Kratos Defense & Security Solutions, Inc. Q3 FY2025 earnings call

• Increased full-year 2025 revenue forecast to 14%-15% organic growth over 2024, up from the previous 11%-13%. Full-year 2026 organic revenue growth forecast revised to 15%-20%, and 2027 to 18%-23% organic growth. EBITDA margin expansion expected for 2026 and 2027 as the business scales.
• Announced acquisition of Orbit for approximately $356 million, expected to close in Q1 2026, immediately accretive across financial metrics.
• Valkyrie program with Airbus for the German Luftwaffe, with first two Valkyries shipped to Airbus. Collaboration with Taiwan's NCSIST on a Kamikaze variant of Kratos' tactical fire jet system. Partnership with Korea Aerospace Industries on AI-enabled manned/unmanned teaming systems.
• Hypersonic systems like Erinyes, Dark Fury, and Zeus 1/2 solid rocket motors; satellite business with virtualized C2 and TT&C capabilities; Orbit acquisition brings mission-critical communication systems and leading technology.

Third quarter revenues were $347.6 million, exceeding the estimated range of $315 million to $325 million. The Unmanned Systems business saw a 35.8% organic revenue growth, with a shipment of tactical Valkyries to an international customer. The defense rocket support business had an organic revenue growth of 47.2%, and the space training and cyber business had 21.2% organic growth. Adjusted EBITDA for the third quarter of 2025 was $30.8 million, above the estimated range. Cash flow used in operations was $13.3 million, and free cash flow used in operations was $41.3 million after capital expenditures.

• Full-year 2025 revenue guidance increased to $1.320 billion to $1.330 billion, reflecting 14%-15% organic growth over 2024. Fourth quarter revenue guidance is $320 million to $330 million, with an estimated organic growth rate of 11%-14% over Q4 2024.
• 2026 organic revenue growth forecasted at 15%-20%, 2027 at 18%-23% organic growth above 2026. EBITDA margin expansion of approximately 100 basis points expected in 2026 over 2025 and again in 2027 over 2026.
• Orbit acquisition not included in current financial guidance; will be included once the transaction closes.

• Impact of federal government shutdown on government contract receivable payment dates, affecting accounts receivable days sales outstanding.
• Uncertainties in regulatory approval timing for international shipments, which could impact revenue recognition.
• Continued significant bid proposal and related investments, which may temporarily impact EBITDA margins if not managed effectively.

Q: Ellen on for Sheila asked about the international opportunity for Valkyrie and revenue contribution.

A: Eric DeMarco stated Airbus procured Valkyries for a CCA opportunity with the German Luftwaffe, but production revenue from Valkyrie is not included in current forecasts until programmatic clarity is achieved.

Q: Seth Seifman asked about Valkyrie progress with the Marines and EBITDA progression.

A: Eric DeMarco explained Valkyrie is a program of record with infrastructure build-up ongoing, and EBITDA margins are affected by bid proposal costs but expected to expand as the business scales.

Q: Michael Ciarmoli asked about drivers of accelerating organic growth and growth between KUS and KGS.

A: Eric DeMarco cited hypersonic franchise, space business growth, microwave electronics, engine business, and C5ISR as key drivers, with Valkyrie not yet baked into current numbers.

Q: Jan-Frans Engelbrecht asked about Valkyrie details and Prometheus.

A: Eric DeMarco discussed Valkyrie budgeting and Marine Force Design Update, and Prometheus will initially focus on tactical missiles with potential for broader market share.

Q: Anthony Valentini asked about WIP for Valkyrie and margin drag from target drone program.

A: Deanna Lund stated second lot of 12 Valkyries nearly completed, with current annual capacity at 50, and target drone program still a margin drag with renegotiation expected in next year or so.