Kratos (KTOS) Q1 FY26 earnings call: guidance and Q&A

Could you elaborate on the strong Q1 results and the fiscal revenue raise, specifically where you see the most strength and how Orbit and Nomad are performing?

Eric highlighted strong performance in the engine business (KTT), Microwave Electronics (due to Middle East conflict and restocking), and Unmanned Systems (tactical side). Nomad is expected to be a strong organic grower after capital investments, focusing on counter-UAS and SATCOM. Orbit, located in Israel, is a 'crown jewel' with unique SATCOM capabilities for unmanned systems, expected to grow consistently with Kratos.

“So internally, as I said in the remarks, Sheila, our engine business, KTT, is ripping right now. It is ripping.”

asked by Sheila Kahyaoglu · answered by Eric DeMarco

Where are Valkyrie, Mako, and Firejet drones primarily produced, and how is Kratos competing in the small jet engine market for cruise missiles?

Valkyrie airframes are 100% in Oklahoma, with avionics in Florida. Mako is in Sacramento. Tactical Firejet production is largely moved to Oklahoma and now uses Kratos jet engines, making it vertically integrated. Kratos' small jet engines (Auburn Hills) are winning the vast majority of opportunities, with plans to ramp production to thousands of engines annually for programs like the Air Force's FAM.

“I believe that we have won the vast majority of the opportunities that have been presented to us, if not every one of them. This is why, Mike, we are -- Deanna and I right now are working with the team, putting the program plan together with the supply chain, getting ready to turn them on to build like 3,000 engines next year.”

asked by Michael Crawford · answered by Eric DeMarco

How quickly should we expect the ramp-up for the GBU 75 (JDAM LR), and what is Florida Turbine's involvement in cruise missile engine opportunities?

The GBU 75 program of record is for 25,000 units, with potential for more, and is fully funded. Kratos expects LRIP next year and full-rate production the following year, contributing to the plan for 3,000-6,000 engines annually by 2028-2029. Kratos has been selected for the engine development for the submarine-launched cruise missile nuclear and for expanded production on two missile platforms under 7-year framework agreements, alongside GE.

“We have been selected as the engine GEK. -- we have been selected as the engine for the expanded production. I think it's going up 4x, I think, is what the announcement was 4x current production for 2 of those missile platforms already.”

asked by Peter Arment · answered by Eric DeMarco

Why does the Q2 outlook show a slowdown in organic growth and a step down in EBITDA margin before picking up in H2, and what is the long-term margin potential?

Deanna explained that Q2's margin dip is due to an expected less favorable mix and increased infrastructure, manufacturing, and bid/proposal costs not yet fully absorbed by ramped production. The revenue step-down is primarily due to timing of production and shipments in Unmanned Systems. Eric stated confidence in a year-over-year 100 basis point increase in EBITDA margins for FY26, FY27, and potentially FY28, balancing significant bid/proposal costs for new wins with margin expansion.

“We're looking for year-over-year 100 basis point increases. So 26 over 25, 100 basis points, 27 over 26, 100 basis points. You can probably pencil in if you want to, 28 over 27, 100 basis points.”

asked by Noah Poponak · answered by Eric DeMarco

How will increased drone funding impact Kratos, and what is the confidence level that this funding will materialize in a timely manner, especially given reliance on reconciliation bills?

Eric expressed high confidence in engine-side growth due to missile and drone programs. For drones, Kratos aims to be a merchant supplier of engines, selectively building entire systems to avoid competing with partners. He believes national security spending will continue to increase due to global threats, and while the mix of base budget vs. reconciliation bills might change, the new baseline for the base budget ($1.150 trillion) will adequately fund programs like DOG, even without future reconciliation bills.

“The new baseline for the base budget is $1.150 billion, which never goes down. The only time it ever went down was under Obama and sequestration. And so you take that $1.150 billion base and that goes up 3%, 5%, 6% a year. The dog program will be adequately funded as a new program that we'll be able to successfully execute our business plan, even if there are no future reconciliation bills.”

asked by Kenneth Herbert · answered by Eric DeMarco

How does the $100 million Defense Production Act funding for the Prometheus JV impact Kratos' investment, and what are the prospects for the enlarged Israeli business given its exposure to munition restocking?

The department's $100 million investment in the Prometheus energetics campus, alongside Kratos' $50 million, creates opportunities for significant additional funds to accelerate production. Eric expects Prometheus to be a 'grand slam home run.' For the Israeli business, which is near 10% of Kratos' revenue, there is very large exposure to munition restocking (e.g., Iron Dome, Arrow, Barak). Significant growth is forecasted for the foreseeable future due to restocking and new systems with partners Rafael, Elbit, and Israeli Aerospace Industry.

“Prometheus, in my opinion, is going to be a grand slam home run for the United States, the Energetics business and for Rafael and Kratos. The department is with us -- our customer is with us, and we're planning right now, we're going to have first fire next year, first fire next year, yes.”

asked by Jonathan Siegmann · answered by Eric DeMarco

How is the labor situation impacting Kratos' ability to staff new programs, and what is the outlook for the commercial business (e.g., truck platooning, logistics automation) given the defense focus?

The labor situation has improved but remains challenging, especially for turbomachinery engineers and security-cleared personnel. This is Kratos' #1 operational challenge, limiting growth acceleration in some areas. While the unmanned ground system commercial business is doing well (e.g., farming equipment automation), it's not a strategic focus due to the overwhelming opportunities on the national security side. However, Kratos is in discussions for a potential contract with a global farming equipment company by year-end.

“Our #1 operational challenge right now as a company is obtaining and retaining qualified people.”

asked by Joseph Gomes · answered by Eric DeMarco

Given Kratos' ground station capability across all orbital inclinations, does it have a place in the recompete of SCAR with OpenSpace, and what is the outlook for future Gauntlet drones?

Eric confirmed Kratos' presence across LEO, MEO, GEO, and Cislunar orbits. For SCAR, Kratos will evaluate if it wants to prime or partner, noting that the '85% solution now' philosophy might favor parabolic antennas over AESA. For Gauntlet drones, Eric affirmed that other Group 2-5 drones will be procured at scale and Kratos is in a strong position to ramp production and take greater economics on future production lots, with compelling solutions for future phases.

“On your first 2 questions, yes and yes. So yes, yes and yes. We -- we're in source selection right now on something related to that, so I can't get into too many details.”

asked by Austin Moeller · answered by Eric DeMarco