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Marie Mendoza: 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.

Eric DeMarco: 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 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 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 an order — 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 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 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. Deanna?

Deanna Lund: 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. Eric?

A – Eric DeMarco: Thank you, Deanna. We’ll turn it over to the moderator now for any questions.

Operator: [Operator Instructions] Our first question comes from the line of Peter Arment with Baird.

Peter Arment: 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?

Eric DeMarco: Yes. 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 OpenSpace, 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 3 or 4 additional vehicles.

There’s a lot going up there. And the Chinese — we identified the Chinese doing some dog fighting up there with their satellites. There’s a lot going on. We 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.

Peter Arment: 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 do we — and is this kind of in preparation for Increment 2 or with CCA, or any kind of thoughts there?

Eric DeMarco: 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.

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

Mike Crawford: 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?

Eric DeMarco: 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.

Mike Crawford: And then just back to the Valkyrie. Can you just remind us how — when these 24 units that are being manufactured under these 2 production spirals, once you do get a contract, how that hits your financials?

Deanna Lund: Yes. Mike, so once they are manufactured, once we receive the contract, if we — whatever value has been already built in our inventory or our capital, it would be moved to inventory. So let’s say there are 5 aircraft that we receive a contract for. Those 5 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 5 that are completed in this example, then it would be the full revenue that would be recorded at the time of the contract award.

Mike Crawford: And then Prometheus, that’s just going to be below the line, right?

Deanna Lund: That’s correct. It will be recorded in interest and investments below the line.

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

Ken Herbert: 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?

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

Eric DeMarco: And Ken, as we’ve talked about before, we have a couple of target drone programs that are 5-year contracts that we bid on — 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 prices. 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 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 2 contracts.

Ken Herbert: And I think you mentioned the facility move in Israel is going to happen over 3 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 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?

Eric DeMarco: 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.

Operator: Our next question comes from Joe Gomes with NOBLE Capital.

Joe Gomes: 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?

Eric DeMarco: 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.

Joe Gomes: And then you guys put out a press release a couple of weeks ago about expanding your truck platooning technology into new areas. And in the press release, you talked about, again, repurposing technologies for the commercial use. And you got to be 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?

Eric DeMarco: Right. So the ones we’ve got going that are significant. And you asked 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 have been — 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? OpenSpace. This is one of the reasons why OpenSpace 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 2 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. 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 4 or 5 that come to mind that are actually out there and they’re not on a whiteboard.

Joe Gomes: 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?

Eric DeMarco: 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 turbomachinery, 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 right — it’s incredible right now. It’s incredible. It’s going to be one of our primary growth drivers this year turbo 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 of supply of us. So those are the areas.

Operator: Our next question comes from Michael Ciarmoli with Truist Securities.

Michael Ciarmoli: 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?

Eric DeMarco: Absolutely. And your question is a very relevant question for a lot of what we do. Our — Kratos, 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, it’s not — 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 of 3 customers that have come to us not recently over the past few years that we are working with where they want — they must have a second source, must, because the quantities that are coming are staggering and there can’t be a single point of failure. And 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 significant.

Michael Ciarmoli: 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?

Eric DeMarco: Okay. And Michael, I’m going to talk clarity, surety, and then I’ll reiterate. Okay. Our hypersonic franchise is absolutely going to be the #1 growth driver in absolute dollars and in growth rate for this company for the foreseeable future, unless global peace breaks out. Our hypersonic franchise across the board, virtually every aspect, including space-related and tracking things, think HBTSS, think Titan, think those programs, which we don’t talk a lot about. So it’s — the biggies are Erinyes, 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, turbojets, turbofans, hypersonic engines, back to hypersonics, space propulsion systems.

No question, this is going to be our #2 growth driver in this company for the foreseeable future. Okay. Number three, microwave electronics, particularly internationally out of Israel. And as I know many of you know, a lot of those Israeli systems or Israeli systems with their prime goes to India, for example. Okay. I see no let up here, not at all in, in what’s happening with our Microwave Electronics business internationally and domestically. And now Michael, I premise that with when/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 I’m not — we’re not counting those chickens until the little eggies hatch.

And so that’s how we see it.

Operator: Our next question comes from Andre Madrid with BTIG.

Andre Madrid: 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?

Eric DeMarco: Yes. 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 not — that’s through talking with program offices. Okay. This has brought incredible clarity to us for calendar 2025. Okay. 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 #1, 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 the — what’s come out in this 2025 CRA, which isn’t really a CRA.

Andre Madrid: 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.

Deanna Lund: Yes. Andre, the lion’s share of the bookings were target drones. Some tactical, but the lion’s share is target.

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

Eric DeMarco: Right. And so as I mentioned to Mr. Ciarmoli, I don’t want to count the ducks until they’re — the chickens until they’re hatched. I don’t — we’re not going to get ahead of ourselves here. And so, for our big growth drivers with our 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.

Andre Madrid: 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?

Eric DeMarco: Yes. 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, okay? However, the launches that you’re talking about have not been for large geosynchronous orbit software-defined satellites, specifically the Airbus, Thales and Boeing make. They have issues. I’m not — 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, right? 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. If I have to assume that it’s going to be more of the older bent pipe, I 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 GEO satellite 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 backed. 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.

Operator: Our next question comes from Pete Skibitski with Alembic Global.

Peter Skibitski: 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?

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

Eric DeMarco: Yes, 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.

Deanna Lund: 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.

Peter Skibitski: And just, Eric, just maybe on MACH-TB, just to — it sounds like the full year CR isn’t going to impact 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?

Deanna Lund: 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.

Eric DeMarco: 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.

Operator: Our next question comes from Rustam Kanga with Citizens.

Rustam Kanga: This is Russ, on for Trevor Walsh. Just one zooming out here. Eric, any thoughts or breadcumbs 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?

Eric DeMarco: My friend, I cannot say anything about CCA programs at all right now. I can’t do it. I apologize.

Rustam Kanga: 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?

Eric DeMarco: 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.

Rustam Kanga: 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?

Eric DeMarco: 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.

Operator: [Operator Instructions] Our next question comes from Greg Konrad with Jefferies.

Greg Konrad: 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?

Eric DeMarco: Yes. Okay. So I’ll take them in reverse. There are 0 must-win programs for us to achieve that growth, we’ve already won them. We’ve won them, sole source. Okay. 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 its 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, MACH-TB. So we’re all over that. We’re all over it. And so we are — as I think I alluded to a few minutes ago, unless global peace breaks out, our hypersonic franchise across Kratos will be the #1 growth driver for this company if we don’t receive one of the call options on the tactical drone side.

Greg Konrad: 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?

Eric DeMarco: Yes. So we support — C5ISR supports virtually every air defense system the United States does: IBCS, Patriot, IFPC, long-range hypersonic weapon and derivatives. Okay. There are many radars that we’re on — we’re under NDA. Okay. 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 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 4 or 5 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.

Operator: That concludes today’s question-and-answer session. I’d like to turn the call back to Eric DeMarco for closing remarks.

Eric DeMarco: 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.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.