Kratos Defense & Security Solutions, Inc. Q1 FY2025 Earnings Call

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & 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 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 forecast, including approximately 10% 2025 and 13% to 15% 2026 year-over-year organic revenue growth. Further supporting both our '25 and future organic growth outlook confidence, Kratos' Q1 book-to-bill ratio was 1.2:1 and Kratos' last 12 months book-to-bill ratio was also 1.2:1. 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 Kratos have made the upfront investment and have real working relevant products and systems that certain customers will procure those existing products rather than incur millions or billions in customer-funded R&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 the Department of Defense, 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 contemplated tariffs. Integrated air and missile defense and counter UAS are areas where Kratos is an acknowledged industry leader and where we are seeing substantial new and increased opportunities across our entire company, including system hardware; microwave electronics for missiles, radars and counter UAS systems; target drones to test, exercise and train the war fighters 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 midterm future growth areas for Kratos also include our hypersonic franchise, jet drones, jet engines and propulsion systems for missiles and drones, microwave electronics, and C5ISR systems for missiles, radar and counter UAS systems. Expected mid- and longer-term growth areas include the Golden Dome initiative, strategic systems and our Prometheus, Anaconda, Helios, Vulcan, ARES, and other initiatives, the majority of which are with customers or partners, and are not build it and hope they'll come. On Prometheus, we are progressing on schedule with our outstanding partner, RAFAEL, and also with potential third-party customers with the opportunity, including RAFAEL's intention for tens of thousands of SRMs and Energetics to be manufactured for RAFAEL by Prometheus, increasing since our last report to you. 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 Erinyes 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 it's extremely low cost point, which is positioning Kratos similar to Kratos' jet drone family to provide affordable mass and quantities. We now have on order long leads for several Erinyes and Dark Furys 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 MACH-TB, which provides a data point on the OPTEMPO 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' Furys family of a new low-cost hypersonic systems, including additional low-cost flight vehicles and drones for certain relevant mission profiles we are targeting, including, of course, in coordination with certain customers. The newest of these flight vehicles of Kratos' Furys family is under the Project ARES, which is now in development. And similar to Kratos' Erinyes and Dark Fury, we expect our ARES system to be first to initial flight and to market. We expect and are forecasting Kratos' company-wide hypersonic franchise to be one of our fastest growers, including certain of our highest margins for the foreseeable future. Kratos' target drone business is performing as expected, including with our 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 their 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 cost for their jet drone system, take delivery, fly, and operate the system. Kratos' tactical jet drone customers don't have to imagine anything from PowerPoints or idle robots sitting around an idle factory. We recently unveiled the version of our Valkyrie featuring internal landing gear with our Valkyrie family's objective to provide runway flexibility and runway independence to our customers. With the Valkyrie, you can do rocket launch for complete runway independence where fixed air fields or runways are threatened. You can do conventional takeoff and land for training or where traditional air fields 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 war fighter. 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 Ghost Works 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 PowerPoint models or renditions, and we are currently tracking to our plan to produce several hundred small jet engines in the second half of this year, with production quantities expected to substantially ramp in '26 and then again in '27. KTT's air-gapped development group, Blade Works 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, RAFAEL, 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 OpenSpace 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' space, satellite, training and cyber division is our company's largest business, and we expect this business' margins to significantly increase in '26, which would lift the margins of all of Kratos, which is a top priority for our corporation. Kratos' Israeli-based Microwave Electronics business has a record backlog and a near-record opportunity pipeline, both of which are expected to continue to grow, including as we support our key partners, Israeli Aerospace Industries, RAFAEL and Elbit in 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 3-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 weapon 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 the funded customer, partner or targeted program where Kratos' upfront capital investment is expected to be recovered via the future program, contract industrial base 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.

Thank you, Eric. Good afternoon. As we have included a detailed summary of the first quarter financial performance as well as the initial second quarter and affirmation of full year 2025 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenues for the first quarter were $302.6 million, above our estimated range of $285 million to $295 million, which includes strength in 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 million to $24 million, reflecting a more favorable mix of higher-margin revenues, offset partially by continued increased subcontractor and material costs on certain multiyear fixed price contracts 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 used in operations was $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 Systems and hypersonic businesses to meet existing and anticipated customer 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 U.S. 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 execution and for employee sourcing, hiring, retention, and the related costs. 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 multiyear fixed price contracts, specifically in our Unmanned Systems target business, where we have experienced cost growth with certain ancillary materials on our targets and for which we are unable to seek recovery from the customer until the renewal of future production lot contracts occurs. As we have discussed in the past, these production lots are typically negotiated and awarded in 5-year contracts with certain of these having been negotiated in 2020 and 2021. As the period of performance of these contracts spans over a multiyear period, we do not expect to complete deliverables under these contracts until the next few years. We are continuing to take action where possible to aggressively manage costs and to mitigate the continued future impact of cost growth on these materials and labor as much as possible. As we mentioned on our last earnings call, we are making investments for capital expenditures for property, plant and equipment, including the expansion of our manufacturing 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 MACH-TB 2.0 contract award and continued manufacture of 2 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.

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

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

Congrats on all the developments that are going on. Eric, let me just start on Golden Dome PWSA kind of program that’s already out there, Space Force Transport and Triangle Air, and Kratos is obviously involved in the ground segment of that program. How do you expect to kind of see the benefits under this program moving forward as Tranche 3 progresses? And we recently heard that the PWSA is going to form part of Golden Dome. Just how does Kratos fit in all that?

Yes. As we've mentioned before, we're focused on command and control, telemetry tracking, and moving into SATCOM. With more assets in space, whether in LEO, MEO, or GEO, there's an increasing need for ground equipment, software, and OpenSpace, especially since many satellites have software-defined capabilities. This is an area where we are excelling, and the momentum is clearly in our favor. Space domain awareness, alongside the Golden Dome initiative, is drawing significant funding, especially in light of China's and Russia's advancements. Recently, it was reported that a Russian space vehicle deployed several additional vehicles, and we've also observed Chinese satellite activity, including maneuvers that resemble dog fighting. Therefore, we need to deploy systems that can protect themselves, defend, and maneuver, all of which depend on ground equipment and systems, and that's where we lead in the industry.

You mentioned the Valkyrie and its new variants with landing gear. When can we expect the test flights for the landing gear to begin? Is this related to Increment 2 or CCA, or do you have any thoughts on that?

Yes. Obviously, we moved out on the landing gear capable Valkyrie in conjunction and in communication with several customers. And 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.

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

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?

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

And then back to the Valkyrie, could you remind us how the 24 units being manufactured under the two production spirals will impact your financials once you secure a contract?

Yes, Mike. Once the aircraft are manufactured and we receive the contract, the value built into our inventory or capital will be transferred to inventory. For example, if we receive a contract for 5 aircraft, the percentage of completion for those aircraft will be moved to inventory, and revenue will be recognized at the time of the contract. If all 5 are completed in this scenario, we will record the full revenue at the time of the contract award.

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

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

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

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 and 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.

We have a couple of target drone programs with 5-year contracts that we successfully bid on and won in 2018 and 2019. We will continue production of these through the remainder of this year and next year. Over the past few years, inflation and labor costs have affected us, especially since we manufacture some drones in California, where minimum wage increases have raised expenses. Generally, fixed-price contracts allow for better profitability as you progress along the learning curve, but in this challenging environment, we have to absorb rising costs or find ways to manage them. We are actively working on managing costs, especially with some suppliers who have significantly raised their prices. We are collaborating with our customers to qualify alternative options, which is a complex process. I believe we will see some relief and benefits later this year and into next year thanks to our efforts. However, the significant improvements are expected around 2027-2028 with the new fixed-price contracts, where we will present high-cost actuals to the government for their approval. This is the situation we are navigating with these two contracts.

You mentioned that the facility move in Israel is set to occur over three weeks. The guidance for the second quarter reflects this timeline. To be honest, it sounds ambitious given the need for customer certification and other processes involved. Can you clarify your confidence in minimizing disruption and identify any potential risks associated with the facility move?

Yes. 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 3 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 will occur over 2 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 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.

Our next question comes from Joe Gomes with NOBLE Capital.

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 could give us kind of maybe an overview. Is there anything that the competitors are doing or saying they're going to do that, 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?

Yes. There is absolutely nothing any of our tactical drone competitors or want to be 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.

You issued a press release a couple of weeks ago about expanding your truck platooning technology into new areas. In that release, you mentioned repurposing technologies for commercial use. I'm curious if you can share what other technologies you are considering for repurposing in commercial applications.

We have several significant projects underway. I'm glad you asked about our robotic trucks and vehicles because they could make a substantial impact next year in the trucking sector. We have data showing that there are tens of millions of trucks on the road that were manufactured in the '60s, '70s, and '80s, and our kit can convert them to autonomous operation. This aligns perfectly with Kratos' strengths: creating low-cost, intelligent solutions without reinventing the wheel, focusing on practicality rather than perfection. OpenSpace is one of the reasons for our success in the government sector, as it also serves commercial needs. This allows us to utilize research and development efforts effectively, reducing costs for both our commercial and government customers. In terms of engines, we are involved in several military and commercial turbofan engine programs, leveraging our R&D and engineering teams to deliver benefits to both markets. Regarding rocket motors, we are engaged in hypersonic and ballistic missile target projects. While we are limited in what we can disclose due to strict NDAs, we are participating in multiple high-profile commercial rocket engine programs for companies aiming for missions to Mars and the Moon. Specifically, our engineering team contributed to the development of jet engines for the F-22 and F-35, and they are now supporting Boom Supersonic, which has a promising business plan. These are just a few examples of the active projects we have that are beyond the conceptual stage.

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 that 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 top of the list for you that you would want to target?

Microwave electronics would be at the top of the list because everything needs it. It has to be the right flavor, size, fit, culture, and everything else. That's one area that stands out. Another is turbomachinery, mainly to access resources, people, and specialized equipment for engines and propulsion systems, which we are seeing incredible demand for right now. This sector will be one of our primary growth drivers this year, especially with turbo engines, jets, and other types of propulsion systems in 2026 and 2027. We are facing a supply-demand imbalance, with too much demand and not enough supply. Those are the key areas.

Our next question comes from Michael Ciarmoli with Truist Securities.

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 unmanned systems that require those types of engines? Could you give any more color there?

Absolutely. Your question is very pertinent to much of what we do. Our main opportunity in the engine sector involves new programs where our engines will be incorporated into the development of missile systems or drone systems. Our engine plays a crucial role in these systems. This is why having a family of engines that are already operational is important. The teams we are collaborating with on new missile, drone, and loitering munition programs are actually designing their systems around our engine. When I refer to power, I'm talking not just about thrust, but also about electrical power. We excel in providing power to all the subsystems, including electronic warfare, electronic attack, decoys, and more. Our primary opportunities lie in new systems and missiles. Additionally, there are a couple of customers we have been working with over the past few years who are looking for a second source because the anticipated quantities are enormous, and it's vital to avoid a single point of failure. I am confident that within the next 12 to 18 months, we will be able to announce something significant.

That leads into my follow-up question here, the next one. I think we get the question all the time from investors, what really sparks the growth inflection? Or as your company continues to evolve, how does the revenue mix look? And I think we, obviously, 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 talked pretty enthusiastically Valkyrie, Thanatos, but then you got Prometheus, you've got the engines with GE, you've been in targets. I mean, what is the biggest revenue driver as you see it over the next 2 to 3 years?

Our hypersonic franchise will be the primary growth driver for this company in terms of both absolute dollars and growth rate for the foreseeable future, unless global peace occurs. This franchise encompasses various areas, including space-related projects and tracking systems like HBTSS and Titan, which we don't often discuss. Key programs include Erinyes, Dark Fury, Zeus, Oriole, and the upcoming DART, along with another project I mentioned previously, all supported by our customers. Next, engines and propulsion systems across all types—turbojets, turbofans, hypersonic engines, and space propulsion—will be our second major growth driver moving forward. Third, microwave electronics, especially in international markets like Israel, will continue to thrive. Many Israeli systems are being utilized in India, and I don't expect any slowdown in our Microwave Electronics business, both internationally and domestically. Additionally, when our tactical drone initiative launches, it has the potential to be a significant game changer for the company. However, I'm cautious about it, not wanting to rely on it until it's fully realized.

Our next question comes from Andre Madrid with BTIG.

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

Yes. The recent funding resolution isn't truly a continuing resolution; it's actually an appropriations bill. I emphasize this because it allows for the reallocation of funds between different priorities, which is not standard for a typical continuing resolution. This is very beneficial for us, a sentiment supported by discussions with program offices. It has provided us with significant clarity for the calendar year 2025. The only factors delaying our progress in April, May, and June are related to the necessity for government program offices and contracting offices to complete essential paperwork, obligate funds, establish contracts, and distribute them to industry participants, including Kratos. Despite my confidence in our position as a leader in the field, I recognize that many contractors are vying for attention. However, we feel substantially more confident about our 2025 plan, which has been reinforced due to the developments in this 2025 funding resolution, even though it isn't strictly a continuing resolution.

And then if we move, I guess, if we zero in on Unmanned Systems, not that beat the dead horse here, but could 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.

Yes. Andre, the lion's share of the bookings were target drones. Some tactical, but the lion's share is target.

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

Right. As I mentioned earlier, I don't want to jump to conclusions before everything is finalized. We're remaining cautious. Our main growth drivers include our focus on hypersonics, microwave technology, and engines. Our target drone business is performing exceptionally well. This is largely because the air defense systems being purchased worldwide require testing against Kratos target drones. If we succeed on the tactical side, it could represent a significant turning point for the company.

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 were kind of bottled up, we're finally getting through. Has that provided any relief? Or are we still seeing a prolonged impact here? And maybe can we get a sense around timing?

Absolutely. Anything that enters space for the free world is beneficial for Kratos and our commercial revenue. Our ground equipment will either manage and control it or track it through our space domain awareness network, among other functions. That's a positive development. However, the launches you mentioned have not involved the large geosynchronous orbit software-defined satellites, particularly those from Airbus, Thales, and Boeing, which are currently facing challenges. These issues are widely known and are part of the reason why Airbus and Thales, along with others like Leonardo, are considering a merger. They need to launch successfully to compete with SpaceX, and I’m uncertain how long it will take these original equipment manufacturers to resolve these issues and get their satellites operational. For now, it seems we may see more of the older bent pipe type satellites, primarily for broadcasting with spot beams. We are also collaborating with nearly every new micro GEO satellite manufacturer, which is a significant development. I won’t go into too much detail to maintain our competitive edge, but these manufacturers often lack ground equipment and prefer to partner with us since they are usually backed by venture capital or private equity. This presents a great opportunity for us. Additionally, on the military and national security front, there are numerous opportunities ahead. We will need to wait and see how the larger software-defined GEO satellites perform once they are launched.

Our next question comes from Pete Skibitski with Alembic Global.

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?

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

Yes, Pete, during the last call, I mentioned that I believed we had reached the lowest point in Q4. This applies to us specifically, as others have not yet hit bottom. However, we have stabilized and are seeing growth. I anticipate even more growth due to the strong performance in the government sector, particularly related to national security. It is gradually improving, but this is not due to the commercial software-based satellites.

And that's driven by the book-to-bill that was over 2:1 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.

And Eric, regarding MACH-TB, it seems that the full year CR won't affect the ramp-up of that program. Could you clarify if it doesn't start generating revenue until the second half of the year, meaning we'll see about half a year's revenue this year and a full year's revenue next year? Is that still the expected timeline?

Yes. 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.

Yes. A big part of that is some of the launches we've been doing under MACH-TB and some of these other hypersonic things, we leaned forward without a contract and a program, and we ordered the long leads for rocket motors and Erinyes 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 Erinyes and Dark Furys. 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 MACH-TB, we're the prime. So on certain launches that you see guys like Stratolaunch do or Rocket Lab 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 to 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 MACH-TB program.

Our next question comes from Rustam Kanga with Citizens.

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? I 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. I can't do it. I apologize.

Can you clarify your comment about the U.S. supply base being the sole source linked to the target drone and the increase in costs? What is driving that?

Yes, I will absolutely. And I touched about this either on the last call or the other call. There are 2 suppliers that we have that they're the only ones that are qualified to make these things for our target drones. 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. And 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.

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?

Yes. Take a look at the Barak missile systems. It is one of our primary programs. They go to India. 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. Unfortunately, I look at it fortunately as long as people don't get hurt, is 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.

Our next question comes from Greg Konrad with Jefferies.

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

Sure. I'll address them in reverse order. There are no critical programs we need to win to achieve that growth; we've already secured them as the sole provider. Additionally, I can confidently say that nearly all of our partners and suppliers involved in these hypersonic programs provide military-grade components sourced from the U.S., so that's not a concern. This initiative is one of the largest, if not the largest, within the company, known as MACH-TB, and we are fully engaged in it. As I mentioned earlier, unless there is a significant shift towards global peace, our hypersonic division at Kratos will be the primary growth driver for this company, especially if we do not get any options related to the tactical drone segment.

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

Yes. C5ISR supports nearly all air defense systems utilized by the United States, including IBCS, Patriot, IFPC, and long-range hypersonic weapons and their derivatives. There are several radars that we are involved with, though we are under a non-disclosure agreement. Our C5ISR business, which focuses entirely on military-spec hardware for missiles, radars, and air defense systems, is experiencing rapid growth. We have recently gained another opportunity in the directed energy sector, linked to air defense, which I believe we will secure. This business is unique in the United States. We essentially support nearly every prime contractor as a merchant supplier, enabling us to collaborate without competing against them. By working with four or five of these primes on their air defense systems, we provide them leverage by reducing their costs, allowing them to sell more units.

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