KTOS - NASDAQ

Welcome to Kratos Defense & Security Solutions Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Marie Mendoza, Senior VP and General Counsel. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for the crisis, defense and security solutions. Third quarter 2024 conference call. With me today is Eric DeMarco Kratos, President and CEO, and Deanna Lund Kratos as Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance and other forward looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures, as that term was defined in Regulation G, non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.

Good afternoon. For the third quarter. Kratos continue to execute, demonstrating the success of our strategy of making internally funded investments to rapidly develop and be first to market with relevant hardware and software for our national security customers. In Q3 every Kratos business unit substantially achieved or exceeded its objectives, with the exception of our commercial satellite business, which continues to be impacted by new entrance industry disruption and delays, including delays and delivery by the manufacturers of software defined satellites, which I have discussed in detail previously. The ongoing generational recapitalization of strategic weapons systems, including strategic, satellite air defense, radar and missile systems, continues to be a catalyst to the current and expected future Kratos financial performance, including our affirmation today of our 2024 financial guidance and our 2025 base case financial forecast expectation of 10% year over year revenue growth. As I mentioned on our previous call in Q3 and Q4 '24 and in Q1 of '25 Kratos is expected to continue to make significant internally funded bid proposal and other expenditures in pursuit of certain new, large, single award programs, one of which, with a potential value of approximately 1.5 billion. We hope to be selected on by the end of Q1 of next year. Additionally, we are also hoping to hear on a new single award space opportunity with an initial value in excess of $100 million and a potential future value several orders of magnitude greater than that. We are closely managing these BMP Investments related to our financial guidance that we affirmed today and the opportunities we are pursuing to ensure that we can make these investments, pursue these opportunities and also achieve our expected financial guidance range. Though these investments have been and are expected to continue to impact Kratos near term profitability and EBITDA if we are successful, based on the potential size of certain of these opportunities, we expect to win. We are looking to potentially increase Kratos future, year over year, planned revenue growth rate above the current 10% base case forecast in 2026. Virtually every Kratos division has exposure to the rapidly growing air defense systems area, including Kratos microwave electronics, our rocket systems, C5 ISR, space and satellite target drones, turbine technologies and our ballistic missile target business, each of which Kratos is the industry leader. Kratos is microwave electronics business, where we support Iron Dome, aero lightning, iron sting and other systems has a record backlog and is generating record financial results, which are expected to continue into 2025 including in support of the Israeli Defense Forces and our important partners, including Rafael, Elbit and Israeli Aerospace Industries. To address our Israeli businesses, record backlog and opportunity pipeline and demonstrating Kratos commitment to Israel. Kratos is on schedule to open a new manufacturing facility, expand our current manufacturing facility and complete our space qualified facility capability in Israel in Q2, 2025. Additionally, due to customer demand, including as related to missile and radar systems, we are now also planning to open an additional microwave products facility in India in close coordination with both our customers and our partners. Kratos Turbine Technologies and our engine business is also generating record results, including having a record opportunity pipeline with hypersonic, supersonic cruise missiles, loitering munitions, drones and space systems all being expected future growth areas. As a result of the investments we have made Kratos, small, low cost turbo jet engine facility in Michigan is now capable of producing approximately 10,000 engines annually as we expect to receive engine production contracts for drones, missiles and loitering munitions programs next year. Additionally, we have now identified the site for an additional new, small turbo-fan engine production facility, including as related to our partner, GE Aerospace for larger drones, missiles, air vehicles and systems, the demand for jet engines is rapidly growing, and we expect small jet engines, including Kratos, TDI, Spartan family of small but mighty first to market, turbojets that are in production and operational today to be a future growth catalyst and contributor for Kratos. Kratos C5 ISR business supports, air defense counter UAS radar missile and strategic programs including Patriot Integrated Battle Command System or IBCs, indirect fires enduring shield, or IFPIC, short range air defense or SHORAD. Sentinel, or GBSD, FAD or Terminal High Altitude Area Defense and many others. Since our last quarterly report, Kratos has received a new hypersonic system related program award, which is expected to be one of Kratos largest programs over its expected future multi-year period of performance. Additionally, we were just recently informed that Kratos has been down selected on another new major weapons system program, hardware opportunity that we also hope to be successful on in 2025. Kratos new Sentinel Program, dedicated facility, is planned to be operational mid to late next year, and we expect the Sentinel program to be one of Kratos largest programs in future year growth contributors. Key Kratos C5 ISR Partners and customers include Northrop Grumman, Lockheed, Raytheon and Leidos Dynetics. Kratos' rocket systems business also has several important growth related program areas, including Aegis, Hypersonics, ballistic missile defense targets, sub-orbital vehicles, strategic and nuclear systems and space related system. Expected future year growth contributors for Kratos in our rocket system area include our first to market Erinyes and Dark Fury Hypersonic Glide vehicles, the Dark Hypersonic system with our partner, Hypersonics, our first to market

Thank you, Eric, good afternoon. As we have included a detailed summary of the third quarter financial performance as well as the initial fourth quarter and affirmation of the full year 2024 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenues for the third quarter were $275.9 million in our estimated range of $265 million to $280 million, which includes notable strength and organic revenue growth in virtually all of our businesses, including our unmanned systems, turbine technologies, microwave products, C5 ISR defense rocket support and training solutions businesses offset by the expected industry related impact from OEM delays in the manufacturing delivery of software defined satellites. Adjusted EBITDA for the third quarter of '24 was $24.6 million, exceeding our estimated range of $20 million to $23 million, reflecting a more favorable mix of higher margin revenues, offset partially by increased bid and proposal costs associated with a large potential opportunity. Unmanned systems, organic revenue growth was 8.7% for the third quarter, including the impact of the Sierra Technical Services or STS acquisition on a pro-forma basis, as if acquired at the beginning of 2023. Cash generated from operating activities was $6.1 million, which includes the impact of working capital requirements related to increases in prepaid assets, primarily resulting from deposits required for long lead motors and engines related to expected ramps in production, as well as advanced payments required by key suppliers and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered. Once these motors and engines are completed and delivered to Kratos, the related prepaid deposits will be transferred to our inventory balances. These prepaid assets are investments for inventory we are making for programs, either under contract or based upon customer indications of demand and future production and/or deliverables. Free cash flow used from operations was $9.2 million after funding capital expenditures, have $15.3 million. As we planned we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket system and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment and systems. We are also continuing to manufacture the two production lots of Valkyries prior to contract award. Based on our current build and construction schedules, approximately 10 million of capital expenditures that were initially expected to be incurred in 2024 are now expected to carry over into 2025. This is offset by the working capital uses related to increases in advance payments and deposits required for long lead production items, which has been more than 10 million for two programs in the first nine months of 2024. Consolidated DSOs, or day sales outstanding, increased from 103 days in the second quarter to 105 days in the third quarter based upon milestone payment schedules. Our contract mix for the third quarter of '24 was 69% of revenues generated from fixed price contracts, 25% from cost type contracts, and 6% related to time and material contracts. Revenues generated from contracts with the U.S. Federal Government during the third quarter of '24 were approximately 67% including revenues generated from contracts with the DoD, non-DoD federal government agencies and FMS contracts. In the third quarter of '24 we generated 12% of revenues from commercial customers and 21% from foreign customers. An operational priority remains hiring and retention of skilled technical labor across the company, with total Kratos head count of 4047 at the end of the third quarter, as compared to 4012 at the end of the second quarter and 3986 at the end of the first quarter of '24. Now moving on to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chain execution and for employees. Sourcing, hiring, retention and the related cost. We have also taken into consideration in our affirmed fiscal '24 guidance, a federal fiscal year '25 continuing resolution, or CRA, commencing on October 1 which it has and under such CRA, no new program contract awards, no increases in existing production contract money and no transition from program development to production. Eric.

Thank you. Deanna. We'll turn it over to the moderator for questions.

[Operator Instructions]. Our first question comes in line of Michael Ciarmoli from Truist Securities

Eric, just I mean, we've got, you know, holidays and stuff here, not, not a lot of time for the rest of the year. What's the driver in the wide range for the fourth quarter? And then, I guess, just on, on the '25 initial outlook. Can you give us any color, or, you know, maybe some detail by end market, you know what? What are the leading growth engines what's kind of lagging?

Yes, sir. Hey, Mike, so on the on the range in the fourth quarter, every year it starts around September 30, with the government fiscal year-end, there's sweep up money, and a lot of customers have some money that they have some priorities on, and this is in particular in our space and satellite business and data purchases, including off of our space domain awareness network, which we've seen virtually every year for the past several years and it's very possible that we're going to get several of those this year, and we just can't plan them. They can come with one week's notice that's the biggest driver on the range are these data sales off the space domain awareness network. That's the big that's that one. On the other one, the big drivers for next year, all right, number one is going to be the air defense system work that's going on. It's incredible I went through some of the air defense just some of the air defense systems run and these are all counter UAS systems. These are big hardware programs. That's really going to be a driver for us the next one. Mike, and I can't emphasize how important

Got it. And then just, just a bigger picture question you mentioned, you know, the Reagan like build up. Obviously, it's super early days here post-election. I mean, if Musk is serious about gutting government spending, how do you think this plays out for defense? He's obviously got the track record with SpaceX. Does this put the old defense guard at risk? Does it favor new startups like I know you're working with BlueHalo or [indiscernible] and where does that leave you guys?

Yeah, I think that for non-traditionals like Kratos, [indiscernible] Shield, BlueHalo, I can go on and on I don't see a better setup for guys like us than the ones I just named. If you recall, a couple three years ago, at an Air Force conference, Mr. Musk actually said, I envision a future, five years from now, where jet drones are going to start replacing the manned aircraft. And he's also looking laser focused on affordability and getting more for your money, which is, as everyone knows, that's what Kratos has done with the drones and the hypersonics and the solid rocket motors. I'm this at worst, this is neutral, but most likely, this is going to be a very big benefit for the new entrants and the non-traditionals like Kratos.

Our next question comes from the line of Peter Arment from Baird.

Eric, it's first time I think I've ever heard you talk about a foreign source selection when you're talking about for your tactical drones, is this like a firm commitment from the customer or do you know the potential quantity? You know any more color on that? That would be helpful?

Yeah. So one of the reasons I mentioned that today, Peter is it's possible, in the next few months, not by us but because of the nature of this, it could become public. And I wanted to make sure you all at least were informed on this. I can't say a lot. I can't get ahead of myself on this. But if you recall, on the last earnings call, I made some comments that on one or two of these new opportunities we're pursuing. As a result of them, we were lining up our supply chain for a third lot of 12 Valkyries. Well, this ties into this, and so we're cautiously optimistic. We have been down selected. We were getting there and that's all I want to say. And we have not included any of this in 2025 none. And so, God willing, if it comes through this could be a big binary for us.

Right. And then on your you've given us a lot of information in this release regarding, you know, kind of the where all the growth can come from, in terms of capacity and growth in drones and engines on the drone side, the tactical drone, well, I guess the fire jet. There's opportunities with the Navy on the tactical side. Can you give any more color there on how that's progressing?

Apollo and Athena are very, very relevant. Relative to tactical drones, one of them relevant to a non-Air Force customer, I have to choose my words carefully here we continue to make -- I don't talk about a lot because I can't we continue to make progress with Air Wolf, including internationally, the tactical fire jet. And one of the primary reasons for that is because it's a Valkyrie can go several 1000 miles a tactical fire jet cannot, and so from political and policy purposes, it's more palatable. And one of these jet drones that our engines are going to be in flying is going to be tactical fire jet next year, which is significantly increasing performance in the electrical area for certain subsystems that are going to be very relevant. That ties into your question. I can't be more direct than that.

Yeah. Just lastly, you mentioned, you know, the turbojet development and TDI and sounds like the outlook there. Certainly the capacity is in place. How do you anticipate kind of production ramping up now that you've kind of made that significant investment there?

Yeah. So I think that probably in first quarter, no first half, the continuing resolution is directly impacting a couple three of these programs. Can't get the money because it's in the 2025, budget. We're going to get, we're going to get the some initial LRIP orders. Okay? And late next year, second half next year, we could get a couple more LRIP orders. And based on what we're designed in on these systems, based on what it looks like, we have a new President now he's going to have a lot of say in the 2026 budget request. So assuming there aren't any draconian changes there, which I don't believe there will be 2026 could be a break out year for us in the small jet engine production.

Our next question comes from the line of Ken Herbert from RBC Capital Markets LLC.

Hey, Eric. We've obviously got a new administration coming in as we think about where we see some leadership changes in Congress and what would likely be greater, sort of a greater push for higher defense spending. I know it's obviously early, and you sounds like you're alluding to this, and '25 is probably not where we necessarily see this, relative to '26 and beyond. But are you prepared now to think about if we're in a situation where we do see call it sort of mid-single digit, real growth in at least U.S., defense spending. What that means to your long term, 10% top line outlook that you've been delivering to over the last several years?

Yes. So you know, Senator Wicker of Mississippi, very well may be the Chairman of the Seminar Services Committee, and that gentleman is a 100% Patriot through and through and if you Google it, you can probably see $1 trillion defense budgets under Wicker. I know he was looking for that recently, which are needed because of the threat profile. And I can go down the list on what people are speculating, or are going to have some of these important roles it looks like for United States National Security. It's going to be a Grand Slam, which we need right now for the country's sake. Now having said that, affordability is going to be very, very important. It's just going to be, irrespective of defense budgets go up to 950 billion, or a 1 trillion. Again, I'm the CEO. I drink the Kool Aid. But based on the programs we've won, the ones that we're going to win in the next three, six months, we know we're going to win. We've been told and based on the opportunity pipeline where this is Strategic Systems, nuclear systems, air defense systems, where we're basically sole source. This is one of the reasons I mentioned that probably in '26 we're going to take up our 10% year over year growth number. We're going to. I don't believe it's going to be lack of winning the work. The constraint, or the restraint we're going to have is getting the qualified people, primarily manufacturing people, including those that can get security clearances, because you can imagine, with what's going on in the industry, these people are in incredible demand right now by all of us and that's going to be it, but that's Ken why I made the comments on, we're looking to potentially take it up in 26 because of what you just alluded to.

And if I could, it looks like, in terms of profitability within the unmanned segment this year, on an EBIT level, you probably end the year, and, you know, low single digits in terms of margin, you're outlining, again, significant investments within that segment to support, obviously, the planned growth. Do we see, or should we expect much margin expansion within the unmanned segment in '25 I'm sorry, or can you provide any additional commentary around that?

Obviously, I don't want to get ahead of ourselves, since we're not giving guidance yet. Ken, but we would expect to see some margin expansion, just with the leverage off of our fixed infrastructure as we move also from move up production and move from development into production, so we would expect to see some expansion

Our next question comes from the line of Mike Crawford from B. Riley Securities.

Thank you given the increase in proliferation of space based architectures. Could you give us a sense of what your satellite business historically has looked like, broken down between Leo and Geo maybe historically today and where that might be in the future?

Yes. So the satellite business [indiscernible] has been substantially geo focused, which here heretofore [ph] the vast majority and the vast number of satellites that went up. They went 22,500 miles up, and they were in geosynchronous orbit. That was before Elon, and that was before anti-satellite weapons that Russia and China have. Now we're going to distributed constellations in Leo and Meo orbit that kind of can be kind of, sort of augmented by geo but the vast number of satellites that are going up are going up into Leo, and then we can get, we can get into these that if they're over the ocean, they can't communicate unless they have laser cross links, etc. So we continue to be as of right now because of the legacy systems and these software defined satellites and Airbus and then Talus and Boeing are putting up. Our business is predominantly still geo but because the market, especially in the Tracking Network areas, have been moving to distributed Leos. We are moving there with them. We're moving right along with them. So expect our mix to continue to move more and more away from the geo to the Leo and the Meo as a result of the systems that are going up.

Thank you, Eric. And then just related, the single award, $100 million plus space opportunity that could expand from there, did? Can you say whether that's commercial or sovereign?

It's not commercial.

Okay. And then separately, you had this successful joint exercise at Air Force Base and one flag, and we know Marines is a customer, but I mean the Air Force had, I mean, they're in the joint exercise, and they have the CCA program, where now it's unsure. It looks like the exquisites are never going to go into volume production, but it's unclear whether the next increment is going to be for more [indiscernible] aircraft, or is it something that's more related to counter UAS, or can you not comment on that either?

My opinion on this, Mike, is the United States Air Force responsibilities are massive, and they're increasing. They're just massive that what they're responsible for and their resources, financial and otherwise, are not adequate for them because of these massive responsibilities. And so they, in my opinion, the Air Force, very smart. They're going to be looking for areas where they can augment systems with lower cost systems that may not be exquisite, but they're very, very capable, very capable and I believe Kratos drones, runway capable, runway independent, etc, I sincerely believe we're going to be part of helping there for solve their drone issues from a resourcing standpoint, I believe that, and I'll leave it at that.

Our next question comes from the line of Seth Seifman from JPMorgan.

Apologies if I missed it. Is there? Is there any update on, on Prometheus? I'm smiling.

We are. The last time we talked, I said we were in the red zone. We are on the five yard line. I truly believe that at our next earnings report, if not sooner, independently, because of the significance of this to Kratos and the United States industrial base, that we are going to be able to announce something either we got it in the end zone, or otherwise, I believe we're going to get it in the end zone this. This, this could be one of the biggest catalysts for Kratos ever. We're almost there, but I don't want to jinx it.

Of course when you think about that, you know kind of 10% next year. And you know what we discussed a little bit earlier about the drivers of that, is that something that where there's, you know, is not factored in, and maybe there's upside related to that?

It is factored at zero. This is so significant to future years and so binary. We're not factoring it at all. It's zero. It is zero in our forecasts.

Okay, got it. And then maybe it's just a fall. I feel like I should know this. But when we think about the producing at the scale of the turbines that you're talking about, what would be the primary destination for that level of production or the kind of top groups of programs that would be the customers for that scale of production?

Low cost cruise missiles. There are a handful or two of brand new low cost cruise missile or similar programs that are underway. They're underway. They're happening. There's not a lot of publicity on them, but they're happening and these are orders of magnitude less, orders and orders of magnitude less costly than existing exquisite cruise missiles. This is clearly affordability, quantity, affordable mass, that the military, several branches, are looking at and they're doing it. This is going to happen. This is happening so it's low cost cruise missiles. Why we built this family of engines specifically for this application, because we saw it coming.

Our next question comes from the line of Sheila Kahyaoglu from Jefferies.

Hi guys, Connor, on here for Sheila. Thanks so much for taking my question. Your commentary around the hypersonics pursuits is clearly very positive. I think you previously called out it could be a $1 billion opportunity over the next five years. Can you just give us an update on where the broader hypersonic business stands today and how you think about that trajectory?

Yeah. Okay, so we Kratos legacy in the hypersonic areas is significant. We're involved. I'll give you some programs, high fire, high cause, fast those were Kratos launch systems, and Kratos was involved in those, as you may have saw last year, France launched a hypersonic glider. Kratos launched it for them Kratos system. Heretofore, and also, you know, our ballistic missile targets, ballistic missile re-entry vehicles, they routinely go over Mach 5 5000 miles an hour. So they're hypersonic. So we're an expert in the field. We just don't propagate it a lot. Our sweet spot in drones right now, contractually, it's target drones in solid rocket motors. It's ballistic missile targets and so you one would think that where would we be? We would be in hypersonic targets. We would be in hypersonic test vehicles. We would be in things like that right now as we speak. And also, similar to what we've done with the target drones where we've now transitioned, augmented to tactical. We also very well may take a look at that in the hypersonic area, because we can do things orders of magnitude less costly and faster than anybody else out there.

Got it, that's very helpful Maybe for my second one. Just to look at the micro-electronics business in a little bit more detail, it's clearly been a strong driver for you guys this year, given the demand in the region. But with all that capacity coming online next year, any way you can frame the growth opportunity for 2025 and beyond.

This business should be a 15% to 20% grower, if not more, for the foreseeable future, to replenish the stocks, the inventories that have been expended over the last 13 months. And then, in addition to that, I mentioned the facility. We're standing up in India with partners, with customers. This is not a bit we don't build it, and they will come. We have programs because of everything that's going on in Russia and the Ukraine and what's going on with Israel and Hamas and Hezbollah, India has not talked a lot about relative to China, and what's going on relative to rearming there. We are embedded in there, and we see the opportunity there, and that could be the next step function for us in a couple of years as we get online, supporting them.

[Operator Instructions]. Our next question comes from the line of Andre Madrid with BTIG.

I wanted to talk on labor. I know you guys have cited this in the past as kind of being a hurdle to really be able to scale the propulsion business, especially at KTT. Can you highlight any progress on recruiting and retaining talent?

We have dozens and dozens of open wrecks right now, especially in the turbo machinery area. And as we've talked about before, the competition is not just only your traditional aerospace guys, but it's these new space companies like SpaceX and others. And I mean it just this is business. We make progress but as we talk about, it's costly, and I'm good for the people, you know, good for good for them, but it's costly. So it's challenging, it's remaining challenging. We are about, I didn't talk about this in our prepared remarks. I believe we're going to receive another very large propulsion system contract on the military side, that's going to get going in January. For us, it's not under contract yet, but it's coming, and we're going to be sole source and we're going to get it staffed, but the margins won't be as strong as we thought, because we're going to have to pay to get these experts, and we're going to need, like, 50 of them to do this new program. So it's hard.

That's fair. No, I totally feel for you there. It's, you know, pretty, pretty industry wide, but I guess pivoting again, I know somebody had mentioned it on the space side. I wanted to drill and look at it more at a BU level, you know, space training and cyber security. It's pretty broad, but it seems like what's happening on the commercial space front is when you think about contract mix, it seems like this is a bigger one. I mean, considering though the breadth of that portfolio, it is the largest that you know, on a BU basis of the entire company, what opportunities are there to kind of offset and expand in other areas, be it defense, be it cyber?

Yep. So something I haven't talked about for the past several quarters in detail is our training business -- training systems. And these are virtualized training systems. These are augmented reality training systems. And it's also hardware training systems. So for example, we were involved with the M1 tank. You can imagine what's going on with that, where we do the Bradley. You can imagine what's going on with that. We do multiple helicopters, as the weapon systems are being produced, including as they're going internationally, training systems, the demand today is probably better in this area than it's been in the last 10 years. No kidding, we have out there two or three bids right now, and we got another one we're getting ready to submit, where our training business could literally double in size over the next two years. Literally, you know, it could go 40 to 80, and then it could go, no kidding, if we hit two of these, one, there were two. If we hit one of them, it could go 40 to 80, 150 and so those are heavily factored but the training area where we're only one of one of two or three guys that can do this, you're going to be hearing us talk more and more about this next year, because it's got to be a major contributor to us, and it's going to offset what's going on back on that commercial space side.

Our next question comes from the line of Joe Gomes from Noble Capital.

Eric, I wonder, see, maybe you could talk a little bit about the international target drone opportunity. I haven't heard a whole lot about that lately. What if anything is going on there that could be exciting for the company?

Yes. So back to air defense systems. You read about the U.S. allies, NATO, other allies, acquiring air defense systems. So THINK systems like Patriot or SHORAD, even the Old Hawk systems that are out there, and I can go on, they all need to be exercised. In addition to that, international customers are now taking F35s. Those systems, those air to air missiles need to be exercised. Our international target drone business is experiencing very significant growth, but it's a small piece the biggest target drone guys in the world, of US Navy, the US Air Force, the US Army, okay, so it's like 20 million a year, but it's growing very significantly. Here's the important part, because they're international, the margins are much, much higher than with the U.S. government. And so I would expect for the next several years, and you follow the air defense systems, follow the F35 where they're going. Those are the countries that are buying our target drones and very importantly, they have to put the infrastructure in to launch them, to fly them, to recover them. It's the razor and the razor blade then they get the target drones and they shoot them down, and we ship them more and so it will be one of our strongest growers for the foreseeable future for the reasons I just explained.

Okay, thanks for that. And one other one that kind of switch gears away from all the military. And you know, one of the items we've talked a little bit about in the past is your driverless vehicle solutions and just wondering what is going on in that sector these days.

I am smiling, it's doing great. The trucking shortage, the driving shortage and I've learned more about this in the past several years. Is acute, and it's expanding, I think over the next few years, like a million tough truck drivers are retiring, and they're not going to be replaced, and so we continue to make incredible progress, sales, revenue, profit, sugar beets, soybeans, minerals. These are on big Agro complexes in states, on state roads where we have unmanned vehicles driving. It's incredible and our differentiator here is we, you know, we developed this for tanks. We have a kit that we put into a truck and we turned into a robot. So it's very cheap, very low cost, and that's our angle, because we're not going to compete against guys that are building manned cars. So this business will probably be materially financially positive for us, in other words, big enough for us to start talking about in '26 you know, it's growing. It's a few, several millions of dollars in revenue right now, very profitable and it's scaling. I don't talk about it much because it just hasn't been significant to the whole thing '26 it's probably going to be to a point where we're going to be talking with you about it routinely, because it's going to be, it could be in the 10s of millions.

Our next question comes from the line of Pete Skibitski from Alembic Global.

I just wanted to see if we can kind of wrap our hands around this commercial space area just a little bit more. It was down a chunk this quarter. Just wonder, what's it down year to date? What's your expectation for the full year? And sort of, when do you think it'll bottom?

Yes, Pete, I'm glad you asked the question, because it's going to give me an opportunity to highlight how strong the rest of the company is doing. It's going to be down this year on the commercial satellite side, $30 million to $35 million in revenue down because the operators are not taking receipt of the satellites from we know who these guys are, which means they're delaying the ground equipment deployments, which contracts we've already won. So it's down 30 or 35 and Pete, think about it. The rest of the business has completely offset it. So it shows you that if this had not happened with the software defined satellites, we would be blowing every financial metric away, blowing it away, and which is why I'm so confident next year we're going to do so, so good is because at worst, that business is going to have stabilized. I actually think it's going to start going up again. I don't want to get into the details on that right now and every other business as Deanna Lund and I have talked about today is it's either at or near record backlog and record opportunity pipelines. So thank you for asking that question.

Yes. I mean, it was down. It says 24 million this quarter, and I thought it was down previously as well. So that would seem to indicate it's already bottom. There may be bottom this quarter, and there's not really further meaningful headwind to add.

I think that’s fair.

Okay, and are you sorry if I missed this, but the revenue guidance for KGS for this year is it still 860, to 875?

That's correct. Peter.

Thank you at this time, I would now like to turn the conference back over to Eric DeMarco for closing remarks.

Great. Thank you all for joining us, and we will -- our next planned chat will be when we report Q4 at the end of February, and that's when we'll put the meat on the bone, on the financial guidance. Thank you.