Kratos Defense & Security Solutions, Inc.

Good day and thank you for standing by. Welcome to Kratos Defense and 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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.

Thank you. Good afternoon, everyone, and thank you for joining us for the Chris Defense and Security Solutions Third Quarter 2024 Conference Call. With me today is Eric DeMarco, CRADA's President and Chief Executive Officer, and Deanna Lund, CRADA's 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. 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. With that, I will now turn the call over to Eric DeMarco.

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 entrance, 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% year-over-year revenue growth. As I mentioned on our previous call, In Q3 and Q4-24 and in Q1 of 25, 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. 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 BMP 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. 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 year-over-year 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. Kratos' microwave electronics business, where we support Iron Dome, Arrow, Lightning, 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 Israeli Defense Forces and our important partners, including Rafael, Elbit, and Israeli Aerospace Industries. To address our Israeli business's record backlog on 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 product facility in India in close coordination with both our customers and our partners. 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 to 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. 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 Fires Enduring Shield or IFPIC, 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 down selected on another new major weapons system program hardware opportunity that we also hope to be successful on in 2025. 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 Aranis and Dark Fury hypersonic glide vehicles, the Dark hypersonic system with our partner hypersonics, our first-to-market Zeus 1 and Zeus 2 solid rocket motor or SRM systems, and our Oriel SRM system, and also the Terrier and Target mission-related systems with our government partners. Since our last quarterly report, and as we announced today, Kratos' Zeus 1 and Zeus 2 solid rocket motor stacks 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. This will be located in the United States, which site we expect to break ground on by the end of this year and 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 open space 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. 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. 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 Naval Navy Air Warfare Center Aircraft Division, and other industry partners. 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 of this incredibly successful and relevant mission. This joint collaboration event is part of the Penetrating Affordable Autonomous Collaborative Killer Portfolio, or PACP, 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. 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. 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. Kratos's Ghostworks has also made progress with our customer in integrating Kratos's jet engines into Kratos tactical and target drones with initial flights of Kratos' jet engines and Kratos drones planned for the second half of 25. Kratos' mil-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. Related to drone manufacturing capacity, Kratos is currently positioned with the internally and 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. 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 2021. after the new administration and Congress is in place, and hopefully when we have better clarity on the current continuing resolution authorization situation. 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. This is Deanna.

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 to $280 million, which includes notable strength in 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. Adjusted EBITDA for the third quarter of 24 was 24.6 million, exceeding our estimated range of 20 to 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 advanced payments required by key suppliers and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered. 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. 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 24 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 US federal government during the third quarter of 24 were approximately 67%, including revenues generated from contracts with the DOD, non-DOD federal government agencies, and FMS contracts. In the third quarter of 24, 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 credos 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 24. 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 costs. We have also taken into consideration in our affirmed fiscal 24 guidance a federal fiscal year 25 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 money, and no transition from program development to production. Eric?

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

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Charmoly from Truist Securities.

Hey, good evening, guys. Nice results. Thanks for taking the questions. Eric, 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 25 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?

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 end, 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, and it's very possible that we're going to get several of those this year. And we just can't plan them. They can come with one week's notice. That's the biggest driver on the range are these data sales off the Space Demand Awareness Network. Okay? Got it. That's that one. The other one, the big drivers for next year. All right. Number one is going to be the air defense system work that's going on. It's incredible. I went through just 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. 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. 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, GEK. Those are the big catalysts that we have high confidence in just based on what we've got.

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, you know, the old defense guard at risk? Does it favor new startups like, you know, I know you're working with Blue Halo or Andoril, and where does that leave you guys?

Yeah, I think that for... Non-traditionals like Kratos, Andral, Shield, Blue Halo, 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, three years ago at an Air Force conference, Mr. 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. Got it.

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

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

Yeah, thanks. Good afternoon, Eric, Indiana. 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... you know, for your tactical drones. Is this like a firm commitment from the customer or do you know the potential quantity, you know, any more color on that that would be helpful?

Yes. 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. And 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 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. Well, this ties into this. And so we're cautiously optimistic. We have been down-selected. We're getting there. And that's all I want to say. And we have not included any of this in 2025. None. And so, God willing, if it comes through, this could be a big binary for us.

Right. And then on your... You've given us a lot of impression 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 fire jet, there's opportunities with the Navy on the tactical side. Can you give any more color there on how that's progressing? 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. I don't talk about it a lot because I can't. We continue to make progress with Airwolf, including internationally, the tactical fire jet. One of the primary reasons for that is because a Valkyrie can go several thousand miles. A tactical fire jet cannot. And so from political and policy purposes, it's more palatable. And one of these jet drones that our engines are going to be in flying is going to be tactical fire jet 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 got it yeah just lastly you mentioned you know the turbojet uh development and tdi and it sounds like the outlook there certainly the capacity is in place how do you how do you anticipate kind of uh production ramping up uh now that you've kind of made that significant investment there yeah um

So I think that probably in first quarter, first half, the continuing resolution is directly impacting a couple, 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. And late next year, second half next year, we could get a couple more LRIP orders. And based on what, you know, 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.

Got it. I'll jump back into you. Thanks, Eric.

Okay, thanks.

Thank you. One moment for our next question. Our next question comes from the line of Ken Herbert from RBC Capital Markets, LLC.

Hey, good afternoon, Eric and Deanna.

Hey, Ken. Hi, Ken. Good afternoon.

Yeah. Hey, Eric. You know, 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 greater 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 25 is probably not where we necessarily see this relative to 26 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?

Yep.

So, you know, Senator Wicker of Mississippi very well may be the chairman of the Senator 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 $9.50 or a trillion. Again, I'm the CEO. I drink the Kool-Aid. But 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 26, we're going to take up our 10% year-over-year 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. 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. That's, Ken, why I made the comments. We're looking to potentially take it up in 26 because of what you just alluded to.

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 2025, or can you provide any initial commentary around that?

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

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

Thanks. Thanks, Ken.

Thank you. One moment for our next question. Our next question comes from the line of Mike Crawford from B. Reilly 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?

Yep. 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 GL, 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, et cetera. So we continue to be, as of right now, Because of the legacy systems and these software-defined satellites that Airbus and TALIS and Boeing are putting up, our business is predominantly still geo. But because the market, especially in the tracking network areas, have 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.

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?

It's not commercial.

Okay. And then, separately, You had this successful joint exercise at Air Force Base, 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, where now it's unsure. 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 attributable or is it something that's more related to counter UAS, or can you not comment on that either?

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. And the... Their resources, financial and otherwise, are not adequate for them because of these massive responsibilities. And 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. And I believe Kratos drones, runway capable, runway independent, etc. 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.

Okay, thank you.

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

Hey, thanks very much, and good afternoon.

Hi, Seth. Hi, Seth.

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

I'm smiling. We are, 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. 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. Sorry. We're almost there, but I don't want to jinx anything.

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

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.

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

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

Excellent.

Thanks very much.

Yep.

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

Hi, guys. Connor on here for Sheila. Thanks so much for taking my question. Your commentary around the hypersonics pursuits is clearly very positive. 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?

Yeah. Okay, so we, Kratos' legacy in the hypersonic areas is significant. We're involved, I'll give you some programs, High Fire, High Cause, Fast, those were Kratos launch systems, and Kratos was involved in those. As you may have saw last year, France launched a hypersonic glider, Kratos launched it for them, Kratos system. Heretofore, Also, our ballistic missile targets, ballistic missile reentry vehicles, they routinely go over Mach 5, 5,000 miles an hour, so they're hypersonic. 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. 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.

Got it. That's very helpful. 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? This business...

should be a 15% to 20% grower, if not more, for the foreseeable future to re-plemish the stocks, the inventories that have been expended over the last 13 months. And then in addition to that, I mentioned the facility we're standing up in India with partners, with customers. We don't build it and they will come. We have programs. You know, because of everything that's going on in Russia and the Ukraine and what's going on with Israel and Hamas and Hezbollah, you know, 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.

Perfect. Thanks so much. Yep.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from the line of Andre Madrid from BTIG.

Eric, Diana, 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?

I'm sighing. We have dozens and dozens of open wrecks right now, especially in the turbo machinery 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. I mean, this is business. We make progress, but as we talk about it, 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. 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.

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. 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. Considering though the breadth of that portfolio, you know, it is the largest set of, you know, on a BU basis of the entire company. Um, what opportunities are there to kind of offset and expand in other areas, be it defense, be it cyber.

Yep. So something I, I, 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. 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've 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, there are two, if we hit one of them, It could go 40 to 80 to 150. 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.

Awesome. Looking forward to hearing about it. Thanks, Eric. Yep, you got it.

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

Good afternoon, and thanks for taking my questions. Hey, Joe.

Hi, Joe.

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

Yep. 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 Shorrat, 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, you know, 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 US government. 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.

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.

I'm smiling. It's doing great. 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 agri-complexes, in states, on state roads where we have unmanned vehicles driving. It's incredible. And our differentiator here is we, you know, we developed this for tanks. We have a kit that we put into a truck and we turned 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 26. You know, 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. 26, it's probably going to be to a point where we're going to be talking with you about it routinely because it could be in the tens of millions.

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

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

Hey, good afternoon, Eric and Deanna. 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. It was down a chunk this quarter. Just wondering, what's it down year to date? What's your expectation for the full year? And sort of when do you think it'll bottom?

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 to $35 million in revenue. Down. Because the operators are not taking receipt of the satellites. 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 or $35. 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 the software-defined satellites, we would be blowing every financial metric away, blowing it away, 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. And every other business that Deanne 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.

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. I think that's fair. Okay. I think that's fair. Sorry if I missed this, but the revenue guidance for KGS for this year, is it still 860 to 875?

That's correct, Peter.

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

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

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.

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