Ladies and gentlemen, thank you for standing by. And welcome to the Kratos Defense & Security Solutions Third Quarter 2019 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Marie Mendoza, Senior VP, General Counsel. Thank you. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions third quarter 2019 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer.Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call.Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.With that, I will now to turn the call over to Eric DeMarco.

Thank you, Marie. As Kratos transitions, we're making significant investments and executing on development programs, and executing on new or increased production programs, this transition is reflected in our financial performance, including organic growth and an improved business mix, which is driving higher margins, profit and EBITDA rates.Representative third quarter financial highlights for Kratos include, our revenues increased 15.5% over the prior year. And importantly, our Unmanned Systems revenues organically increased 37% over Q3 of 2018. Our operating income increased approximately 14% over the prior year, and our adjusted EBITDA increased 22% over last year.We generated $10.2 million of third quarter operating cash flow, which brought our nine month operating cash flow generation to $30 million and our nine month free cash flow generation to $12 million. The free cash flow generation is even after the substantial investments we are making in our new Oklahoma drone facility, and the build-out of a separate new secured drone facility. And at the end of Q3, Kratos' LTM adjusted EBITDA was $75 million. We believe that these financial results are representative of the long-term growth platform we're building, including as reflected by the third quarter trailing 12 months book-to-bill ratio of our Unmanned Systems division of 1.3 to 1.0, we are forecasting the strongest future growth for the company.Additionally, Kratos' on or positioned for a number of existing new and planned for programs of record, which are expected to see significant future funding and growth as reflected in the pending 2020 DoD budget, and in the five or fiscal year defense plan or the FYDP. We also believe that affordability of Kratos' offerings, which have been a key element of our success will be highly desired, irrespective of which political party is in office or controls the Congress.In Q3, our industry leading target…

Thank you, Eric. Good afternoon. Kratos' third quarter 2019 revenues of $184.1 million were at the high end of our estimates of $175 million to $185 million, and our adjusted EBITDA of $20.4 million exceeded our estimates of $16 million to $18 million due to a favorable mix of revenues and execution, primarily in our Space & Satellite Communications business.Excluding the impact of the recently acquired FTT entity, which contributed $16.3 million in revenues, Kratos revenues grew organically 5.3% in the third quarter compared to the prior year. Kratos' adjusted EPS of $0.09 per share also exceeded our forecast of $0.05 to $0.07 per share for the quarter. In the third quarter, KGS generated revenues of $138.4 million, up 9.8% from $126.1 million for Q3 '18. Adjusted EBITDA of $15.5 million or 11.2% of revenues, up from $14.1 million in Q3 of '18, and operating income of $11.1 million, up slightly from $11 million in Q3 of '18.Excluding the impact of the FTT acquisition, KGS revenues decreased 3.2% year-over-year or approximately $4 million, which resulted from the continued reduction in the company's legacy government services revenues, which declined $5.1 million in the third quarter as compared to the prior year. Operating income and adjusted EBITDA were impacted by a favorable mix of revenues, including higher margin software revenues and leverage on fixed manufacturing overhead and administrative expenses. Revenues in our Unmanned Systems segment increased 37.2% from $33.3 million in the third quarter of 2018 to $45.7 million, and adjusted EBITDA increased 88.5% from $2.6 million to $4.9 million in the third quarter of 2019.Our Q3 consolidated operating income was $11.5 million, up from the third quarter of 2018 operating income of $10.1 million. Our adjusted EBITDA for the third quarter is from consolidated continuing operations including net income attributable to…

Thank you, Deanna. We will now turn it over to the moderator for any questions.

[Operator Instructions]. And our first question is from Josh Sullivan from Seaport Global. Your line is now open.

Good evening. Just with regard to the Valkyrie program. Outside of the continuing resolution timing, what are the remaining steps for the program before a large order? How many more flight tests are required here?

Josh, the first part, I couldn't hear you talking on the Valkyrie?

Yes, on the Valkyrie program. How many more flight tests are required before an order?

So, well, I don't know how many flight tests are required before an order. I believe we could receive an order before any more flight tests occur for example. So they're not, I do not see them is directly linked together.

Okay, got it. And then just on the organic growth in the BMD segment in 2020 that you're referencing, does that assume any waiting on winning some of these hypersonic contracts you're going after or can you hit that independent of those wins?

We -- the vast majority of it, majority of it, we believe we've got with that over 30 rocket motor order we just received. So the primary item that could impact that, Josh, would be timing on when we get a 2020 -- a 2020 budget.

And then just the $6 million to $8 million related to the company owned aerial target drones you are building, was that increased? And then, given you're investing in the drones or the products, will you own the IP for whatever programs those are going after?

Yeah, Josh that was increased by about $2 million and total capex has not increased. But the components within the capex for Unmanned shifted a little bit. And those are -- those are targets that we own, that we have the IP on.

And then just on the competitive environment, outside of the Valkyrie, Thanatos, Spartan, Project F, are you seeing a competitive response or are you still the only bidder in some of these programs?

No, there are -- there has definitely been a competitive response. Thanatos was competitive, Spartan was competitive, we're going after one right now that is competitive. So there is definitely competition in this area.

Got it. Thank you.

Yes, sir.

Thank you. Our next question is from Noah Poponak from Goldman Sachs. Your line is now open.

Hello everybody.

Good morning.

I'm not sure where you are, Eric, but good evening to you.

Good evening.

Maybe a long day. So I wanted to ask about the margins, they're better margins in the quarter and you kind of opened up your prepared remarks. I'm talking about the shift in mix that's -- and it didn't sound specific to the quarter, it did sounded like you view it as an ongoing shift in mix improving the margins. And so, on the one hand or early stages of new work can be lower margin. On the other hand, you guys have had heavy investments that I think come out fast volume growth, you can just have drop through and it seems like you have a much more substantial degree of automation involved in future work. So should we be thinking about these 3Q margins as a new baseline that you work off of to go higher from here? Or is a third quarter really benefiting a lot from mix?

In our Satellite & Space business, which as you know is the biggest in the company, there is a transition moving more toward software defined elements than hardware, which is driving increased margins. We believe that is going to continue into next year and into the future until it stabilizes. So our satellite business particularly in, where we're doing the space situational awareness, where we own and operate the global network and in the products that we're delivering, which are moving more toward software, margins are definitely increasing there, revenue is coming down somewhat as it moves to software.On the drone side, as we transition from these development programs to low rate initial production to full-rate production, right now that which is occurring in the target drone side as Deanna mentioned , we are getting increased margins there as quantities go up in the production facilities. We're getting leverage on the fixed manufacturing costs. We expect that -- we expect that to continue more going forward as more units go through the factories and we get the leverage on them. So those are the two primary areas where margins are going up and they're kind of sorted for different reasons.

Is there something offsetting those things?

Let me think. Probably, depending on how the Training business recompete turns out and the structure of that contract going forward, that very likely could have reduced margins to it. And because of the situation we're in, which I said I'm -- we're in a good mood about how this appears to be trending right now because it's live. I don't want to get into too much but our Training business margins at least on that major program if it sustain could start coming down somewhat. On our Commercial Satellite business where we are, and this is where we build work stations, teleports which do command and control and they do signal monitoring. There is commercial pressure there. So those margins, we do not expect those to increase and depending on the nature of the business, we could see some compression there.

So, all in Eric, what's your level of confidence that you expand the margins in 2020 versus 2019?

High.

Okay. If I take the guidance for 2019, and if I go to the midpoint of the revenue in order to be at the mid point of EBITDA, the margin in the fourth quarter would have to be down 200 basis points sequentially, and have to be the lowest margin of the year, which is usually not the case. Is that conservatism or is there something specific in the mix in the fourth quarter?

We are trying to be cautious because of the CRA that currently goes through the third week of November, and very possibly could go through the end of the year, and what that potentially could do for example as you know typically in the third quarter and the fourth quarter because it's around that federal fiscal year. We -- and in particularly in the satellite business we get dropped ship orders of equipment and software sales.

Yeah.

And some of those can be very high margin.

So are those out of the guidance?

We have been -- we are looking at them on a case-by-case basis and factoring not knowing what's going to happen after November 22nd or whatever that date is.

I understand. Related to the CR, I believe you said you could see a Valkyrie order within 90 days post a final 2020 budget. So is it -- is it looking increasingly likely you'll have not insignificant Valkyrie revenues in 2020?

Noah, say that last part again. I want to make sure I answer that --

Well I guess prior to today, it felt like the timeline on Valkyrie made 2021 and beyond revenues like very likely, and obviously that's what matters most, but just in thinking of the pieces for next year, I thought Valkyrie revenue contribution was more of a coin toss but it sounds like you're saying you would expect in order just a few months into next year, unless I heard that incorrectly.

No, I am expecting a material, Valkyrie related order within 90 days after the 2020 budget becomes effective.

Okay. And then just last item, and I'll go back in the queue. Did you quantify the training, the annual revenue contribution from the training program that had the recompete?

Yes. And so what we have said on the last quarter's call when we talked about the recompete is that because of the restructuring that I mentioned a minute ago, it was looking to be something like $25 million or $30 million a year going forward. Okay. However, for this year in 2019 because of the OPTEMPO that has been going on and the structure of the contract, it is about $50 million. And so we were planning on it coming down because of the structure. So this year was $50 million-$55 million, next year was $25 million-$30 million because of the structure change.

And then if I heard you correctly, because of the timeline of protest, it sounds like you will at least have that extended into mid 2020 even if you ultimately don't keep it and then obviously if you keep it, you keep it, is that correct?

Right. Yes, so what I, what I said was that right now based on, and again this is live. So I don't want to get add anybody, but based on most recent communications we are expecting to maintain it at least into the beginning of Q2.

Okay. Okay, thanks so much.

Yes, sir.

Thank you. Our next question is from Seth Seifman from JP Morgan. Your line is now open.

Hey, good afternoon. This is actually Ben on for Seth.

Hi Ben.

Hi Ben.

So I guess, I wanted to hone in on the organic sales in KGS for a bit. I mean, you've given some encouraging commentary today about 2020. You've been talking about this business pretty positively in the last few quarters. But if we kind of dig into Q3, and strip out KTT, and you've been taking out the headwind from government services, the kind of the rest of this business was pretty flattish. So I guess, how do we kind of square, square that up with kind of the go-forward outlook for this business?

Right. So in our KGS business, let's take training for example. We work on very large programs like for example, we are in production right now on KC-46. We are in production on a number of Marine Corps Common Aircrew Trainers. These are tens of millions of dollar programs. We are in a massive program with the Navy. So when we win these programs, when we are awarded them, our book-to-bill in that quarter can be 3 or 4 to 1. But then, it runs out for two years or three years, if you see what I mean. And so, there are a number of things that we're pursuing right now that if we're successful on there could be a significant blip upwards in our book-to-bill ratio that will carry that LTM forward at 1.2 or 1.3 to 1 for a while.So that's one, is the dynamic of that business, which is also the same in our C5ISR business. Very large programs, and I believe it looks like you're going to see that in Q4 in our C5ISR business relative to a very large platform that we're sole source on. So we're going to get it, and if we do get in Q4, you're going to see a significant upward tick because of the size of it, and it's going to be all funded and how far it goes into the future. And then, while the satellite side and the space side that business, it's a mix of very large programs like I mentioned OPIR. As you know, we have an integral part on CBERS, OPIR is kind of sort of a follow on to CBERS. I believe we're going to get a significant sole source position on OPIR, which if that happens, will be a significant uptick in bookings and backlog for that period.There is another part of the satellite business that we were just bantering with know about that is on the software side, that is more of a book and burn where we get them quarter-to-quarter. And so, there is that mix going on. That's kind of how I reconcile what's going on in KGS.

Okay, thanks. That's pretty helpful.

Yeah.

And I guess on the continuing resolution, the risk is increasing that we see this extended not only to the end of the year, but possibly I mean we're hearing -- what about, what happens if it's a full year CR. I guess, which of your business units and the growth outlooks there are most at risk if we see some CR that extends into 2020?

So on -- so the good news is, on the base business, we're in a -- coming in, 2019 was a $720 billion defense budget. We're now in production on Navy SSAT, we're in production on AVSAT, we're in production on another one. So the good news is as we've achieved production on a lot of these of the base business, if there were an extended continuing resolution, it is very solid work in production. If the CRA gets extended for example, we cannot get to full-rate production on SSAT, we're going to be stuck in LRIP II then LRIP III, OK, for example. There is a restricted program, I can't say a lot about. We are in LRIP on it, it is a very good program, very profitable. We can't get to full-rate production on that and that's that -- that program happens to be in our Unmanned Systems business. On the tactical drone side, we have the development funding from the '19 budget. Unless there is a reprogramming, which only occurs from time to time, we cannot move into significant production in the tactical area without a 2020 budget.

Okay. And then so the outlook for KGS you think is mostly unaffected by a long-term --

I want to be very clear. It's unaffected. It cannot see significant growth increases in ramps in production without the budget. It can hold court but as you know, there were no new production programs under a CR, and there are no increases to existing production programs under CR, unless there is a reprogramming.

Right. It makes sense. And just the last one, can you give us a percentage of the Unmanned sales this year that comes from tactical drones?

I don't have that off the top of my head because we don't have production revenue in that area, right now it's substantial -- it's substantially all target aerial drones, target ground drones and target seaborne drones and the related command and control and avionics electronics. So I don't, sorry, I don't have that right here with me.

Okay, thanks.

Thank you. Our next question is from Ken Herbert from Canaccord. Your line is now open.

Hi, Eric and Deanna. I wanted to first dig into Gremlins a little bit. I know we've been following and you've talked about the capacity issues around flight test ranges. Is it a similar dynamic with Gremlins that you could potentially do they get a follow on contract or incremental contracts without corresponding progress on the flight test side or is this program really dependent upon continued progress on the flight test and demonstration with the upcoming milestones, which means a contract, maybe the soonest is second half of '20 depending upon scheduled flight test program.

Obviously, since we're not the prime Dynetics, as I don't ever want to get ahead of them, but from what we've seen with the Valkyrie and what we expect with the Valkyrie, I think it's absolutely possible that there could be drone orders before a phase or a series of demonstration programs is complete.

Okay. But it sounds like from your commentary that I mean CR issues aside, would you -- would you view that as a relatively low probability or something that maybe has a decent chance?

I think to be -- I think to be safe and to be conservative, I would -- I would -- I would go with the assumption that once the demonstrations are successfully completed, then you move to unit orders. I think that would be the safe way to go.

Okay. And if I could Eric, just a bigger question, I mean obviously your customer on the Air Force side has talked a lot about -- about the Digital Twin or Digital Thread or Digital Manufacturing as you think about how they are really trying to drive accelerated development processes and testing of weapon systems. I know you own the IP on the Valkyrie and that's obviously attributable but to what extent did you sort of follow that design or incorporate that into design process and how much optionality or flexibility does that give you on that platform sort of moving forward you know with the risk of getting ahead of things, but it's pretty clear that programs like the Valkyrie will undergo fairly substantial refresh and upgrade cycles as the technology moves forward. And I'm just trying to get a sense as to your position on that considering the major focus of your customer.

That's a great -- that's a great question. Let me -- let me give you the analogy of this, Ken. The F-15 has been flying since the '70s, and Boeing has now come out with an F-15EX. And if you look at the airframe, the airframe of that's 4 or 4.5 generation fighter is substantially almost exactly the same as it was in the '70s. Hold that thought relative to the Valkyrie. The Valkyrie is an incredible airframe. For security reasons, I can't say a lot about it, but if you look at it, you know what I mean. It has been specifically designed to be modular with open architecture for payloads.So the reason the F-15 is still flying today is because of new electronic warfare systems, new ISR systems, new earth systems, OK, new weapon systems. The Valkyrie has been designed the exact same way with open architecture plug and play modularity. So for that type of a system, it is extremely flexible and we designed it specifically to address the thought you have right there.

Okay, excellent. Thank you very much, Eric and Deanna.

You got it.

Thank you. Our next question is from Mike Crawford from B. Riley FBR. Your line is now open.

Thank you. Eric, why build company owned target, I understand why you build company owned tactical drones like the Mako and the Valkyrie but unless it was hypersonic where you're trying to demonstrate something ahead of known requirement. I don't understand why you would build a company owned target?

So we just completed in the last few weeks, a very large target operation for an international customer at an international range, very large multiple, multiple fire jet targets. The reason we got that job is because we had 10 or 15 fire jets company owned assets look at it as on the shelf, what that customer said is, we want to do it off in 90 days. There is no way we could build them in 90 days with the production plans we have and everything else going on. We pulled the company-owned assets off the shelf, we put together a contract that was a lease where they are leasing them, so they're leasing the flight, they are leasing the representation, but in that agreement, when they shoot them down, they buy it and it's no longer company owned.So now the numbers I'm going to give you are an example because I can't get into the details. Let's say, we brought 20 of them down there, we owned all 20 of them. They are ours. If they didn't shoot any of them down, we get all 20 back, they are Kratos-owned. But if they shoot 10 of them down, they pay for that 10, we get the tender -- that survived back, those are still company owned and they go back into capital.

Okay.

It gives us the flexibility to react very quickly to customer demands, which gives us a competitive advantage.

Okay, great. Thank you. And just maybe if I could dig in a bit further on the margin front. If you look at some on specified future date where in Unmanned systems you have target revenue approaching $250 million a year. And maybe tactical revenue nearly twice that much and running at a good full production rates at all your facilities. Do you have a sense of what the EBITDA margins might be in Unmanned systems at that point in time and more of a steady state like point in time?

Yeah, 14% to 15%.

Thank you. Our next question is from Joe Gomes from NOBLE Capital. Your line is now open.

Thank you. Last quarter, you talked about you placed the engine order and you talked a little bit today about the 90 days of the budget being adopted of getting orders. Are you still very comfortable with where you are in the engine orders, if you could give a little more color or detail there, I appreciate it.

Absolutely. We absolutely are and Joe, very candidly about three weeks ago because of what's going on with the customer set. We had the discussions about actually ordering more engines because right now, it appears what the customer, and it's plural, customers. What they envision is they want to start receiving the drones in '21. And with a 12 month -- and with the 12-month lead time on the engine, the only way we could hit what they're communicating to us they would like is toward the ones we already ordered and potentially depending on how things were lining up. We may in fact order some more, which not only helps from a customer standpoint, but helps from a company standpoint because these engines are specific, and we'll just talk about the Valkyrie, because we're looking at this for different things.For the Valkyrie, let's say we get this award and order by the end of March, and that would assume end of the year through the end of the year continuing resolution. Well we get that order, and there is significant progress has been done built, done building those engines. We believe these are going to qualify for a percent complete accounting instead of a unit delivery. We believe right now that's what it appears to be. So that could be beneficial for us in my example that we could start generating revenue in Q2, on the effort incurred to date on the engines plus any other effort we've been doing on the program.

Okay, thanks on that. And if you could just provide a little more detail on the -- you talked about the legacy government services business that it was down in the quarter. I mean, where do we stand on that business today, is it just going to be bled off or what do we see for that business?

So that business right now is about $50 million to $55 million a year in revenue. And Joe, it's a terrible business. Everything is LPTA, low price technically acceptable. It's all the cost shoot-out, it's all commoditized, it's very difficult. I thank god, we are in a product and systems business. So we are still bidding, we're still trying to win, but we don't bid low. We're not going to bid low. And so, it's probably going to continue to trail off.

Okay, great. Thank you.

Yeah.

Thank you. Our next question is from Michael Ciarmoli from SunTrust. Your line is now open.

Hey, good evening guys. Thanks for taking the questions.

Hi Mike.

How are you? Eric, just on the continuing resolution, can you talk about how it's -- it is already or it may impact order flow. Are you seeing anything on bookings and then as it relates to -- you sort of gave us I think a pretty good timeline last quarter of Gremlins expecting the first half order, Thanatos, Spartan, Athena some of the revenues, they were supposed to get in 2020. I think OmegA first half award. Does any of that change or slide to the right a little bit under a continuing resolution?

Yes. So we -- as I went through, we've received some. We've been fortunate enough to receive some, but you heard me mention like we expect significant future funding on Thanatos. We expect significant future funding on Spartan. Those are moving to the right. They're tied to the budget that's what it looks like to us. They are directly tied to that 2020 budget.

Okay.

And so, yes, we've been fortunate, we've gotten some, but there is a handful or so that are just moving on us, they're sitting there. We've won them, they are ours, but it's just -- they are moving. So that tells me they're tied to the 2020 budget being approved.

Okay. And then just back to the margins, I think kind of what Noah was sitting on, and Mike you mentioned 14% to 15% EBITDA margins. It sounded like with volume you can get better overhead absorption. But how should we think about I guess specifically maybe in Oklahoma, the production scheme there, you've been prototyping Valkyries, you've got to step up, you just talked about ordering engines as you kind of transition from prototyping to even lower rate production. I mean, do we, is there a little bit of a hiccup there with natural learning curves as you sort of begin to industrialize that process away from just prototyping.

Yeah. So it's a good question. So in Oklahoma, right now, we are building production fire jets, and our plan over time is to transition a significant amount of, not all of the fire jet production to the MQM-178 out of Sacramento to Oklahoma. So the autoclave has arrived, it's up and running. We're going to start building Aerostructures there soon. And we need to do that because of our 177 production increases for the Navy and Sacramento, we cannot move that of qualifications, and we are seeing -- also seeing increases with the Air Force in the 167 and we have some other things going on at Sacramento that cannot be moved.So we're going to move the fire jets, we're building those in Oklahoma, right now, we're going to continue to move those. However, now, to your point, there will definitely be a learning curve on the tactical drones just like there is on a target drone where -- just like there is on F-35 where the first one cost X, the second one cost Y, which is less than X, the third one cost Z, which is less than Y. As you learn as you build them and it comes down. So, Mike -- Mr. Crawford's question was when your steady state that's normalized and that's how I took it. But when you are in initial production in LRIP you do not have the efficiencies that you will have when you're at full-rate production. So, you will not have the margins.

Got it. Last one for me, can we just get an update on the -- I think that last missile target contract, the teaser contract when you expect to hear something from that and maybe kind of order of magnitude, how that would impact revenues versus the current run rate of that program?

Right. So. So right now that that solicitation, it looks like, it is due to come out either late this year, but I plan on Q1 because of what's going on in Washington.

Okay.

So the solution -- solicitation comes out in Q1 or so, I would look for a Q3 or Q4 award. I think this is one of the things that are being pushed to the right. Order of magnitude, what we are looking at right now, this can change because we have not seen the solicitation yet, it is 25 to 50 a year.

Got it. All right, perfect. Thanks guys.

Thank you.

Thank you. Our next question is from Pete Skibitski from Alembic Global. Your line is now open.

Hey, good afternoon, guys, nice quarter. Hey Eric, just can you size maybe this Army holodeck program, it sounds like you're pretty, pretty high on that program?

I'm very proud of the team, our training team knocked it out of the park on this one, extremely competitive bid but it was not low price technically acceptable, it was best valued and we won in my opinion, because of our technology. And it's the initial award is a multi-multi-million dollar award that we're working on. But the scope of this and what this touches, it's very, very significant. I can't say more than what we put out in our little brief press release to get ahead of the customer. But this is Kratos, this is leading-edge technology integrated together to bring a solution to the customer that is very high tech, but it's not bleeding edge. So there's not a ton of risk where it can be a win-win and we're looking for a multi-year growing program here.

Okay. I appreciate. Just one more question and I'm not even sure if you're tracking this but this idea of having a system design agent for Skyborg seem to be kind of moving along. Do you think that impacts your role there on that program, and it sounds like kind of an ecosystem approach that the Air Force is kind of thinking about this. Could you -- are you tracking that and what your thoughts on that?

Yeah, we're tracking it very closely. We responded to the RFI, I believe the RFP will probably come out in Q1. I do not believe that that approach in any way adversely impacts Kratos. Skyborg is an AI program, it's an artificial intelligence program. We are providing the platform or the platforms and I want to say it that way because it could be platforms relative to the affordable tactical drone element of that AI program. So we are on it. We are tracking it, I am highly confident we will participate in this one way or another, when it comes to fruition and this structure that they have been talking about for the past month, it's very interesting I see what they are doing. But in no way is that adverse for our aspect of this.

Okay. Are you saying that you could potentially, you look the prime on the SBA roll as well, so it would be additive to the current role --

You know I don't want to say that specifically to Skyborg, because I don't know yet however remember Gremlins, we primed it, and we partnered it, and in Phase I we won one of each.

Perfect, OK. Okay. Fair enough.

Okay, thank you.

Thanks for the color guys.

Thank you. Our next question is from Noah Poponak from Goldman Sachs. Your line is now open.

Eric, could you just circle back and just give us a fresh update on the total BMD hypersonic target opportunity topic, because pretty recently, it was the three programs, you had won the first. North upon the second, the third was outstanding. But then a few weeks ago, you had the Oriole rocket motor award that seem to release to us, came on and then in your prepared remarks today you said, you are in pursuit of multiple BMD and hypersonic target ops some of which could be awarded in the next few months. So that seems new. Is it just rapidly evolving or what's the update?

So prime system integrators that are winning hypersonic weapon programs. They need to test aspects of it, they need to test the front end, they need to test what I'll call telemetry, in the right place, at the right time, at the right speed of things, and as you know we have a proven system that has been doing that for a long time. The program is like high cost, and high fire and fast, and so we see the potential opportunity to support guys that have been winning system programs to help test, fill in to test their systems very rapidly, and very affordably, so they can hit their deployment deadlines.

I am assuming those are considerably smaller than something like the third one you talked about priming and it being $1 billion program?

Correct. Absolutely. Yes sir.

Yeah, but they could come at you pretty quickly?

Yes sir.

Okay. And then on Gremlins, what is the updated flight test timeline?

So I would, again, I'm not Dynetics of the prime, however Dynetics their program manager did an interview in the past three weeks that is public where they have indicated they have -- they have identified an additional range, a new one. They are working, I said plan on Q1. They are trying to get something done in Q4 this year. And so, I am encouraged, I don't want to speak for them, I encourage you to take a look at that, their work in that.

So I think previously you guys had estimated test flight before the end of 2019. And then the final test like mid-2020, I understand earthquakes are out of everyone's control, but sounds like the initial has slipped as a result may be tucked into the end of 2019. The final mid-2020, is that still rough order of magnitude, what we should be thinking?

In the prepared remarks, Noah, I had said that right now I'm planning on the second half of '20 because of that anomaly and hopefully things will change then, it will be sort of over there.

Okay, thank you.

Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Eric DeMarco for closing remarks.

Thank you very much for joining us this afternoon, and we will all be circling up with you. And we report our fourth quarter in February. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.