In a third quarter earnings call on Nov. 2, Kratos [KTOS] CEO Eric DeMarco said that the company forecasts revenue growth of 10 percent next year without potential tactical drone production orders and that he expects Kratos will win its “largest to-date tactical drone related contract award” late next year.
The company released a depiction of its planned Thanatos tactical drone on Nov. 2. Kratos has mentioned Thanatos and Athena, another tactical drone, in the past, including in this 2019 investor briefing, but the company has been close hold on most everything about the programs, including whether the potential customers belong to DoD or the intelligence community.
In response to an earnings call question from Jefferies‘ defense analyst Sheila Kahyaoglu on Nov. 2, DeMarco said that Kratos is in contract negotiations and discussions on Thanatos and Athena.
“I’m confident these will turn ahead into contract awards mid next year and that then we’ll go fly under funded contracts,” he said. “There’s a lot going on, and it’s accelerating in the low-cost and attritable drone area, and I believe it’s because of what’s going on in the world,”
Ukraine and the Middle East have been awash with drone use in the conflicts there.
The Air Force plans to make Skyborg–one of the service’s original Vanguard research and development efforts–a program of record in fiscal 2024, and for the Kratos XQ-58A Valkyrie, that will likely mean the start of equipping and testing the drone with systems for specific missions to dovetail with the service’s Collaborative Combat Aircraft (CCA) effort (Defense Daily, Sept. 14).
On Nov. 2, DeMarco demurred on answering questions delving into some specifics of Kratos’ drone programs, including deployment of production, mission-specific Valkyries. He also said he could not comment on what systems Kratos is providing to aid Ukraine.
DeMarco said that a fiscal 2024 Continuing Resolution (CR) could imperil the achievements of the company’s financial goals, and the high cost of development and attracting and retaining workers with security clearances are reducing cash flow. DeMarco said that the costs for cleared workers are especially high, given demands for those workers in the space sector and for strategic recapitalization–the Northrop Grumman [NOC] Sentinel ICBM.
“Our primary operational challenge remains the obtaining, retaining, and related escalating cost of qualified individuals, including those willing and able to obtain a national security clearance,” he said in a Nov. 2 Kratos earnings release. “As a result, though we expect continued future year over year profit margin expansion, including as noted with our Q3 [third quarter] results and affirmed Q4 EBITDA [earnings before interest, taxes, depreciation and amortization] guidance, we will be cautious in our future EBITDA forecast. Also, as the industry and Kratos are currently operating under a Continuing Resolution Authorization, similar to previous years, we will wait to release our detailed fiscal 2024 business financial forecast in February 2024, when we report our fiscal 2023 results, as we should then have better budgetary and programmatic clarity.”
Kratos reported 2022 year-end revenues as $898 million–nearly $677 million for Kratos Government Solutions solutions and about $222 million at Kratos Unmanned Systems division, and Kratos said on Nov. 2 that it is forecasting revenues of $1 billion this year.
The Pentagon Defense Innovation Unit’s Replicator drone initiative out of Silicon Valley, Calif., “is gonna happen, and when it does, we’re gonna be there,” DeMarco told the financial analysts on Nov. 2. The initiative may field thousands of artificial intelligence-harnessing drones in several years.
Kratos has collaborated with Shield AI to integrate Shield’s Hivemind autonomous piloting software into the Valkyrie (Defense Daily, Oct. 31).
“We are working with Shield AI with Shield’s artificial intelligence pilot integration into several of Kratos’ high performance jet drones, including Valkyrie,” DeMarco said on Nov. 2. “We believe Shield will have a clear market advantage over its primary competitor, as Shield has access to Kratos’ family of flying today jet drone systems and its competition of power points, ground models, simulations or propeller points. The Kratos Shield flights are occurring at the Oklahoma Burns Flat Facility, which I completely endorse, that the competition does not know what Kratos and Shield are up to, as Shield AI is expected to be advanced through these flights and also at a separate additional range facility.”
Kratos also wants to expand its engine business, and the company’s Michigan-based Technical Directions, Inc. (TDI) is to build the TDI J85 engine for Boeing‘s [BA] Powered Joint Direct Munition (Defense Daily, Oct. 24).
In response to a question on Nov. 2 from Pete Skibitski, a defense analyst at Alembic Global Advisors, on the timeline for PJDAM production and fielding, DeMarco replied, “If you could see me, I’m smiling ear to ear. I cannot get ahead of our Boeing partner. However, we’re standing up a production factory to do some things, and I’ll leave it at that.”