Kratos Raises Guidance as Engine Orders for 3,000 Turbojets Signal Cruise Missile Ramp Ahead
Q2 2026 earnings call, August 4, 2026
Kratos Defense & Security Solutions delivered a second quarter that beat its own guidance on both revenue and margin, and management used the call to lay out one of its most concrete long-term demand signals yet: initial orders placed with the supply chain for components to build 3,000 small turbojet engines in 2027, followed by components for another 5,000 engines in 2028, tied directly to the Pentagon's pivot toward low-cost, mass-produced cruise missiles. CEO Eric DeMarco said the company is no longer waiting on hope, but building capacity against programs it says are already showing up in budget justification documents. "We do not do a build it and they will come," DeMarco said, explaining that Kratos only commits capital once it has a contract, a partner, or funding in hand.
Turbojet economics look like a new profit engine
The centerpiece of the call was the buildout of Kratos' Spartan turbojet engine business, manufactured at the company's newly operational Michigan facility, with an average selling price of approximately $50,000 per unit. DeMarco pointed to the Air Force's Family of Affordable Mass Munitions program, which calls for 27,000 low-cost cruise missiles, and a separate Pentagon initiative targeting 10,000 units under the Low-Cost Containerized Munitions program, as the demand backdrop. He added that JDAM-LR alone "could be one of the largest single opportunities for our company," with potential volume in the tens of thousands. Do the math on 8,000 units at $50,000 each and the engine business alone could approach $400 million in annual revenue by the back half of the decade, though DeMarco was careful not to commit to a 2029 number. Turbofans, the larger engine class built through a 50-50 partnership with GE Aerospace at a new Oklahoma facility opening next summer, are aimed at JASSM and LRASM, where the Air Force is reportedly looking to acquire over 11,000 missiles over six to seven years. Management said that ramp begins in 2028 and steps up materially in 2029-2030.
Hypersonics still the nearest-term growth driver
Kratos reiterated that its hypersonics business, which generated roughly $200 million in 2025 revenue, is tracking to $400 million in 2026 and at least $700 million in 2027. CFO Deanna Lund quantified the sequential ramp, guiding to $20 million to $25 million of incremental hypersonics revenue from the second quarter into the third, with up to $30 million more in the fourth quarter. The company's new hypersonic system integration facility in Indiana is now operational, and Kratos expects to begin receiving the first of 120 previously procured solid rocket motors in the third quarter. DeMarco cited the MACH-TB program's reported $7 billion in five-year funding within Pentagon budget documents, along with a striking intelligence estimate he referenced on the call: China could field approximately 4,000 hypersonic missiles by 2035 and Russia around 1,000. Analyst Pete Skibitski of Alembic Global pressed on whether a $1 billion-plus run rate for MACH-TB-related work by 2028 was reasonable; DeMarco didn't confirm the figure but said "this could be very, very substantive for the next five years."
Margins pressured by shekel strength, not fundamentals
Second-quarter adjusted EBITDA of $38.2 million beat the high end of guidance, but currency remains a persistent drag. Lund said the strengthening Israeli shekel cut second-quarter EBITDA by $2.5 million and cost $2.8 million over the first half, with a full-year headwind now estimated at $5 million to $7 million, since Kratos is paid in dollars but pays its Israeli workforce and vendors in shekels. Absent that impact, margin expansion in the second half would have been more visible. Away from currency, the company's Israeli microwave and SATCOM business, which employs over 700 people, is working with Israel Aerospace Industries, RAFAEL, and Elbit to replenish stockpiles depleted during the Iran conflict, which DeMarco called "a clear differentiator for our company globally."
Guidance raised, cash flow reshuffled to fund the ramp
Kratos raised its full-year 2026 organic revenue growth guidance to 19-23%, up from a prior range, with third-quarter revenue guided to $460 million to $480 million, implying 19-25% organic growth, and fourth-quarter growth guided at 19-31%. Total planned investment for the year remains unchanged at $250 million to $270 million, but Lund flagged that the classification of that spending has shifted: working capital tied to jet engine procurement and drone development is now being recorded as inventory rather than capital expenditure, which pushed second-quarter free cash flow to a use of $18.9 million. Days sales outstanding improved to 114 days from 130 in the first quarter. On the policy backdrop, DeMarco said Kratos is modeling a fourth-quarter continuing resolution as its base case, consistent with four of the last five years, and sees the fiscal 2027 defense base budget rising roughly 15% to $1.15 trillion, with potential upside toward $1.5 trillion if a second reconciliation bill passes.
Management draws a direct comparison to Anduril
Asked by an analyst from Noble Capital to explain why private rival Anduril commands a far richer valuation multiple, DeMarco didn't dodge the comparison. "Anduril is an absolute peer of Kratos. We're peers, okay?" he said, pointing to overlapping capabilities in software-defined command and control, jet drones, hypersonics, and solid rocket motors following Anduril's acquisition of Adranos. He attributed the valuation gap primarily to Anduril's private status, which frees it from public-company financial discipline, while asserting his own view plainly: "In my opinion, I'm the CEO, I drink the Kool-Aid. Kratos is the most valuable defense company there is."
Unmanned systems growth clouded by classification
Unmanned Systems revenue grew 8.1% organically in the quarter, driven by Valkyrie activity, and management added a 10% organic growth component to full-year guidance for the segment. But DeMarco was notably guarded on specifics, citing customer restrictions: two additional drone programs beyond Valkyrie and Tactical Firejet are now under contract and classified, with one already in the weapons-release testing phase. On Taiwan, DeMarco said the customer is evaluating both the Mighty Hornet, a Valkyrie-derivative jet drone now flying with a Kratos-built engine, and additional Valkyrie units, with production decisions possible in the first half of 2027 pending upcoming flight demonstrations. Valkyrie production margins were guided at 10-15% EBITDA domestically and 15-20% internationally, reflecting relief from Truth in Negotiations Act pricing constraints on non-sole-source foreign contracts.