Aerospace and defense company Kratos (NASDAQ: KTOS) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 26% year on year to $347.6 million. Revenue guidance for the full year exceeded analysts’ estimates, but next quarter’s guidance of $325 million was less impressive, coming in 2.5% below expectations. Its non-GAAP profit of $0.14 per share was 12.3% above analysts’ consensus estimates.

Is now the time to buy KTOS? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

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.

Looking forward, Kratos’ guidance reflects management’s expectation that hypersonic and rocket systems, as well as expanding international drone partnerships, will be pivotal for growth. DeMarco explained that “our hypersonic franchise will be the clear driver of growth for us for the next two or three years,” with several classified and unclassified programs ramping up. He also noted that investments in microwave electronics and engine production are set to support these expanding opportunities. However, Lund cautioned that the company is navigating higher bid proposal and pursuit costs, and ongoing material and subcontractor expenses tied to existing contracts may continue to weigh on margins. Management underscored that production-level Valkyrie sales and full integration of the Orbit acquisition are not yet reflected in guidance, suggesting potential upside if these materialize.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to surging demand in unmanned systems, strong execution in space and rocket support, and new contract wins, while also highlighting persistent cost pressures and investment needs across the portfolio.

• Unmanned Systems momentum: The Unmanned Systems division delivered outsized organic growth, driven by the shipment of tactical Valkyries to Airbus for a German air force program and increased demand from both U.S. and international customers. Management stressed that these sales were enabled by Kratos’ ability to provide production-ready aircraft, distinguishing it from competitors still in development phases.

• Hypersonic and rocket programs: Kratos’ hypersonic franchise and rocket systems were called out as major growth engines, with new multi-year contracts such as Helios and Anaconda expected to contribute substantial, recurring revenue over the coming years. Management revealed that these wins were not isolated, but part of a broader pipeline of classified and unclassified programs involving key partners like Lockheed Martin and RAFAEL.

• Satellite and space business turnaround: The satellite and space division’s growth accelerated due to increased demand from national security and classified customers. CEO DeMarco noted a sharp turnaround from recent quarters, with the division poised for further expansion as it secures command-and-control contracts and develops proprietary software-defined network capabilities.

• Orbit acquisition announced: Kratos unveiled its planned $356 million acquisition of Orbit, a global supplier of mission-critical satellite communications hardware. Management expects this deal to be immediately accretive, citing Orbit’s miniaturization technology and established customer relationships as highly complementary to Kratos’ microwave division. However, financials related to Orbit are not yet included in the company’s forecasts.

• Cost pressures on margins: Despite strong revenue growth, margins were held back by persistent material and subcontractor cost increases in fixed price contracts, elevated bid and proposal expenses, and facility underutilization. CFO Lund emphasized that these drags are expected to continue until multiyear contract renegotiations and higher production volumes improve economies of scale.

Drivers of Future Performance

Kratos’ guidance is shaped by expectations for continued growth in hypersonics, drone systems, and expanded production, balanced by ongoing cost challenges and variable contract timing.

• Hypersonic franchise ramping: Management identified the expansion of hypersonic weapons, rocket systems, and related engine production as key growth drivers, with several programs moving from development to production phases over the next two years. DeMarco stated that the hypersonic segment could surpass all other divisions by 2028, contingent on timely government funding and program execution.

• International and new market entry: Kratos sees significant opportunity in international drone sales, particularly through partnerships with Airbus for Germany and NCSIST in Taiwan, as well as emerging agreements in South Korea. These deals are expected to boost absolute revenue, though the U.S. remains the largest relative market. Management highlighted policy changes that enable greater access to foreign markets for U.S. suppliers.

• Margin headwinds and cost management: CFO Lund warned that elevated material costs, ongoing fixed price contract pressures, and high bid proposal spending will persist as headwinds. Margin expansion is expected in future years as production ramps and legacy contracts are renegotiated, but in the near term, these factors will constrain profitability.

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 $83.50, down from $90.19 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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