Aerospace and defense company Kratos (NASDAQ:KTOS) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 17.1% year on year to $351.5 million. Revenue guidance for the full year exceeded analysts’ estimates, but next quarter’s guidance of $320 million was less impressive, coming in 1.5% below expectations. Its non-GAAP profit of $0.11 per share was 17.7% above analysts’ consensus estimates.
Is now the time to buy KTOS? Find out in our full research report (it’s free).
Kratos (KTOS) Q2 CY2025 Highlights:
- Revenue: $351.5 million vs analyst estimates of $305.5 million (17.1% year-on-year growth, 15% beat)
- Adjusted EPS: $0.11 vs analyst estimates of $0.09 (17.7% beat)
- Adjusted EBITDA: $28.3 million vs analyst estimates of $23.7 million (8.1% margin, 19.4% beat)
- The company lifted its revenue guidance for the full year to $1.3 billion at the midpoint from $1.27 billion, a 2.2% increase
- EBITDA guidance for the full year is $117 million at the midpoint, in line with analyst expectations
- Operating Margin: 1.1%, down from 4.2% in the same quarter last year
- Organic Revenue rose 15.1% year on year (16.7% in the same quarter last year)
- Market Capitalization: $10.78 billion
StockStory’s Take
Kratos’ second quarter saw a strong positive market reaction, as the company posted results that exceeded Wall Street’s revenue and non-GAAP profit expectations. Management attributed the outperformance to sustained momentum across its hypersonics, rocket support, and C5ISR (Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance, and Reconnaissance) segments. CEO Eric DeMarco pointed to a “generational global recapitalization of weapon systems,” highlighting Kratos’ unique positioning to capture new defense technology demand. The company’s backlog and proposal pipeline were cited as key indicators of continued robust order activity.
Looking ahead, Kratos’ upgraded full-year outlook is built on anticipated contract wins in tactical drones, hypersonics, propulsion, and international missile systems. Management noted that new programs such as Poseidon and DMOS, as well as sole-source positions in projects like Valkyrie and Air Wolf, are expected to underpin growth starting in 2027. CFO Deanna Lund emphasized ongoing investments in manufacturing capacity and supply chain resiliency, cautioning that material and subcontractor costs on fixed-price contracts remain a margin risk. DeMarco described upcoming contract announcements as potential “flywheel” opportunities for sustained revenue, profit, and cash flow expansion.
Key Insights from Management’s Remarks
Management attributed the quarter’s momentum to broad-based growth, strength in hypersonics and defense programs, and strategic early investments in drone production.
-
Hypersonics and rocket support: The company credited a notable hypersonic mission and strong demand in rocket systems as key contributors to Q2 growth. Management highlighted that hypersonics remain the top-ranked franchise, bolstered by robust funding in the U.S. Reconciliation Bill and a growing pipeline of contract opportunities.
-
Tactical drone production investments: Kratos’ decision to begin serial production of Valkyrie drones ahead of contract awards enabled faster customer adoption and positioned the company to capitalize on future government orders. Management explained that this approach led to sole-source opportunities and immediate revenue recognition upon contract wins.
-
International expansion and margin mix: Recent down-selection of Valkyrie by the German Luftwaffe and partnerships with Airbus point to growing international opportunities. Management noted that international contracts, especially in Europe, typically carry higher margins compared to U.S. government deals due to direct commercial structures.
-
Microwave electronics and acquisition strategy: The acquisition of Norden Millimeter and expansion of the Israeli-based microwave electronics business were described as strategic, with management citing increasing demand for missile componentry and plans to further scale this high-margin segment through targeted M&A.
-
Manufacturing and supply chain investment: Kratos continued to invest in new facilities, especially for hypersonics, propulsion, and microwave systems, to meet anticipated growth. Management also discussed ongoing efforts to vertically integrate critical manufacturing processes and mitigate sole-source supplier risks, particularly for rare earth materials and specialized components.
Drivers of Future Performance
Kratos’ full-year guidance reflects optimism around contract wins, drone ramp-ups, and expanded capacity, while acknowledging supply chain and margin headwinds.
-
Contract pipeline and program awards: Management identified large programs such as Poseidon, DMOS, Prometheus, and GEK as drivers of future growth beginning in 2027. Success in these areas is contingent on timely contract awards, facility buildouts, and execution of multi-year government procurement cycles. CFO Deanna Lund noted that new business wins could significantly increase revenue and profit, especially as drone and propulsion projects scale.
-
Margins and cost management: The company expects margin expansion over the next two years as higher-margin programs enter production and lower-margin contracts are renewed at improved rates. However, material and subcontractor costs on fixed-price contracts remain a risk, and Kratos is working to contain these expenses through supply chain diversification and vertical integration.
-
Capital deployment and capacity expansion: Kratos is deploying capital toward new manufacturing facilities and technology upgrades to support expected demand, but management cautioned that elevated capital expenditures and working capital needs will persist as the company ramps up production. Lund stated that free cash flow usage is likely to remain high through 2026 as investments outpace initial returns, but this trend should reverse as large programs move into steady-state production.
Catalysts in Upcoming Quarters
For the remainder of the year, the StockStory team will closely monitor (1) the pace and value of new contract awards in drones, hypersonics, and missile systems, (2) execution on planned manufacturing capacity expansions and facility buildouts, and (3) progress in renewing or repricing fixed-price contracts to improve margins. Additional signposts include updates on Prometheus and GEK joint ventures and further evidence of international order flow.
Kratos currently trades at $65.78, up from $59.15 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).
High Quality Stocks for All Market Conditions
Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.
The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.
StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.