Opto: Hello everyone. Today we're joined by Eric DiMarco, CEO of Kratos Defense. Kratos focuses on next generation defense technologies, including autonomous drones, hypersonic testing systems, and satellite communications. The company has built a reputation for developing lower cost, rapidly deployable technologies at a time when the defense industry is shifting towards autonomy, software, and scalable platforms. How are you doing today, Eric?

Kratos: Good, great, good to see you.

Opto: Yeah, thanks very much for joining us. It's good to dig into Kratos and a lot of people will be very interested to know, you know, how things work at the company. And we'll dig into that in just a second. I thought just to start with for people who don't haven't heard of the company before, could we just, could you just give an overview of what Kratos is and what they do?

Kratos: Absolutely. So Kratos is a hardware, software, and system company focused primarily on national security of the United States and its allies. And as I mentioned, we're primarily hardware and software focused, not a services company.

Opto: And what sort of, if you're going to split out the sort of areas you work on at Kratos, what are the main services you provide or products?

Kratos: Yep. Our core business area is where we're either recognized as the best or one of the top two in the world. Hypersonic systems. And so these are glide vehicles, air breathers and solid rocket motors that get them to hypersonic speed. Tactical jet unmanned aerial drone systems. So these are our jet fighters, jet strike aircraft that are unmanned that use artificial intelligence or augmented autonomy. space and satellite communications. We do the command and control of the space segments. We're on the ground. And we also do the telemetry tracking and control of the satellites that are in orbit. And in that space area, we have invested over $100 million. We have a global network where we monitor space assets for the United States and our allies. And the fourth big piece is our propulsion area. We build jet engines, turbo jets and turbo fans for drones, missiles and loitering munitions. And we also build hypersonic propulsion systems and supersonic propulsion systems. Those are the big four areas of the company.

Opto: Where did Kratos begin? Was it in hypersonic space or have you expanded out into other verticals?

Kratos: Right. We actually began in the hardware for counter UAS systems, which we still do quite a bit of, and air defense systems. So think missile systems and radars. And that led us into drones, shooting down drones, building drones. And then that led us into space, tracking things. And so we kind of followed the thread along the product and software lines that we were building.

Opto: Yeah. And have you always been in this industry or where, where you're in terms of your background? Is it, did it was always defense or have you come from other hardware areas?

Kratos: It's basically always been ⁓ defense. Even when I was ⁓ a child, my dad worked in Area 51. I can talk about that now. Subsequent to that, my dad owned a very large microwave electronics company, Microwave Electronics for Missiles, Aircraft and Radars. Then ⁓ I've had three jobs. My first job was at Arthur Anderson Anderson Consulting, working primarily on defense companies. I went from there to the Titan Corporation, a big defense company that was sold to L3. Then there was Kratos. So I'm 62 years old and virtually all my life has been involved in national security.

Opto: And Kratos calls itself a affordability-driven disruptor. Can you just go through what that means in practice?

Kratos: Yeah. Yeah, so ⁓ we have a bunch of kratosysms. One of them is affordability as a technology. And every product that we engineer, develop, and design for high-scale manufacturing, we do with low cost in mind for affordable mass, large quantities, which we have recently in the past three years, four years, and right now with what's going on, that's Russia and Ukraine right now, and Iran, we're seeing Quantities do matter. Affordable mass does matter. There will always be exquisites, no question, but there's gonna be an awful lot of attritables and expendables. And that's where you gotta be low cost to be able to build large quantities.

Opto: Is it fair to say that the industry has been forced that way because of the new state of warfare today?

Kratos: I don't think the industry has been forced that way. Let me tell you what I mean. If you take a look at the legacy traditional five and a half primes, know, the big five and then L3, the five and a half, ⁓ they're not great at building low cost things. They're great at building exquisite, very capable systems and things like that. I think more it's opened up a new area in the industry to rebuild the industrial base. for the middle companies like Kratos, which there were very, very few left because they were all acquired. I think there were like three of us left. And then the new defense technology companies we're seeing that the venture capitalists are backing and that the private equity firms are backing, none of them are really focused on the super exquisite systems except one, they're focused more on the lower cost, attributable, expendable, disposable systems.

Opto: Okay, you're of ahead of the trend in that area. It's a USP of Kratos. ⁓ Is the affordability of the systems. Is that fair to say? Yeah.

Kratos: Absolutely. I would say, and I'm glad you mentioned this, you really don't hear any other company, small or large, talk about affordability. You don't. We focus competitively. We are the low cost provider. mean, we do a full hypersonic system, solid rocket motors to the glide vehicle, all upshot. $15 million. No one can get under $100, $150 million. We do it for $15 million. Our most expensive, our most exquisite tactical drone is $10 million. We're building small jet engines, $15,000 for jet engines, military grade. So I can go on, but that is our key differentiator.

Opto: Yeah. Yeah. And what's interesting, ⁓ as far as I'm aware, for companies that are set up to create more expensive hardware and things like this, it's actually quite hard for them to create the infrastructure to, ⁓ develop and, and deploy cheaper things. Like it's, it's a whole industry supply chain that you probably have built across.

Kratos: ⁓ It's the culture, it's the DNA of the companies. So the bigger companies, they're building exquisites. Typically they have a human being in them or a man in them. So they have to have redundancy and life support systems. And they have to have certain things for that. But if you start with, okay, your system's gonna be an unmanned hypersonic flyer or an unmanned tactical jet drone, that then, as you just said, goes down the entire supply chain. So for example, If you're going to have an unmanned tactical jet drone, that engine doesn't have to run 10,000 hours between upgrade. It can be designed to run 20 hours because it's going to go boom, which drives the cost down even further. See what I mean? And so it's that mindset that the culture, the DNA, all the way down through the supply chain, which drives down that cost point.

Opto: And where does Kratos sit in the defense value chain today? Is it a prime contractor supplier, something else in between?

Kratos: Yeah. For the vast majority of what we do, we are the go-to merchant supplier slash partner to the big primes and to the new guys. So take a look at our most recent large contract with our Valkyrie drone. It's a program of record with the United States Marine Corps. We're not the prime. Northrop is the prime with their mission systems. I'm the merchant supplier, supplying them the low cost jet strike aircraft. They're integrating in, they're very sophisticated, state of the art mission systems, and then they're selling it to the Marine Corps. See what I mean? Let me keep going. We're selling the Valkyrie to Airbus. Airbus is putting in a very exquisite mission system, European based, okay. You've heard me on my earnings call say I've got two more customers that I believe I'm sole source with the Valkyrie. So there's an instance where I'm actually delivering the airplane, but I'm the merchant supplier to the big guys or my partners to do this.

Opto: And so your client base isn't just US, it covers Europe and other regions.

Kratos: ⁓ absolutely. three or four months ago, this administration first threw an executive order and then it was followed up. The MTCR rules, the Mission Technology Control Regime Act rules were changed. The Secretary Rubio changed them for the United States. This was enormous for Kratos relative to missiles and drones because before, because the United States was worried about security. of systems getting out for missiles and drones to bad guys. So there was a presumption of denial. The State Department would deny you if you tried to do it. It's done a 180. Now there's a presumption of approval where drones and missiles being sold from the US internationally are treated as if they're a manned fighter. Look at all the countries F-16 is sold to, F-35 is sold to. So the past four, three, four months, big sea change in the industry and for Kratos in the ability to sell certain systems internationally.

Opto: Yeah, okay. And Eric, when investors look at Kratos today, what part of the portfolio matters the most? Is it the drones, the hypersonics, space? ⁓

Kratos: So, I believe when investors look at Kratos today, they're focused on the drones. Because drones are sexy, they're in the news, they're changing the warfare, et cetera, et ⁓ I believe you and I are gonna see over the next two, three, four years, they're gonna get equally or more excited about what we're doing in the hypersonic area with our hypersonic flyers and what our space and satellite business is doing. It's incredible what we're doing. We just last week, I announced it on the call, we were informed we've won another $500 billion single award contract for the ground infrastructure for a certain customer. It's incredible. It's all software, our ground. The software virtualized system we have is really doing well with all the software-defined satellites.

Opto: And just to dig into hypersonics a bit more, as you're mentioning, it's a major focus. Where are you solving the biggest technical bottlenecks today?

Kratos: Yeah, so incredibly, other than an exquisite system or so I can't talk about, Kratos is the only company in the United States, and I would say in the world, that is routinely flying hypersonic systems. Kratos is, okay? Hypersonics in my opinion are like stealth was 30 years ago. almost impossible to stop, very hard to stop. And this is where Kratos is coming in with, as I mentioned before, ours are low cost. They're flying today. They're very, very capable, which is why this is one of the, it may be the fastest growing business in the entire company right

Opto: And I think I'm right in saying that the MAC TB2 award, you won that recently, which was quite a major win. Strategically, what does that contract unlock beyond the headline number?

Kratos: Right. And so what that unlocks for Kratos beyond the headline number is analogous to our drones. So in our drones, we're the number one provider of target drones in the world. These are jet aircraft that represent Russian, Chinese, adversary, fighters, missiles, et cetera, that our weapons systems go up and exercise against. What we did is we took those and we modified them. 90 % same supply chain, drove the cost down and we converted them to tactical. Mach-TV, test vehicles, very similar to target drones, right? And so we're getting an incredible amount of data and technology out of the vehicles we're flying. So we're gonna be taking that and moving over to the tactical realm. Again, no one's gonna be able to hit our cost point and we're gonna be able to deliver, these are my words. 90-95 % of the requirement at one-tenth of the cost.

Opto: So yeah, a good follow up to that is how much of the competitive advantage in hypersonics comes from the engineering know-how versus, you know, what you're talking about is the manufacturing capacity for lower costs.

Kratos: Yeah, you know, there's a lot of noise out there right now about people building mega factories and building all this stuff and that's going to drive costs down. That's not the way it works. The way it works is you have to have the engineering capability and the customer to know what they want you to build and what specific security requirements that facility is going to require. These facilities are built with facility security officers for a specific system, for a specific requirement that sign off on it. You just can't build a generic facility and say, I'm going to build a hypersonic light vehicle in it. And so that past performance qualification of knowing what you're going to do with the customer ties into the ability to build a very efficient integration facility or factory. to deliver those systems at a low cost.

Opto: And what needs to happen for hypersonics to become a more repeatable business and grow at Kratos?

Kratos: I believe. Since this administration has come in, if you take a look at their priority areas, take a look at the secretary's November 7 speech on the arsenal of freedom, I think right now, hypersonics, you can see the funding, you can see the funding in the reconciliation bill last year, you can see the funding in the NDAA in the appropriation. The time is now. And I believe at least for the next three years until 2029 that ⁓ that hypersonics in the United States is going to be one of the most well-funded mission critical areas of our national security establishment.

Opto: And just a bit about how the sales works. So are you typically waiting for orders from the primary contractor or are you bidding for things like potentially, you know, sales through at the back of the primary contractor? they saying we want them to do this? Yeah.

Kratos: Yup. All right, so let's stick with hypersonics. So four years ago, we spent a lot of time in the Pentagon, we spent a lot of time at the co-coms, and it was clear there was a need for hypersonic systems that could fly regularly, which meant they needed to be low cost. So Kratos went out and spent a combined internally funded $45 million over two years, two years, white piece of paper. to first flight of a solid rocket motor stack specifically designed for hypersonic vehicles called Zeus and first flight of the Aaronese hypersonic glide vehicle on top of that stack. Kratos did it in 24 months. Okay, because of that, I believe it was a key element of us winning MockTB, that $1.5 billion program. We have won several others that aren't public that I can't talk about. I mentioned last week on our earnings call, I think we're going to get another $1 billion sole source funding authorization for our hypersonics because we identified it, the need, I don't want to say the requirement, the need, and then we went out and we actually built something that was relevant that worked and they bought it. And I refer you back to what the secretary has been saying and what Mr. Feinberg is doing. Contractors. Bring us something that's relevant now, because we're out of time. We've got to get it fielded. And that's winning, and we're seeing that across Kratos.

Opto: And obviously Kratos isn't just air and missile. You discussed and mentioned at start space. How important is the space segment becoming and where do you see that in the future at Kratos?

Kratos: Yeah. The space, our space and satellite business is the crown jewel of the company. It's our biggest business. I think we just grew 20 % and we did 1.3 to 1 book to bill on top of the 20 % organic growth. It's, I know, it's incredible. We, similar to the hypersonic area, we've invested over $100 million. And we were first to market with a software defined command and control and telemetry tracking control system specifically to communicate with the new high throughput spot beam software defined satellites. And we are running the table because we're the only guy that has it. And that I know, and that's where the, the, the, the Leo's are going. That's where the new SysLunar satellites are going. And we have the command and control system. that can bring out the most value in these very sophisticated satellites. And as you know, the number of satellites going up over the next pick at 10 years is 100,000 and put aside SpaceX, 60,000. It's crazy. And a satellite is not worth anything if it can't communicate with the ground.

Opto: Yeah. And are you creating the entire satellite hardware or is it just a piece of hardware that goes on satellites already?

Kratos: Yep, so we are primarily now focused on the ground. And so think of an antenna, and it could be a parabolic antenna or a phased array antenna. And then what we'll do is we'll be involved in the electronics on the phased array antenna. When the satellite signal comes down, it's analog. We, our technology, right at the antenna, convert it to data, to IP, to go into the internet. So you can sit there literally from where you are. and you can command and control that satellite from your office because it's all software. And let me give you another example, these new, here before the satellites in geosynchronous orbit put down a broadcast that would cover a third of the earth and that would be equal power, equal coverage. So if it's over Boston, Boston would see it, but part of it's over the ocean, so a fish would get it and that wouldn't be very good. Now those satellites have spot beams. It doesn't do a broadcast. And so one satellite puts down thousands of spot beams the size of a pencil. It's not cost effective to build hardware to cover all that stuff. So you have a little antenna and you have software. And wherever you need the coverage, you spin up the software to communicate with the satellite.

Opto: And what are the use cases primarily? What are they doing with the satellite communications? Are they talking to other ⁓ parties somewhere? it comms or are they directing other hardware?

Kratos: So two pieces. So there's what I'll call data where it's comms, where it's voice, it's IP, it's video, it's targeting, it's tracking, it's things like that. So think of that piece. And I'll give you an example I love to give. You're probably too young. Did you ever see the movie Patriot Games? Did you ever see that? ⁓ Remember when they reorbited the satellite over the, they reorbited a satellite out of its normal orbit. to take a look at where the Irish Republican Army was so they could go in. Kratos, on the ground, gave the command to move that satellite. Kratos gives the command to turn on the infrared camera. Kratos gives the command to put that telemetry somewhere so somebody could look at it. That's what we do. We operate that satellite.

Opto: And so a good follow up Eric is, so five years from now, do you think the market will see Kratos more as a defense hardware company or a defense technology platform?

Kratos: Probably where we're going, it's going to be more on the technology side because it's going more and more where the software is the differentiator. So take a look at our jet drones. That jet drone hardware, you you got fifth generation, maybe it gets to sixth generation, but the software enabling that platform is going to really make it do a lot more things better, faster, smarter with multiple different payloads five years from So I think we're gonna move more and more just by nature of where national security is going to be seen as a technology company because more of our stuff is gonna by necessity gonna have to be software based to get the most out of that low cost hardware. Yeah.

Opto: Yeah, that makes sense. makes sense. And you've said recently the momentum from 2025 should carry into this year and next year. What gives you the confidence in that outlook? Yeah.

Kratos: Yup. Yeah, ⁓ So number one, the only thing that will slow us down is if there's global peace and we don't see global peace coming. There is a generational recapitalization of strategic weapons systems happening right now. The US industrial base has, for strategic systems to take on Russia and China has atrophied because we came out of the Reagan thing, the wall came down, then we did asymmetric warfare with terrorists. So we have a defense budget of a trillion dollars. It's going up, we can pick the number up to a trillion five. We have five and a half primes and we have Kratos. I'm not kidding. And that this is why the VCs are coming in because they see this supply demand imbalance. There's not enough companies to address the demand. Kratos, we have the past performance qualifications. As I mentioned to you before. We have products now. It's not a PowerPoint of what's going to maybe be there three years from now. And as I summed up at the beginning based on your question, our priority areas, hypersonics, drones, space and satellites and engines is exactly what the military needs right now. So we are in the right place at the right time with the right products at a low cost point. Our trajectory is up and to the right for the foreseeable future.

Opto: And do you see this, what's your outlook on the sort of global politics between China and USA, Russia? Do you see them? not getting along in the future still. What are the causes behind this, you know, tension now where you could say two superpowers are trying to fight for the who's got the top spot.

Kratos: Yeah, well, let's go to Russia first. And I believe people. When people say something, I believe them. Iran says, death to America, I believe them. So we better do something about it. So Russia has said, the president of Russia has said, this is his opinion, that the greatest geopolitical catastrophe in the 20th century was the demise of the Soviet Union. And he would like to rectify that. You got to believe him and look what he's doing in the Ukraine. right? So ⁓ I don't see that philosophy, that policy changing. I see it accelerating. All right? Let's go to the other side of the world. Let's go to the Pacific. ⁓ You see the president of China routinely saying, know, I think one of his head guys said last night, Taiwan, there was never a country Taiwan. There never will be a country Taiwan. Taiwan is part of China. And we're taking it. And I think we've seen them say we're taking it either diplomatically or we're taking it militarily. I take them at their word. And then you look at their buildup, their militarization of the island chains, et cetera, et cetera. The US has got to get ready for this. We got to get ready. And I am a firm believer in peace through strength. And that ties into your previous question on why from a, it's terrible for the world, but business wise, Kratos is up and to the right for a long time to address these threats.

Opto: And we've sort of talked about it, but not in detail. I'm assuming that you've incorporated AI into some of the software that you use for drones and things like this. How do you keep being at the forefront of that technology? Because it's so important when China is also pushing the boundaries of what is possible there.

Kratos: Yeah. Yeah. So let's use the drones as an example. can give you many more. As I mentioned, we're the world leader in high performance jet target drones. We're number one with the US Air Force, number one with the US Navy, number one with the US Army, the biggest users in the world, plus a dozen countries internationally. Our jet drones are flying every day with the customer with, I call it augmented autonomy. People call it artificial intelligence, and it's learning, et cetera, et Take a look at our tactical drones. Our tactical drones fly with Kratos's AI, not somebody else's, and the government loves it. So by definition of what we do, we're flying, every day's an overstatement, but you know, we're flying every week, multiple times a week with multiple customers in incredible threat environments. up against the highest performance manned fighters, radar systems, interceptors in the world, we by definition are staying on the forefront of artificial intelligence and augmented autonomy on the tactical jet drone side. And I don't see how anyone can be anywhere near us because no one has the missions we have because of our target drones. You see what I mean? Okay, let's take a look at our space business. We have a global network where we're monitoring things. And we've built a massive light, I call it a library, a data center, where we've archived what things are doing. Well, we have artificial intelligence that if it sees something change in outer space, something changes, it goes back against that library. The last time this changed was eight years ago. And when it changed, they did this.

Opto: The data you've gathered is very valuable as well.

Kratos: Right. I call that analytics and an analytical tool, but you know, it's an artificial intelligence today. But that's, a, those are analytical tools that we have developed over years and years and years.

Opto: Yeah. And you've recently raised a significant amount of equity. Why was the right time to do it now?

Kratos: Yep. So first of all, made one of the largest, might have been the largest acquisition in our history of Orbit Communications, a satellite communication company in Israel. So we had a discussion with them. They came to us. We had a negotiated deal. They're in Israel. We're in Israel. Same customers, same everything. That was $350 million that we didn't plan on spending. So we just closed that last week. Why timing? I wanted to raise the money to make sure I, to pay that off. Okay. So the money I have on my balance sheet where I've talked to the U S government customer and I've said, government customer, you can give me an order for 5,000 jet engines for missiles. And I, my balance sheet can handle it. My balance sheet still is very strong. So certain government customers won't hesitate to give us opportunities. Exactly. That was it.

Opto: Makes sense. And if you were going to say one thing right now that would be the hardest thing of scaling Kratos going forward, what would that be?

Kratos: The hardest thing is getting the qualified people that are willing and able to get a national security clearance. There are lot of opportunities for very smart people to go work in the commercial area and live a certain lifestyle where they don't have to worry about holding a security clearance. And I'm not, you know, I'm not. passing any judgment here, this is fact. And so getting people, and then once you obtain them, if you get them trained up, retaining them, because Lockheed's gonna want them, or some of the new defense tech, or SpaceX is gonna want them, and that's bidding it up. So it's, clearly the most important asset of Kratos is our people today.

Opto: Okay.

Kratos: and the people we're gonna need to execute the business plan going forward. No question.

Opto: if sense. And yeah, the conversation's been great. Thank you so much for going through everything with us. Just to finish it off, thought we could just, if we have a conversation, say in two, three years time, what would success look like for you with Kratos?

Kratos: Sure. Yeah. Okay, so success is that we, with Lockheed and Northrup and the other big defense companies, we've deterred World War III. So success is going to be that our taxpayer has spent billions and billions of dollars and that money has been put to good use. Kratos was part of it and we've deterred World War III for our way of life and our children. That's clearly, that's number one. One, two, and three. On the business side, we'll go to the business side, is that Kratos is more of an integral part of the U.S. National Security doctrine in the areas that you and I have talked about, which brings value to all of our stakeholders, our customer, the war fighter, the taxpayer, the employee, and the shareholder. Let's face it, my job is to generate value for all of them. My job is to generate money, value, profit for the shareholder. So gotta be able to do all that. And I'd like to be able to say three years from now or the timeframe you gave, we deterred a war and we did that too.

Opto: And am I right in saying your personal vision is for Kratos to be one of the top five in the future?

Kratos: No, see, I don't think that way. Bigger does not mean more valuable. It doesn't mean more valuable to shareholders, and it doesn't mean more value to the government. Right now, there's a naughty and a nice list, and a lot of big guys are on the naughty list. So it's really, I'd like to be the most valuable, don't think like market cap, you know what I mean? But the most...

Opto: Okay. Yeah, OK.

Kratos: valuable where the government, the Department of War, the shareholders go, wow, that company delivered on these five core value things for all of us. And if we're the 50th largest in the country, I don't care.

Opto: Yeah, that makes Yeah, yeah.

Kratos: Does that make sense?

Opto: Yeah, that makes a lot of sense. I've heard things recently, these other companies, ⁓ you know, trying to charge as much as humanly possible for each thing that they're selling. And they're not trying to drive efficiency for the government and things like this.

Kratos: Yeah, I completely disagree with them. You we all have our different business models. We all do our, okay. You know, my shareholders might not want to hear this, but instead of making 12%, I make 9%. And that enabled my war fighter customer to get three more of those things to save lives. That's a no-brainer to me. No-brainer.

Opto: Well, thanks Eric. I mean, this has been great. I've enjoyed learning more about your company and wish you the best. yeah, if you get a chance to speak again in a couple of years time, that'd be great. we'll hopefully see where Kratos is then.

Kratos: Great. ⁓ thank you. if we do have that opportunity, I'll remember and I'll tell you how we did. So great. Good to see you. All right. Bye.

Opto: Thanks, Eric. Have a good day. Bye.