Kratos Defense and Security Solutions
CEO and President: Eric DeMarco
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WSA: Good day from Wall Street. This is Juan Costello, Senior Analyst with the Wall Street Analyzer. Joining us today is Eric DeMarco, the CEO for Kratos Defense & Security Solutions Inc. The company trades on NASDAQ, ticker symbol is KTOS. Thanks for joining us today there, Eric.
Eric DeMarco: Thank you for having me, sir.
WSA: Certainly, always good having you on. So starting off, for some of our listeners that are new to your story, can you provide us with a history and overview?
Eric DeMarco: Absolutely. Kratos Defense is a government contractor. Our primary customers are the United States Department of Defense and friendly allied governments and their Ministries of Defense and their National Security Infrastructure. We are a product-based company. Our primary products are high-performance jet unmanned aerial systems or vehicles. We build satellite communication ground equipment that flies or command and controls a significant majority of the free-world satellites. And we build microwave electronics that go into radar systems, missile systems, and communication systems.
WSA: And can you bring us up to speed there on some of your most recent news and activities, including an update there on the AB Sat contract?
Eric DeMarco: Absolutely. The AB Sat contract, that’s with the Air Force where we provide our 167 unmanned aerial drone system. The Air Force is increasing quantities this year in 2017 and we expect them to increase quantities further in 2018 and ‘19. These are target drones that help exercise the Air Force’s weapon systems. We are ready to go into production on two additional new unmanned aerial drone systems — one with the United States Navy and one with a confidential customer. As soon as we have the 2017 defense budget in place, hopefully in the next month or so, those two programs will go into production and we expect those over the next couple of years to incrementally add nearly $100 million in revenue to our company — just those two programs by themselves.
WSA: Oh, that’s great. And so how does that fit into some of the key trends that you’re seeing right now in the sector? And how are you continuing to position the company to capitalize?
Eric DeMarco: The major key trend or thesis we’re seeing in the sector right now is the recapitalization of the U.S. Military’s strategic assets. We have been, as a country, basically at war with terrorism since 1991, the First Gulf War, over 25 years where we didn’t really have a peer or near-peer threat or competitor. Well, that has all changed now, most recently with both Russia and China gaining parity in certain areas with us–arguably even taking the lead over the United States in certain areas.
And so our recapitalization of the systems, the weapon systems, the offensive systems, and the defensive systems to take on a peer or near-peer has begun to be recapitalized by the Department of Defense, and certain areas where Kratos is involved there, is in unmanned aerial systems that can perform their mission in contested environments and also satellite communications where the U.S. has a clear need, and protecting and defending the space segment is a key thesis right now relative to potential threats.
WSA: And what do you feel, Eric, makes KTOS unique from some of the other players in the sector?
Eric DeMarco: I think the primary uniqueness for Kratos, I believe, that we are truly at the forefront of the Department of Defense’s Third Offset Strategy. And the Third Offset Strategy is a strategy to basically offset the games that the peer or near-peers, for example, Russian and China have made and to offset them with rapidly fielding high-technology systems that are very low cost and can be deployed in quantities, and that is Kratos’ niche. We make the investment with our own internal resources — and new systems and technologies — so we own the intellectual property.
So, for example, we own the intellectual property in virtually every one of our jet-powered unmanned aerial vehicles and we can deliver them rapidly and at low cost. And that even in today’s constricted budget environments, which even if defense budgets increased, we think there’s still always going to be more need or more requirements than money, having low-cost high technology solutions as a winner, and that is where Kratos is focused.
WSA: So what are the key goals and milestone that you’re hoping to accomplish over the course of the next 6 to 12 months?
Eric DeMarco: The big milestones, two of them I just mentioned a minute ago, is getting into production on two high-power, high performance unmanned aerial vehicle programs, the one with the United States Navy and one with the confidential customer, because that will put us on that trajectory for an incremental hundred million in revenue. In the second half of this year, we are scheduled to fly one of our combat aircraft, The Maco. It was the UTAP-22 and we’ve now named it The Maco, and that will be flying in a major military exercise in the second half of this year demonstrating a new capability. And then at the beginning of 2018 we’re going to be flying our newest and largest unmanned combat aerial system, the L-C-A-S-D, the LCASD, which is a very large airplane with a 3,000-mile range. Those are the big milestones for the next 6 to 12 months.
WSA: So as far as investors and the financial community are concerned, what are some of your key drivers there that you want them to have a better grasp on about the company?
Eric DeMarco: I think the primary criteria or drivers for Kratos, is I am not familiar of any company that’s a government contractor in the Department of Defense space that has recently won some major programs like Kratos has that are going to significantly generate organic growth 10% or 20% a year, each of the next several years without any acquisitions. And we have these programs under contract, and we’re going to be going into production and we’re going to be ramping up. And so Kratos is a high-growth, high-technology business that’s positioned in the national security space, which I believe national security will always be a priority to this country and to the investor.
WSA: And perhaps you could talk a little bit about your background and experience, Eric, as well as that of the key management team.
Eric DeMarco: Absolutely. So my background most recently previous to Kratos, I was the President of the Titan Corporation, which was Tom Tom Nancy, on the New York Stock Exchange, it was subsequently sold to L-3 for a very good valuation for the shareholders. And then I came to Kratos and we’ve been building this company now for the last several years. The management team here we have is second to none. The crown jewel of our company is our satellite communication business for which we built the ground infrastructure, the command, and control satellites.
Phil Carrai is the president of that business. Phil is a high-technology, entrepreneurial-oriented president and leader. And his business is one of the fastest growing in our company and it’s also the largest with over 250 million and it’s going to continue to rapidly grow going forward. And another executive I’d like to point out in this discussion is Steve Fendley. He is the president of Kratos’ Unmanned Systems Division. He recently took over that position. We had an executive retire, and Steve is one of the acknowledged industry — if not world leaders — in high-performance unmanned aerial systems, both drones and target aircraft. And he is leading our strategy and our growth trajectory in that business area for us.
WSA: Certainly. So once again joining us today is Eric DeMarco, CEO for Kratos Defense & Security Solutions Incorporated. The company trades on NASDAQ, ticker symbol KTOS, currently trading at $7.87 in share. Market cap is north of $580 million. And before we conclude here Eric, to recap some of your key points, why do you believe investors should consider the company as a good investment opportunity today?
Eric DeMarco: I believe the primary reason investors should look at Kratos as an investment opportunity is the growth trajectory that Kratos is just beginning. We return to organic growth in 2016, the year just ended as the defense budgets bottomed out. The defense budgets are turning up and they are turning up significantly. And certainly, Kratos’ core business areas are unmanned systems and our satellite communications. And with these programs I’ve mentioned in this interview that are going into production in a few months, we see the company generating organic growth, 10%, 20%, 25% year-over-year going forward over the next several years.
WSA: Well, we certainly look forward to continuing to track the company’s growth and report on your upcoming progress. And, we’d like to thank you for taking the time to join us today, Eric, and update our investor audience on Kratos. It’s always good having you guys on.
Eric DeMarco: Great. I truly appreciate the opportunity to chat with you and to update the investment community. Thank you very much.