KRATOS DEFENSE & SECURITY SOLUTIONS, INC. Q1 FY2025 earnings call

Industry Outlook

• Positive news on defense and national security funding, Q1 book-to-bill ratio 1.2:1, opportunity pipeline at $12.6 billion.

Hypersonic Franchise

• Key growth driver with Erinyes, Dark Fury, Zeus, etc., in production and orders, expected high margins.

Unmanned Systems

• Target drone business performing well, tactical drones tracking as expected, Valkyrie in production with multiple customers.

Engines and Propulsion

• Jet engines in production, working with GE on low-cost turbofans, and on classified and hypersonic programs.

Space and Satellite

• National security side growing, commercial side impacted by industry issues but managed with low-cost structure.

Microwave Electronics

• Israeli operation moving to new facility, U.S. business with new organic opportunities.

Revenues for the first quarter were $302.6 million, above the estimated range of $285 million to $295 million, with organic revenue growth across businesses. Microwave Products, C5ISR, and Defense Rocket Support saw organic growth rates from 13% to over 18%. Adjusted EBITDA for Q1 '25 was $26.7 million, above the estimated range. Unmanned Systems organic revenue growth was 6.2% in Q1, and KGS organic revenue growth was 7.8% excluding the Norden Millimeter acquisition impact. National security-focused space and satellite business is growing but commercial satellite-related business is impacted by industry issues. The space, satellite, training, and cyber division is the largest, expected to have significantly increased margins in 2026. Israeli-based Microwave Electronics has a record backlog and opportunity pipeline, moving to a new expanded facility, while the U.S.-based business has new organic program opportunities.

Second Quarter

• Impacted by Microwave Products facility move in Israel, expected shipments and margins affected.

Full Year 2025

• Confidence in financial forecast with 10% organic revenue growth in 2025 and 13%-15% in 2026.

Investments

• Capital expenditures for manufacturing facilities, inventory builds, and development initiatives, with updates on capital outlays timing.

Supply Chain and Costs

• Increased subcontractor and material costs on multiyear fixed price contracts in Unmanned Systems, efforts to manage costs.

Facility Move Risks

• Disruption during Microwave Products facility move in Israel, but confident in mitigating risks.

Commercial Space Impact

• Prolonged impact from macro-level industry issues on commercial satellite-related business.

Q: How does Kratos fit in Golden Dome program?

A: On ground command and control, telemetry tracking, and moving into SATCOM, leveraging space domain awareness.

Q: When do Valkyrie test flights with landing gear occur?

A: Tracking to fly this year, but specific details confidential.

Q: Profit contribution from Unmanned Systems this year?

A: Expected to be profitable, managing costs on fixed price target drone contracts.

Q: Confidence in Israel facility move disruption?

A: Confident in mitigating risks, with phased approach and expectation to catch up in later quarters.

Q: Competitors in tactical drones?

A: No competitors keeping Eric up at night, Kratos has best aircraft at best price.

Q: Repurposing technologies for commercial applications?

A: Robotic trucks, OpenSpace, engines, rocket motors for commercial space.

Q: Tuck-in M&A areas?

A: Microwave electronics and turbomachinery for growth drivers.

Q: Biggest revenue growth contributor in next 2-3 years?

A: Hypersonic franchise, engines/propulsion systems, microwave electronics; tactical drones a potential step function.

Q: Commercial space impact?

A: Positive for Kratos, but commercial software-defined satellites face issues; working with micro GEO satellite manufacturers.

Q: MACH-TB program ramping?

A: Some contribution in first half, ramping in second half and 2026, with long leads ordered for rocket motors and vehicles.

Q: Navy CCA program?

A: Cannot comment on CCA programs due to confidentiality.

Q: Target drone cost elevation?

A: 2 sole suppliers with high pricing, no mitigation on fixed price contracts.

Q: Microwave electronics impact of Israeli conflict?

A: Increased demand from India for air defense systems, positive for business.