the new fixed price contracts where we take actual and we're sole source, and we have the design, 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 that's the dynamic we're navigating through here on two two contracts.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Okay. That's helpful, Eric. And I think you mentioned the facility move in Israel is going to happen over three weeks. And obviously, the guidance for the second quarter reflects that. I mean that sounds it sounds ambitious, to be honest, considering customer certification and and everything else you have to go through.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Can you just talk through sort of confidence in in keeping that disruption to a minimum and maybe where some of the risks could be as you think about about that facility move?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. That's that's actually an excellent question. So you've been through this before with with companies. So we have obviously worked incredibly closely, not just with our prime, but also with the Israeli government because what we're doing is mission critical. So relative to approvals and qualifications, we've got them all already.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

We've got them. And so we're gonna do it in a phased approach over the three weeks. The test equipment, the engineering stands, etcetera, will be relatively simple. And then the manufacturing equipment, the robots will have to go. That'll occur over two weeks.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Again, hand in hand with our customers and with the government. 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. 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 Q2 guidance.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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, September, Q3 will be back on track.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Great. Thanks, Eric. Good luck with the move.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Thank you.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

You very much.

Operator

Our next question comes from Joe Gomes with NOBLE Capital.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Good afternoon. Thanks for taking my questions, Eric and Deanna.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Hi, Joe.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Hi, Joe.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

So, Eric, I wanted to start out on the on the the tactical drones. I haven't really heard a whole lot on the competitive front. And just wondering if you'd give us kind of maybe a overview. Is there anything that the competitors are doing or saying they're going to do that, you know, if if not keeps you up at night, at least makes you shake your head and and say, maybe maybe we should take a look into that. Anything there new on that front?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. There there is absolutely nothing 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.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

This is Thanatos. This is Mako. This is Apollo. This is Athena, and this is Airwolf. And we are going to win because of that.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And that's how I that's how I see it.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

K. Thanks for that.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

And then, you know, you guys put out a press release a couple weeks ago about your your the expanding your truck platooning technology into new areas. And, you know, in the press release, you talked about, again, you know, repurposing technologies for the commercial use. And got me thinking, you'll I don't know if you can provide this at this point, but, you know, what other technologies are you you looking at for repurposing for commercial applications?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Right. So the so the ones we've got going that are significant and and you you ask about our our our robotic trucks and vehicles a lot. I'm I'm glad you are because this could be a needle mover next year in the in the truck area because and I we've got the data. There are tens of millions, obviously, of trucks that are relative trucks that have been that are on the road, that have been built since the sixties, seventies, and eighties, and our kit converts them to autonomy. It's it's right up Kratos' alley.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Low cost, smart, don't recreate the wheel, something that's effective with an eye on better is the enemy of good enough. K? Open space. This is one of the reasons why open space is is 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.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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. We have a number of military engine programs we're on, and we're also on commercial turbofan engine programs, which once again, we lever off the r and d, we lever off the engineering team, it brings value to both sets.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Rocket motors, obviously, we're all familiar with what we're doing in the hypersonic area and the ballistic missile target area and the other stuff we launch area. We don't talk about it a lot because we are under some very serious NDAs, but we are on multiple commercial rocket engine programs for very high profile rocket spaceship companies that wanna go to Mars and the moon and all these places. So we're getting the leverage off of that commercial application of our technology. And I'll give you a specific on the jet engine side. You know, as as as people know, our engineering group was involved in the development of the jet engines for f twenty two and f thirty five.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Well, that group is what's supporting Boom Supersonic, which which which that business plan is coming together very, very nicely for Blake. So those are the four or five that that come to mind that are actually out there and that they're not on a whiteboard.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Great. Thanks. Thanks for that. Very, very exciting in in my view, especially all the dual use as you mentioned. And last one for me.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

I know you've talked in the past. I know you're not looking to do anything big in terms of the m and a. But if if you were out there looking at, you know, some tuck in m and a, what what areas would be, you know, top of the list for you that you would wanna target?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Microwave electronics would be one. Would be at the top of the list. Everything needs microwave electronics. It would have to be the, you know, the right flavor, the right size, the right fit, the right the right culture, the right everything. That's one that comes to mind.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And, turbomachinery. And that would primarily be to get access to resources, people, and the very specialized equipment for engines and propulsion systems, which which the demand for us is incredible. Right? It's incredible right now. It's it's incredible.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

It it's, it's gonna be one of our primary growth drivers this year, TERP engines, jets, other types of propulsion systems, and in '26 and in '27. We have a supply demand imbalance. There's too much demand. And there's not enough of supply of us. So those are the areas.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Great. Thanks for that.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

I'll get back in queue. Thank you again.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yes, sir. Thank you.

Operator

Our next question comes from Michael Ciarmoli with Truist Securities.

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Hey, good evening, Eric, Diana. Thanks for taking the questions. Hey, just to stay on that topic, Eric, with the the demands and need for propulsion and engines. You know, we we obviously heard a lot about that over the past, you know, twenty four, thirty six months, but it but it doesn't seem like there's a lot of share shifting or share gains being made. I mean, are is your opportunity predicated on just a lot of new programs?

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Are you seeing the opportunity to take share on existing missiles or whether it is smaller, you know, unmanned systems that require, you know, those types of engines. Could you give any more color there?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Absolutely. And and and your question is a is a very relevant question for a lot of what we do. Our pry Kratos, our primary opportunity in the engine area is greenfield new programs where we're gonna get designed in 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, 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, 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 when I talk power, it's not just thrust.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

It's the electrical power. That's where we excel to power all the subsystems, including electronic warfare, electronic attack, decoys, blah blah blah, on all these things. So primary opportunity, new systems, new missiles, etcetera. Now there are a couple free 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. Must.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. Because the quant the quantities that are coming are staggering, and there can't be a single point of failure. And I am confident I'm confident in the next twelve to eighteen months, we're gonna be able to announce this. And it's gonna be it's gonna be significant.

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Okay. Okay. You know, that that leads into my my follow-up question here, the next one. You know, I I think we we get the question all the time from investors, what really sparks the growth inflection? Or as your company continues to evolve, how does the revenue mix look?

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

And I think we always just sit here and think it was going to be a big ramp in the unmanned tactical. But I mean, if we look out twenty four, thirty six months, in your view, what has the potential to be the biggest revenue growth contributor? You talked pretty enthusiastically, Valkyrie, Thanatos, but then you got Prometheus. You've got the engines with GE and Targets. I mean, what what is the biggest revenue driver as you see it over the next two to three years?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Okay. And and, Michael, I'm gonna I'm gonna talk clarity, surety, and then I'll then I'll I'll I'll I'll reiterate. K. Our hypersonic franchise is absolutely going to be the number one growth driver in absolute dollars and in growth rate for this company for the foreseeable future unless global peace breaks out.

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Okay.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

No. No. Our hypersonic franchise across the board, virtually every aspect, including space related and tracking things. Think HTTSS. Think Titan.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Think those programs, which we don't talk a lot about. So it's the biggies are Erinys, Dark Fury, Zeus, Oriole. Dart's coming. We have another one coming that I I have alluded to. It's coming.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

All of which we have a customer customers. So the hypersonic franchise is number one. K. Number two, engines, propulsion systems across the board, turbojets, turbofans, hypersonic engines, back to hypersonics, space propulsion systems. No question.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

This is going to be our number two growth driver in this company for the foreseeable future. K? Number three, microwave electronics, particularly internationally out of Israel. And as as as I know many of you know, a lot of those Israeli systems or Israeli systems with with their prime goes to India, for example. K.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

I see no lead up here. Not at all. And what's happening with our microwave electronics business internationally and domestically. And now, Michael, I promise that with when slash if our tactical drone initiative hits. That is going to be one of the, if not the biggest needle mover for the company.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

But I'm putting that as a call option because I've been burned before, and I'm not we're not counting those chickens until the little eggies hatch. And so that's how we see it.

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Got it. Helpful. Thanks, guys. Appreciate it.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep.

Operator

Our next

Operator

question comes from Andre Madrid with BTIG.

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

Eric, Deanna, good afternoon. How are you?

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Hi, good. Hi, Andre.

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

Looking at outlook last quarter when you first provided it, you said that it assumed a mid March CR resolution. Obviously, that didn't happen, but the outlook was kept intact. Could you maybe just walk us through what's baked into the outlook now and how should we how we should be thinking about the potential impact of a full year CR?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. So the the the CR that happened, if you will, is not really a CR. It's an appropriations bill. And why do I say that? Because reprogramming of funds, moving around money between priorities is allowed under this 2025 CR, which is not typically allowed under a normal CR.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

This is very, very good for us. And that's not that that's through talking with program offices. K? This has brought incredible clarity to us for 2025 calendar 2025. K?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

The only thing that's slowing us down, April, May, June, is something I've talked about before. The government program offices and contracting offices have gotta get I'm not saying this lightly, gotta get the paperwork done. Gotta get the money obligated, gotta get it under contract, and gotta get it out to industry including Kratos. And even even though even though I'm the 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 with a lot of contractors. And so we feel we feel orders of magnitude more confident than we felt confident before in our 2025 plan, because of the what what's come out in this this 2025 CRA, which isn't really a CRA.

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

Got it. Got it. And then

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

if we move against if

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

we zero in on on unmanned systems, not to, you know, beat the dead horse here. But can you maybe give us a a 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 a sense of the magnitude.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Yeah. Andre, the lion's share of the bookings were Target Drones. Some tactical, but the lion's share was Target.

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

And when when when might we expect an inflection point where tactical might take the lead in terms of being the the main demand driver?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Right. And so as I mentioned to mister Tremoli, I don't want I don't wanna count the the ducks until they're the chickens until they're hatched. I I don't we're not gonna get ahead of ourselves here. And so for for our big growth drivers, whether surety, focus on hypersonics, focus on microwave, and focus on engines, and our target drone business is is just doing fantastic. Of course.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Why? Because all these air defense systems that are being bought globally need to be exercised against what? Kratos target drones. And and and God willing, when if we we hit it on the tactical side, it will be a step function inflection point for the company.

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

Got it. Got it. No. That that's very helpful. And then, if I could just ask one more.

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

Could you maybe just dig a little bit deeper on the commercial space side? So I I do realize that some of the, you know, downstream customers have started to launch finally, some of those big launches that I think were 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 a sense around timing?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. So so I say this very literally. Anything that goes up in space for the free world is is positive for Kratos and our revenue on the commercial side because our ground equipment is either gonna command and control it, track it. Our space domain awareness network is going to track it for the customer, etcetera, etcetera. So it's good.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

K? However, the launches that you're talking about have not been for large geosynchronous orbit software defined satellites, specifically, that Airbus, Thales, and Boeing make. They have issues. I'm not they're not Eric's issues. This is well publicized now.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

This is one of the reasons why Airbus and Thales and I think the Leonardo or somebody, they're they're looking to to merge. Alright? This is a real issue. They need to get those up to compete with SpaceX, and we can get into a big long how all that works. So I don't know how long it's gonna take for for for the these OEMs to to address these issues and get these things up there.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

I have to assume that it's going to be more of the older bent pipe. I call them bent pipe types of satellites that are more of a broadcast that have spot beams. As you can imagine, we're also now working with virtually every one of the new micro geo satellite manufacturers. This is significant. I'm not gonna get into it a lot because I'm gonna we're gonna sneak up on somebody here.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

But the all those guys, they don't have ground equipment. If they need ground equipment and they're typically VC or PE back, they like working with us, that's gonna be an opportunity for us. That's where we're focused. And, of course, the military and national security side where where we have an incredible amount of opportunities that are coming at us. We're gonna wait and see on these these these big software defined geos until they get up there and they work.

Andre Madrid
VP - Aerospace and Defense Analyst at BTIG

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

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. Yep.

Operator

Our next question comes from Pete Skibitski with Alembic Global.

Pete Skibitski
Director - Aerospace & Defense Equity Research at Alembic Global Advisors

Hey. Good afternoon, Eric and Deanna.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Hi, Pete.

Pete Skibitski
Director - Aerospace & Defense Equity Research at Alembic Global Advisors

I'll I'll just sticking with the space theme, just maybe to delve a little bit deeper. So so space as a whole was down again in the first quarter. Is that right? And then what what what's your assumption what's your assumption for '25 in terms of space growing or not?

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Yeah. So it it was actually up about 2% organically, and we expect it to be up for the year.

Pete Skibitski
Director - Aerospace & Defense Equity Research at Alembic Global Advisors

Okay. Okay. Great. Thanks for that.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yeah. Pete, at the last on the last call, I said I thought it had bottomed out in q four for us for us. Because there are others. It's not bottomed out yet, but it's bottomed out for us. And so I see it it's stable to up, and we're seeing up.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And I think we're gonna see even more up because the government side, the national security related side is doing so so well. And so it it's slowly turning around, but not because of the commercial software based satellites.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Right. And that's driven by by by the book to bill that was that was over two to one last quarter. So that was all predominantly federal national security type space awards that and that's that's the visibility we have for the organic growth that we expect for '25 for overall per space, largely driven by the Fed side.

Pete Skibitski
Director - Aerospace & Defense Equity Research at Alembic Global Advisors

Got it. No. It's very helpful. Thank you. And and just Eric, just maybe on mock TB, just to it sounds like the full year CR isn't gonna impact, that program ramping.

Pete Skibitski
Director - Aerospace & Defense Equity Research at Alembic Global Advisors

But can you remind us, does that not generate revenue until the second half of the year? And so you get kind of a half year this year and a full year next year? Is that is that kind of still on track, that profile?

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Yeah. So we there there is some contribution in the the first half, but not not as much as we expect it to ramp in the second half. And then expect a further ramp into '26.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Got it. A big, yeah, a big a big part of that is, you know, some of the launches we've been doing under mock TV and some of these other hypersonic things. We leaned forward without a contract and a program, and we ordered the long leads for Rocket Motors and Aranes and Dark Fury, which I can talk about now. We've now ordered, as I mentioned in my prepared remarks, I think we've got 70 Rocket Motors under order right now that are that are gonna be coming and a lot of Erinices and Dark Furies. Soon as we get those, we get those integrated, we get them up, and we launch them, that's when the revenue starts.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

So that that's what's holding it back right now. I also wanna remind that on mock TV, we're the prime. So on certain launches that you see guys like Stratolaunch do or Rocketlabs do, all of which are phenomenal partners with Kratos, That flows up through us. So we we get a portion of that, and that's part of our global teaming agreement to further hypersonic testing for The US Defense industrial base. So so please keep that in mind.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

We we we're not gonna tout that. We want them to to to to do it, but those typically are gonna roll up under our mock TB program.

Pete Skibitski
Director - Aerospace & Defense Equity Research at Alembic Global Advisors

Okay. Great. Thanks so much, guys.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Yep. Thank you.

Operator

Our next question comes from Rustom Kanga with Citizens.

Rustam Kanga
VP - Research at Citizens Capital Markets and Advisory

Good afternoon, Eric and Deanna. This is Russ on for Trevor Walsh. Just one zooming out here. Eric, any thoughts or breadcrumbs you can provide us around thinking through the the Navy CCA? Understand that's a low cost opportunity and certainly a critical aspect of, maritime warfare.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yeah. My my friend, I cannot say anything about CCA programs at all right now. I can't do it, and I apologize.

Rustam Kanga
VP - Research at Citizens Capital Markets and Advisory

Okay. Great. One more on can you just help reconcile the comment on the The US supply base being sole sourced alongside the the target drone, the cost elevation? What's the driver there?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yeah. I will absolutely. And I touched I touched about this either on the last call or or the other call. There there there are two suppliers that we have that they're the only they're they're they're they're the only ones that are qualified to make these things for our target drones. And 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.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

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.

Rustam Kanga
VP - Research at Citizens Capital Markets and Advisory

Understood. Appreciate the reminder on that. Last one, you kind of alluded to on the microwave electronics piece, a lot of the Israeli systems when primed go to India. Any comment on if if a conflict in that region persists, how that would affect that business?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. Take a look at the Barak missile systems. It is one of our primary programs. Okay. They go to India.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

You know, we've had incredible demand, obviously, relative to the state of Israel because of what's been going on in Gaza and with Hamas and Ezbollah and Iran and the Houthis, etcetera, etcetera, etcetera. Well, now, of course, we have another conflict and conflict, you know, unfortunately, I look at it fortunately as long as people don't get hurt. It's good for our demand. And so I see I see no respite in the demand that we are seeing from our customers relative to air defense systems for the country of India.

Operator

Our next question comes from Greg Conrad with Jefferies.

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

Good evening.

Deanna Lund
Executive Vice President and CFO at Kratos Defense & Security Solutions

Good evening.

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

Maybe just to circle back to a previous question. I appreciate the biggest growth drivers as you look forward, but there seems to be a lot of programs maybe within those. When you think about accelerating growth next year, how much of that business is won versus competitive? You know, how does supply chain unlock play into this? And then, you know, when you think of all those, are are there any must win programs, you know, competitively to to kind of see that accelerating growth?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. K. So I'll take them in reverse. There are zero must win programs for us to achieve that growth. We've already won them.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

We've won them. Sole source.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

K.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Number two. I'm not gonna say every because I don't know, but I'm gonna say virtually every partner, supplier, element, component on these programs is MIL SPEC, and it's US sourced relative to these hypersonic programs. So that's not a that's not an issue. And, obviously, it's one of the largest, if not the largest program in the company, MachTV. So we're we're all over that.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

We're we're all over it. So we are as I think I alluded to a few minutes ago, unless global peace breaks out, our hypersonic franchise across Kratos will be the number one growth driver for this company if, if we don't receive one of the call options on the tactical drone side.

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

And then maybe within that, I mean, I think hypersonics is probably spread out throughout the business. I mean, C5ISR was pretty strong in the quarter. I think we saw good award activity in April around a couple of key awards. I mean, how do you think about the the biggest drivers, of c five ISR? How much is hypersonics?

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

And and how are you kinda thinking about, you know, that reportable segment going forward?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Yep. So c we support c five ISR, supports virtually every air defense system The United States does. IBCS. Patriot.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

IFPIC.

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

K.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Long range hypersonic weapon and derivatives.

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

K.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

There are many radars that we're on. We're under we're under NDA.

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

K?

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Our c five s c five ISR business, which is 100% mil spec hardware for missiles, radars, and air defense systems, is ramping rapidly. We just received another opportunity in the directed energy area, which is related to air defense that I believe we're gonna get. This, this business is one of a kind in The United States. It's one of a kind.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

And we support virtually, if not every prime, because we are a merchant supplier. We know how to do it. We're not gonna compete with them. And since we're working with four or five of these primes and their air defense systems, They get the leverage off of us doing it for all of them, which reduces their cost so they can sell more of them.

Greg Konrad
Greg Konrad
SVP-Equity Research at Jefferies Financial Group

Thank you.

Operator

That concludes today's question and answer session. I'd like to turn the call back to Eric DeMarco for closing remarks.

Eric DeMarco
Eric DeMarco
President and CEO at Kratos Defense & Security Solutions

Excellent. Thank you for joining us this afternoon, and we will chat with you on the second quarter report, I think the first week in August. Thank you.

Operator

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

Executives
Analysts
Powered by Quartr

Key Takeaways

  • Kratos said a full-year FY2025 budget is secured, with potential $150 billion reconciliation and a $1 trillion FY2026 security budget boosting confidence in ~10% 2025 and 13–15% 2026 organic revenue growth, a Q1 book-to-bill of 1.2x, and a record $12.6 billion opportunity pipeline.
  • Hypersonic franchise momentum includes successful initial mission of the Dark Fury vehicle, first-to-market Zeus rocket motors and Aeronis flyers, and orders for multiple vehicles and ~70 solid rocket motors, positioning it as one of Kratos’ fastest-growing, highest-margin segments.
  • Kratos is expanding its drone portfolio: target drone organic growth was 6.2% in Q1, tactical jet drones like Valkyrie see serial production of 24 units pre-award with a landing-gear variant set to fly in 2025, and multi-hundred-million-dollar bids are pending.
  • Engine and propulsion volumes are ramping, with several hundred small jet engines slated for 2H 2025 and steeper ramps in ’26–’27, a GE turbofan partnership progressing, and new military and commercial rocket engine programs advancing.
  • Q1 results beat expectations with $302.6 million in revenue (vs. $285–295 million guidance) and $26.7 million adjusted EBITDA (vs. $20–24 million), while free cash flow used reflects capital investments in microwave, rocket, and hypersonic facilities and a planned Q2 downtime for an Israeli plant relocation.
AI Generated. May Contain Errors.
Earnings Conference Call
Kratos Defense & Security Solutions Q1 2025
00:00 / 00:00

Transcript Sections