Release Date: February 26, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kratos Defense & Security Solutions Inc (KTOS, Financial) achieved its financial objectives for 2024, with a 9.1% organic revenue growth.
- The company forecasts a 10% organic revenue growth for 2025 and 13-15% for 2026, indicating strong future growth potential.
- Kratos has secured several large new program awards, including a $1.5 billion hypersonic area contract, positioning it for significant future revenue growth.
- The company is expanding its facilities and capabilities, including a new hypersonic production campus, to meet increased demand and future growth.
- Kratos' partnership with Rafael to establish the Prometheus Energetics Joint Venture is expected to significantly enhance its production capabilities and market position.
Negative Points
- Kratos is operating under a continuing resolution authorization (CRA) with no 2025 defense budget in place, creating uncertainty in financial planning.
- The company faces challenges in obtaining and retaining qualified personnel, particularly those with national security clearances.
- Supply chain issues and increasing material costs are impacting Kratos' multi-year fixed price contracts, affecting profitability.
- The commercial satellite business is experiencing delays due to OEM manufacturing and delivery issues, impacting revenue.
- Kratos is cautious about including potential significant tactical drone sales in its financial forecast until contracts are secured.
Q & A Highlights
Q: As Kratos becomes more of a merchant supplier with low-cost engines and the Prometheus Rocket motor, how does this affect the company's long-term margin profile or strategy?
A: Eric DeMarco, CEO: The margin profile is expected to improve starting now and significantly in 2026 and 2027. This is due to the merchant supplier strategy and the renewal of long-term contracts at higher rates, allowing us to recover from past inflation-driven costs. We anticipate being in great shape going into 2026 as these factors positively impact our margins.
Q: Regarding the Mock TV 2.0 program, is there any reason to think Kratos won't convert affordable bridge products to technical products in the future?
A: Eric DeMarco, CEO: There is no reason to think we would not pursue that path. We have a history of converting affordable bridge products to technical products, and we plan to continue doing so.
Q: Can you provide more details on the evolution of the Mock TV contract and what drives revenue and profitability?
A: Eric DeMarco, CEO: The Mock TV contract is primarily an aerial test contract. The U.S. lacks sufficient test assets, especially in the air, and Kratos is one of the few companies with hypersonic systems flying today. We have a roadmap for launches with the customer, and the program is planned to ramp significantly starting in 2026, with further increases in 2027 and 2028.
Q: How should we model out the level of investment going forward, and where does cash flow go after this year?
A: Deanna Lund, CFO: The Prometheus investment is not included in the current numbers, with the majority expected in 2026. Most other investments should be non-recurring and completed in 2025, except for the turbojet facility, which will predominantly be completed in 2026. These are the main factors affecting cash flow and investment levels.
Q: What are Kratos' objectives with the defense electronics business, and how does the recent acquisition of Norden Millimeter fit into this strategy?
A: Eric DeMarco, CEO: Kratos aims to be a leading merchant supplier of microwave electronics in the U.S. We have re-entered the market and accelerated our efforts recently. Our objective is to grow this business rapidly and achieve high margins, leveraging our strong relationships with traditional primes and new defense technology companies.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
