FQ4 Results Analysis - NBFKraken reported clean, in-line FQ4 results and F2025 guidance, but perhaps the more important takeaway from the quarter is the significant growth of the sales pipeline, which has more than doubled since last year. Looking ahead, we continue to believe Kraken is well-positioned to monetize its marketleading products and services while capitalizing on strong industry tailwinds toward accuracy and automation. We reiterate our Outperform rating and our investment thesis outlined in our recent initiation report.
In-Line Q4 Results. Total Q4 revenue came in at $28.1 mln, slightly above the $27.8 mln of consensus and NBF forecast of $27.6 mln. The Y/Y growth was flat due to a tough comparable period (Q4/F23), in which Kraken delivered multiple client projects. As such, we believe the 31.2% trailing 12-month growth is a more accurate measure due to the revenue lumpiness inherent to Kraken’s business model. By segment, product revenue was down 4.5% again due to that lumpiness, while the service revenue was up 11.7%.
Adj. EBITDA came in at $7.0 mln, essentially in line with our and the consensus estimates. Gross profit margin improved to 48.0% from 41.8% last year. That margin expansion, partially offset by opex growth, resulted in a record adj. EBITDA margin of 25.0%.
Unveiling F2025 Guidance. Figure 2 summarizes the newly provided F2025 guidance, which we also consider in line relative to our and the Street’s forecasts. At the midpoint, that guidance translates into an annual revenue and adj. EBITDA growth of 40% and 45%, respectively.
According to Management, this new guidance was based on existing contracts on hand, combined with a mix of commercial and defense pursuits. While the timing of a future contract award is hard to predict, we believe those incremental deals represent upside opportunity, and for a Company that has been executing well against its previous guidance, we consider the performance shortfall risk relatively low.
A Much Larger Sales Pipeline. Perhaps the most important takeaway was the significant growth of Kraken’s sales pipeline, with Management citing “numerous significant defense programs are out for tender and coming to tender this year and next.”. Based on a combination of opportunities across three areas (sensor products, subsea power and subsea services), Kraken now estimates its sales pipeline stands at $2 bln, more than double last year’s $900 mln.
The significant pipeline growth is consistent with the analysis in our recent initiation. If anything, we continue to see the defense market moving towards more automation and underwater drones playing a more critical role to replace the traditional, aging manned vessels. More importantly, this all happens under the backdrop that the non-U.S. military spending is set to scale.
Business Updates — Moving in the Right Direction. At the inaugural earnings call, Management also provided the following business updates:
• Kraken expects to complete its Canadian battery facility by the end of this year. This facility is expected to triple the production capacity to meet increasing demands from existing and new customers (e.g., new customers looking to outsource the UUV battery). New battery designs are also expected with improved energy density and versatility.
• The RaaS business remains on an uninterrupted path with Kraken now looking to integrate the recent 3D at Depth acquisition for upselling, while rolling out KATFISH as a service.
• Strong balance sheet with more than $115 mln of new equity and committed credit facilities over the last 12 months.
NBF Estimate Revisions. Since our previous forecasts are at the midpoint of the newly provided F2025 guidance, we kept our former annual forecasts but tweaked the quarterly mix (see Figure 3 ) to reflect the updated business seasonality with H2 heavy.
We reiterate our Outperform rating with a C$3.00 price target based on our multi-stage DCF model. Key assumptions include 10-20% EBITDA growth over a 10-year horizon, 3% terminal growth rate and a 9-11% discount rate. This target implies an EV/Sales multiple of 6.1x on F2025E (unchanged).