Kratos Defense & Security Solutions, Inc.

mode after the speaker's presentation there will be a question and answer session to ask a question during the session you'll need to press star 1 1 on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star 1 1 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 thank you

Good afternoon, everyone. Thank you for joining us for the Kratos Defense and Security Solutions First Quarter 2025 Conference Call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance, and other forward-looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. 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.

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, 2026, and the future. The defense and national security funding and priorities environment has become much clearer, including a full year of government fiscal 2025 CRA and funding now being in place, a potential additional 150 billion defense-related reconciliation bill progressing, and the potential for a $1 trillion 2026 U.S. national security budget all increasing our confidence in Kratos' 2025 and 2026 full-year financial forecasts, including approximately 10% 2025 and 13% to 15% 2026 year-over-year organic revenue growth. Further supporting both our 2025 and future organic growth outlook confidence, Kratos' Q1 book-to-bill ratio was 1.2 to 1, And Kratos' last 12 months' book-to-bill ratio is also 1.2 to 1. And even after all of these Q1 bookings and LTM bookings and conversion from opportunities to backlog, Kratos' opportunity pipeline stands at approximately $12.6 billion, 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 Credo's 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&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? 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 U.S. located and sourced, we expect little impact from existing or any currently contemplative 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. 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 $150 billion 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 billion 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, Raphael, and also with potential third-party customers with the opportunity, including Raphael's intention for tens of thousands of SRMs and energetics to be manufactured for Raphael by Prometheus, increasing since our last report to you. 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 Aranis 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. 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 positioned in Kratos, similar to Kratos' jet drone family, to provide affordable mass and quantities. We now have on order long leads for several Aranis 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 MockTB, which provides a data point on the op 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 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. The newest of these flight vehicles of Kratos' Furies family is under the project Ares, which is now in development, and similar to Kratos' Aranis and Dark Fury, we expect our Ares system to be first to initial flight and to market. We expect, under 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 U.S. 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, and other systems, all of which need to be exercised, tested, and the respected operators trained. Kratos' tactical drone business is also tracking as expected, including Valkyrie, Thanatos, and our Apollo, Athena, and other programs. 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 costs 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. 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 25, 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. And the most brilliant drone engineer in Kratos and probably the world is now working on a Mach 5-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 PowerPoints, 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 grouped blade work. 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. GE, similar to Northrop, Lockheed, Raphael, Raytheon Dynetics, and others, is an outstanding partner of Kratos. Kratos' Blade Works 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. 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's space, satellite training, and cyber division is our company's largest business, and we expect this business's 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 and 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. 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 weapons systems and the U.S. 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 a funded customer, partner, or targeted program where Kratos' upfront capital investment is expected to be recovered successfully via the future program, contract, industrial-based partner, or other funds at an acceptable rate of return for the investment made. 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. Deanna.

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, an 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 $302.6 million, above our estimated range of $285 to $295 million which includes strength and organic revenue growth across each of our businesses, with the most notable increases in our microwave products, C5ISR, and defense rocket support businesses, with organic revenue growth rates ranging from 13% to over 18%. Adjusted EBITDA for the first quarter of 25 was 26.7 million, also above our estimated range of 20 to 24 million, reflecting a more favorable mix of higher margin revenues offset partially by continued increase subcontractor and material costs on certain multi-year fixed price contract in our unmanned systems business. 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 Norden Millimeter Inc, which closed during the first quarter of 2025. First quarter 25 cash flow use and operations with 29.2 million primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately 37 million. Increases in inventory and other assets of over 19 million 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 25 was $51.8 million after reflecting funding of $22.6 million 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 custom orders and requirements, and investing in related new machinery, equipment, and systems. Consolidated DSOs, or day sales outstanding, increased from 104 days in the fourth quarter to 109 days in the first quarter, reflecting the revenue growth and the timing of milestone billings. Our contract mix for the first quarter of 25 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 25 was approximately 68%, including revenues generated from contracts with the DoD, non-DoD federal government agencies, and FMS contracts. In the first quarter of 25, 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. 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. We have taken into consideration the impact of increased material and subcontractor costs on certain of our multi-year 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. 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 multi-year 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 C5ISR businesses, and related inventory builds in our rocket systems and hypersonic businesses, primarily related to the recent Mock TV 2.0 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.

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

As a reminder, if you'd like to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from a line of Peter Armand with Baird. Good afternoon, Eric and Deanna.

Hi, Peter.

Hi, Peter.

Congrats on all the developments that are going on. If we could just start on Golden Zone, the PWSA kind of program is pretty out there, Space Forces Transport and Tracking Layer. And PRACELS is obviously involved in the ground segment of that program. You know, how do you expect to kind of see, uh, the benefits under this program moving forward as tranche three progresses? And we recently heard that the PWSA is going to form part of golden dome. Just how, how does, how does Kratos fit into all that?

Yes. That is, um, 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 and open space which is needed, 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 rising with the tide. 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 may have seen that it was announced, it was reported in the last couple of weeks, a Chinese space vehicle, excuse me, a Russian space vehicle deployed three or four additional vehicles There's a lot going up there. We identified the Chinese doing some dogfighting up there with their satellites. There's a lot going on. We've got to 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.

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 is this kind of in preparation for increment two or with CCA or any kind of thoughts there? Thanks.

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

Got it. I'll jump back into queue. Thanks, guys. Thank you.

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

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

Yeah. So, just mentioning missile programs generically that our engines support. could be involved with are 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.

Okay, thanks. And then just 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?

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

Okay, great. And then Prometheus, that's just going to be below the line, right?

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

All right. Thank you.

Thank you.

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

Yeah, hi.

Good afternoon, Eric and Deanna. Hi, Ken. Yeah, hey, maybe just to start on unmanned systems, as you 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 the segment be profitable this year on a reported basis? And maybe what's the expectation in the back half of the year?

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

Okay. And Ken, as we've talked about before, We have a couple of target drone programs that are five-year contracts that we bid on, fixed 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. The minimum wage went up, which raised things. So we're managing, 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 are continuing to take some steps to manage our way through it on the cost side. On certain suppliers, which I've discussed before, they have drastically increased their We are working with our customers to see if we can get alternatives qualified, which is not an easy thing to do. So we're doing everything we can. I think we're going to see some relief and some benefit later this year and into next year because of the efforts that we're taking. But the real step up here will be 27, 28, 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's the dynamic we're navigating through here on two contracts. 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 everything else you'll have to go through. Can you just talk through sort of confidence in keeping that disruption to a minimum and maybe where some of the risks could be as you think about that facility move?

Yep. That's actually an excellent question. So you've been through this before 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. We've got them. And so we're going to do it in a phased approach over the three weeks. The test equipment, the engineering stands, et cetera, will be relatively simple. And then the manufacturing equipment, the robots, will have to go. That'll occur over two weeks. 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. 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 what 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.

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

Thank you. Thank you very much.

Our next question comes from Joe Gomes with Noble Capital.

Good afternoon. Thanks for taking my questions, Eric and Deanna. Hi, Joe. Hi, Joe. So, Eric, I want to start out on 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 an overview. Is there anything that the competitors are doing or saying they're going to do that, you know, if not keeps you up at night, at least makes you shake your head and say, hmm, Maybe we should take a look into that. Anything there new on that front?

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

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

Right. So the ones we've got going that are significant, and you ask about our robotic trucks and vehicles a lot. I'm glad you are because this could be a needle mover next year in the truck area because, and we've got the data, there are tens of millions, obviously, of trucks that are relative trucks that are on the road that have been built since the 60s, 70s, and 80s. and our kit converts them to autonomy. It's right up Kratos' alley. Low cost, smart, don't recreate the wheel, something that's effective, with an eye on better is the enemy of good enough. Okay. Open space. This is one of the reasons why open space 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. 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&D, we lever off the engineering team. It brings value to both sets. 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 want to 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 people know, our engineering group was involved in the development of the jet engines for F-22 and F-35. Well, that group is what's supporting Boom Supersonic, which that business plan is coming together very, very nicely for Blake. So those are the four or five that come to mind that are actually out there and they're not on a whiteboard.

Great, thanks for that. Very, very exciting in my view, especially all the dual use, as you mentioned. And last one for me, I know you've talked in the past, you're not looking to do anything big in terms of the M&A, but if you were out there looking at some tuck-in M&A, what areas would be, you know, top of the list for you that you would want to target?

Microwave electronics would be one. Would be at the top of the list. Everything needs microwave electronics. It would have to be the right flavor, the right size, the right fit, the right culture, the right everything. That's one that comes to mind. And turbo machineries. And that would primarily be to get access to resources, people, and the very specialized equipment for engines and propulsion systems, which the demand for us is incredible. It's incredible right now. It's incredible. It's going to be one of our primary growth drivers this year, 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 supply of us. So those are the areas.

Great. Thanks for that. I'll get back in queue. Thank you again. Yes, sir. Thank you.

Our next question comes from Michael Charmoli with Truist Securities.

Hey, good evening, Eric, Deanna. Thanks for taking the questions. Hey, just to stay on that topic, Eric, with the demands and need for propulsion and engines, we obviously heard a lot about that over the past 12, 24, 36 months, but it doesn't seem like there's a lot of share shifting or share gains being made? I mean, is your opportunity predicated on just a lot of new programs? 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?

Absolutely. And your question is a very relevant question for a lot of what we do. Our creatives, our primary opportunity in the engine area is greenfield new programs where we're going to 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, when I talk power, it's not just thrust, 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, et cetera. 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 must have a second source. Must. Because the quantities that are coming are staggering today.

there can't be a single point of failure and i am confident i'm confident in the next 12 to 18 months we're going to be able to announce this and it's going to be it's going to be significant okay okay you know that that leads into my my follow-up question here the next one you know i think we get the question all the time from investors you know what really sparks the growth inflection or as your company continues to evolve You know, how does the revenue mix look? And, you know, I think we all used to sit here and think it was going to be a big ramp in the unmanned tactical. But, I mean, if we look out 24, 36 months, in your view, what has the potential to be the biggest revenue growth contributor? You know, you talked pretty enthusiastically, Valkyrie, Thanatos, but then you got Prometheus. You've got the engines with GE and Targets. I mean, what is the biggest contributor? revenue driver as you see it over the next two to three years.

Okay. And Michael, I'm going to talk clarity, surety, and then I'll reiterate. 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. Okay. No, our hypersonic franchise across the board. Virtually every aspect, including space-related and tracking things. Think HGTSS, think Titan, think those programs which we don't talk a lot about. So it's the Biggies or Aranies, Dark Fury, Zeus, Oriole, Dart's coming. We have another one coming that I have alluded to. It's coming. All of which... we have a customer, customers. So the hypersonic franchise is number one. Okay, number two, engines, propulsion systems across the board, turbo jets, turbo fans, hypersonic engines, back to hypersonics, space propulsion systems. No question, this is going to be our number two growth driver in this company for the foreseeable future. Okay, number three, microwave electronics particularly internationally out of israel and 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 okay i see no lead up here not at all in what's happening with our microwave electronics business internationally and domestically and now michael i premise 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. But I'm putting that as a call option because I've been burned before, and we're not counting those chickens until the little eggies hatch. And so that's how we see it. Got it. Helpful.

Thanks, guys.

Appreciate it. Yep.

Our next question comes from Andre Madrid with BTIG.

Eric, Deanna, good afternoon. How are you?

Hi, good. Hi, Andre.

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 big in the outlook now and how we should be thinking about the potential impact of a four-year CR?

Yeah. So 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. This is very, very good for us. And that's through talking with program offices. This has brought incredible clarity to us for calendar 2025. 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 got to get, I'm not saying this lightly, got to get the paperwork done. Got to get the money obligated, got to get it under contract, and got to get it out to industry, including Kratos. And 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 lot of contractors. And so we feel orders of magnitude more confident, and we felt confident before in our 2025 plan because of what's come out in this 2025 CRA, which isn't really a CRA.

Got it, got it. And then if we move, I guess, if we zero in on unmanned systems, not to, you know, beat the dead horse here, but can you maybe give us 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 sense of the magnitude.

Yeah, Andre, the lion's share of the bookings were target drones.

some tactical but the lifetime is target and when when might we expect an inflection point where tactical might take the lead in terms of being the the main demand driver right so as i mentioned to mr tramali i don't i don't want to count the the ducks until they're the chickens until they're hatched um i i don't we're not going to get ahead of ourselves here and so For our big growth drivers, where there's surety, focus on hypersonics, focus on microwave, and focus on engines. And our target drone business is just doing fantastic. Of course. Why? Because all these air defense systems that are being bought globally need to be exercised against what? Kratos target drones. And God willing, when if we hit it on the tactical side, it will be a step function inflection point for the company.

Got it. No, that's very helpful. And then if I could just ask one more, could you maybe just dig a little bit deeper on the commercial space side? So I do realize that some of the downstream customers have started to launch finally, some of those big launches that I think we're 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?

Yep. So I say this very literally. Anything that goes up in space for the free world is positive for Kratos and our revenue on the commercial side because our ground equipment is either going to command and control it, track it, our space domain awareness network is going to track it for the customer, et cetera, et cetera. So it's good. 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. They're not Eric's issues. This is well publicized now. This is one of the reasons why Airbus and Thales, and I think Leonardo or somebody, they're looking to merge. 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 going to take for these OEMs to address these issues and get these things up there. I have to assume that it's going to be more of the older bent pipe. They 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-geosatellite manufacturers. This is significant. I'm not going to get into it a lot because we're going to sneak up on somebody here. But all those guys, they don't have ground equipment, and they need ground equipment, and they're typically VC or PE back. They like working with us. That's going to be an opportunity for us. That's where we're focused, and, of course, the military and national security side, where we have an incredible amount of opportunities that are coming at us. We're going to wait and see on these big software-defined geos until they get up there and they work.

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

Yep, yep.

Our next question comes from Pete Skibitsky with Alembic Global.

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

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

Okay. Okay, great. Thank you for that.

Yeah, Pete, on the last call I said I thought it had bottomed out in Q4 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's stable to up. And we're seeing up. And I think we're going to see even more up because the government side, the national security related side, is doing so, so well. And so it's slowly turning around, but not because of the commercial software-based satellites.

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

Got it. No, it's very helpful. Thank you. And just, Eric, maybe on Mock TB, just to, it sounds like the full year CR isn't going to impact, you know, that program ramping. 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 kind of still on track, that profile?

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

Got it. Yeah, a big part of that is, you know, some of the launches we've been doing under Mock TB and some of these other hypersonic things, we leaned forward without a contract in a program And we ordered the long leads for Rocket Motors and Aeronis 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 going to be coming and a lot of Aeronis and Dark Furies. As soon as we get those, we get those integrated, we get them up and we launch them. That's when the revenue starts. So that's what's holding it back right now. I also want to remind that on MockDB, we're the prime. So on certain launches that you see guys like Stratolaunch do or Rocket Labs do, all of which are phenomenal partners with Kratos, that flows up through us. So we get a portion of that, and that's part of our global teaming agreement further hypersonic testing for the U.S. defense industrial base. So please keep that in mind. We're not going to tout that. We want them to do it, but those typically are going to roll up under our Mock TB program.

Okay. Great. Thanks so much, guys.

Thank you. Our next question comes from Rustam Kenga with Citizens.

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 Navy CCA? Understand that's a low-cost opportunity and certainly a critical aspect of maritime warfare.

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

Okay, great. One more on, can you just help reconcile the comment on the U.S. supply base being sole source alongside the target drone, the cost elevation? What's the driver there?

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

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 Prime go to India, any comment on if a conflict in that region persists, how that would affect that business?

Yep. Take a look at the Barak missile systems. It is one of our primary programs. They go to India. 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 Hezbollah and Iran and the Houthis, et cetera, et cetera, et cetera. 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 no respite in the demand that we are seeing from our customers relative to air defense systems for the country of India.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touchstone phone. Our next question comes from Greg Conrad with Jefferies.

Good evening.

Good evening.

Maybe just to circle back to a previous question, you know, appreciate the biggest growth drivers as you look forward. But, you know, 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 one versus competitive? You know, how does supply chain unlock play into this? And then, you know, when you think of all those, are there any must win programs, you know, competitively to kind of see that accelerating growth? Yeah.

Okay. So I'll take them in reverse. There are zero must win programs for us to achieve that growth. We've already won them. We've won them. Sole source. Number two, I'm not going to say every because I don't know, but I'm going to say virtually every partner, supplier, element, component on these programs is mil-spec and it's U.S. sourced relative to these hypersonic programs. So that's not an issue. And obviously, it's one of the largest, if not the largest program in the company, Mock TV. So we're all over that. 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 craters will be the number one growth driver for this company if we don't receive one of the call options on the tactical drone side.

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 a good award activity in April around a couple of key awards. I mean, how do you think about the biggest drivers of C5ISR? How much is hypersonics? And how are you kind of thinking about, you know, that reportable segment going forward? Yep.

So we support C5ISR. supports virtually every air defense system the United States does. IBCS. Patriot. IFPIC. Long range hypersonic weapon and derivatives. There are many radars that were under NDA. Our C5ISR 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 going to get. This... This business is one of a kind in the United States. It's one of a kind. And we support virtually, if not every prime, because we are a merchant supplier. We know how to do it. We're not going to 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.

Thank you. That concludes today's question and answer session.

I'd like to turn the call back to Eric DiMarco for closing remarks.

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.

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