Kratos’ third quarter results saw a negative market reaction despite notable revenue growth and a substantial earnings beat. Management emphasized that the quarter’s performance was driven largely by accelerating demand for its unmanned systems, including shipments of tactical Valkyries to international partners, and robust growth in rocket support and space-related businesses. CEO Eric DeMarco highlighted that Kratos is benefiting from “increasing demand for military-grade hardware or systems and software to support national security,” with the Unmanned Systems division leading the charge thanks to regulatory approvals and new program wins. CFO Deanna Lund added that continued investments in manufacturing and facility expansion were necessary to support the surge in orders but contributed to margin pressures, particularly in long-term fixed price contracts.
Is now the time to buy KTOS? Find out in our full research report (it’s free for active Edge members).
Kratos (KTOS) Q3 CY2025 Highlights:
- Revenue: $347.6 million vs analyst estimates of $320.8 million (26% year-on-year growth, 8.3% beat)
- Adjusted EPS: $0.14 vs analyst estimates of $0.12 (12.3% beat)
- Adjusted EBITDA: $30.8 million vs analyst estimates of $28.15 million (8.9% margin, 9.4% beat)
- Revenue Guidance for Q4 CY2025 is $325 million at the midpoint, below analyst estimates of $333.3 million
- EBITDA guidance for the full year is $35.5 million at the midpoint, below analyst estimates of $118.5 million
- Operating Margin: 2%, in line with the same quarter last year
- Organic Revenue rose 23.8% year on year vs analyst estimates of 14.9% growth (885.8 basis point beat)
- Market Capitalization: $13.37 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From Kratos’s Q3 Earnings Call
- Ellen Page (Jefferies) asked about the revenue potential for Valkyrie in Europe; CEO Eric DeMarco clarified only research and development revenues are currently forecast, with production upside pending contract clarity.
- Seth Seifman (JPMorgan) inquired about the ramp-up of Valkyrie production and cash flow timing; DeMarco explained infrastructure buildout is underway and projected dozens of annual Valkyrie deliveries once full-rate production begins.
- Michael Ciarmoli (Truist Securities) pressed for more detail on growth drivers in 2026-2027; DeMarco pointed to hypersonic programs, space and satellite contracts, and the emerging engine business as primary contributors, with Valkyrie sales excluded from current guidance.
- Anthony Valentini (Goldman Sachs) questioned the long-term margin profile; DeMarco responded that margins will rise as bid proposal spending normalizes and higher-margin production contracts begin, but are currently suppressed by elevated growth investments.
- Jan-Frans Engelbrecht (Baird) sought clarification on the scale and timing of hypersonic solid rocket motor programs; DeMarco confirmed tactical missiles are the initial focus, with expansion into larger applications and multibillion-dollar potential as market demand grows.
Catalysts in Upcoming Quarters
In the coming quarters, the StockStory team will focus on (1) progress in scaling hypersonic and rocket system production, (2) the pace and scope of new Valkyrie contract awards and the transition to full-rate production, and (3) initial contributions from international drone partnerships and the Orbit acquisition. Additional signposts include renegotiation of long-term fixed price contracts and improvements in facility utilization, both of which could impact margin recovery and cash flow trajectory.
Kratos currently trades at $79.44, down from $90.19 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free for active Edge members).
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