Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kratos Defense & Security Solutions Inc (KTOS, Financial) reported strong Q1 2024 results with revenues of $277.2 million, exceeding the estimated range of $240 million to $260 million.
- The company achieved a 19.5% consolidated organic revenue growth rate, driven by higher-than-expected performance across most business units.
- Kratos' unmanned systems business saw a Q1 organic growth of 21.8%, with bookings of $81 million and a book-to-bill ratio of 1.4 times.
- The company ended Q1 with a backlog of over $1.2 billion and an opportunity pipeline of approximately $11 billion, providing confidence in future growth.
- Kratos' microwave electronics business significantly outperformed in Q1, receiving new and increased follow-on orders for missile radar and air defense systems, including Iron Dome and Iron Sting.
Negative Points
- Despite strong performance, Kratos faces challenges in obtaining and retaining qualified technical personnel, which could impact future growth and execution.
- The company is making significant investments in facilities, machinery, and equipment, which could strain financial resources if not managed properly.
- Supply chain disruptions and inflation continue to pose risks, potentially affecting cost and price increases.
- Kratos' space business, while showing some growth, is impacted by continuing resolutions and reprioritization of space assets, leading to delays in decision-making.
- The company is cautious about its top-line growth guidance, reflecting uncertainties in government contracting and budget approvals.
Q & A Highlights
Q: You had strong 20% organic growth in Q1. Given your guidance of approximately 10% growth for the year, how do you reconcile this with the high demand signals you're seeing?
A: Our backlog and near-term opportunities for 2024 are solid. However, we are being cautious due to the government contracting offices needing to get 12 months' worth of money under contract in six months. We are confident but cautious about the execution.
Q: Regarding the engine opportunities for both turbine and TDI, how do you expect these businesses to scale up?
A: Unless something unexpected happens, KTT and TDI will continue to meet or exceed expectations. We expect additional production programs for engines for missiles, drones, and loitering munitions in the second half of this year.
Q: Any update on positioning around the CCA program for increment two?
A: The Air Force announced the CCA program for up to 2,000 drones. The first increment was for 100 planes, which was not in our forecasts. We are focused on the remaining 1,900, which align with our capabilities.
Q: Can you provide more details about the investments in new and existing facilities across multiple lines of business?
A: We are standing up two engine manufacturing lines, building out integration centers for solid rocket motors, and expanding our Israeli-based microwave electronics business. These investments are under contract and necessary to meet the increasing demand.
Q: On Valkyrie, you mentioned the order might slide into 2025. How do you get comfortable with the investment without having the order in hand yet?
A: We have two customers for two separate orders. We expect to receive at least one order this calendar year and the other in the first quarter of next year. We are confident in moving ahead based on the current geopolitical environment.
Q: How would you characterize your success in shifting to more of a merchant supplier role?
A: We focus on probability of win and required investment. We partner with traditional prime system integrators like Raytheon, Northrop, and Lockheed in areas where it makes sense, such as air defense and CUAS systems.
Q: Can you talk about the incremental production lot on the Valkyrie and how pricing has evolved?
A: Pricing depends on the variant and quantity. We submitted a ROM for a few dozen at $4 million each for a certain variant. Another variant is about $5.5 million to $6 million each, and a third variant, which is closer to $10 million, is a more advanced system.
Q: Can you run through some of the top opportunities that could generate revenue and operating earnings ahead of guidance?
A: Tactical drones, engine production runs, Zeus and hypersonic flyers, and expanded scope on certain engine programs are key opportunities. The biggest challenge is hiring and retaining skilled personnel.
Q: How should we think about the growth trajectory at KGS for the rest of the year?
A: The annual guidance remains unchanged with approximately 20-25% growth for unmanned systems and around 6% annual growth for KGS.
Q: Can you provide more details about the Apollo and Athena drones and how they compare to Kratos' other offerings?
A: These drones are more on the disposable side, similar to our target drones. Athena might be discussed more next quarter, while Apollo's details are likely to remain confidential due to its application.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
