Kratos, bullish on satellite communications, in talks with LEO constellations

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WASHINGTON — Kratos Defense & Security Solutions is selling off one of its business units to focus on the high-growth areas of satellite communications and drones.

Kratos President and CEO Eric DeMarco said Feb. 28 that the company’s satellite communications division, which provides software for flying satellites and identifying and mitigating harmful radio-frequency (RF) interference, is “the cash-flow engine that has enabled us to build Kratos as it is today.”

San Diego, California-based Kratos reported $751.9 million in revenue for 2017, up 12.4 percent year over year, and an adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, of $54.4 million, up 20.9 percent. Kratos announced the sale of its Public Safety & Security System Integration Business Feb. 28 for $69 million in cash to Securitas Electronic Security of Uniontown, Ohio, saying the divestiture sharpens Kratos into a “pure play defense systems, product, technology and intellectual property company.” The transaction is expected to close within 90 days.

In a conference call with investors, DeMarco said Kratos’ Satellite Communications division is “exceeding virtually every one of this business’s operational and financial objectives,” and is on track for long-term annual growth.

Three trends are driving Kratos’ satellite business according to DeMarco: smallsat constellation operators designing their ground systems, high-throughput satellites that have more complicated RF systems, and an increase in U.S. defense space spending.

DeMarco said smallsat operators across the whole gamut of sizes are choosing their command and control communications systems. Those ground systems, which need to manage more satellites in more complicated orbits than traditional geostationary satellites, require altogether different ground technology, he said.

“It’s a whole new generation of ground equipment [that is] smaller, arguably less dynamic, but there’s going to be a lot more of it,” he said. “Right now is the time. We are getting designed in. We are trying to pick the winners.”

DeMarco didn’t say which constellation ventures Kratos sees as likely winners or whether the company has contracts with any of them.

DeMarco said Kratos has business with nearly every top satellite operator, including the U.S. Air Force, and can parlay that advantage into gaining new customers. Kratos competitors in command and control include Braxton Technologies of Colorado Springs, Colorado, and Zodiac Aerospace of Plaisir, France.

DeMarco said Kratos provides ground segment technology to the Department of Defense’s WGS, Advanced EHF and MUOS communications satellite systems, as well as the SBIRS missile warning satellites. DoD concerns about Russian and Chinese threats have Kratos positioned to benefit from a boost in defense spending for space and satellite communications, he said.

DeMarco said Kratos’ spectrum monitoring business, which finds RF signals that intentionally or unintentionally impede satellite signals, grew by 35-percent last year. High-throughput satellites that use smaller, more concentrated beams to deliver more capacity, are adding complexity to spectrum management and becoming a boon for Kratos, he said.

“In our opinion, the potential for jamming, or beams getting crossed, or interfering with each other as more and more satellites go up, is only going to increase … being able to quickly identify and remedy that is big business and big money,” he said.  

Kratos doesn’t report the financial performance of its satellite communications division separately, but lumps it inside its largest segment, Kratos Government Solutions alongside its Microwave Electronics and Training Systems businesses. Kratos Government Solutions generated $480.3 million in 2017 revenue, up $14.5 million from the year prior. Unmanned Systems generated $121.7 million in 2017 revenue, up $45.9 million, and Kratos’ Public Safety and Security division reported $149.9 million, up $22.8 million.

Kratos reported a net loss of $22.2 million for the year, partly attributed to paying off $15.2 million in debt. DeMarco said he expects the company will return to positive cash flow in 2018.

Kratos Chief Financial Officer Deanna Lund said Kratos’ backlog stood at $730.4 million as of Dec. 31.