Rolls-Royce raised its full-year profit guidance on Thursday, crediting surging defense budgets and the buildout of power-hungry AI data centers. The engineering group now expects underlying operating profit of £4.7 billion to £4.9 billion, a sharp increase from the previous range of £4 billion to £4.2 billion. Free cash flow guidance also climbed to £3.8 billion to £4 billion.
The upgrade came as the company reported first-half underlying operating profit of £2.5 billion ($3.3 billion), up 46% from a year earlier. Revenue rose over 24% to £11.3 billion. Shares gained as much as 6% in London trading before settling around 4% higher.
Dual tailwinds: defense and data centers
Chief Financial Officer Helen McCabe told CNBC that orders in the company's data center power business grew more than 50% in the first half. Operators are increasingly seeking backup and on-site power solutions as electricity grids struggle to keep up with demand from AI workloads.
McCabe also highlighted opportunities from higher defense spending, pointing to long-term commitments under the U.K.'s defense investment plan and NATO's push for greater military investment. "We've had very positive initial conversations with the new [U.K.] government, and we absolutely support their focus on growth, defense, and advancing industrial manufacturing, and we look forward to supporting them in that and playing our role," she said.
Turnaround strategy gains traction
The results underscore the broadening of Rolls-Royce's business under CEO Tufan Erginbilgic. Once viewed primarily as a civil aerospace manufacturer tied to long-haul aviation, the company is now positioning itself as a supplier to AI infrastructure and the global rearmament cycle.
"Our transformation continues to deliver," Erginbilgic said in a statement, adding that the group had "unlocked new growth opportunities across the Group" and built a more diversified portfolio.
Why this matters for finance professionals
The guidance hike signals that Rolls-Royce's earnings are becoming less dependent on the civil aviation cycle. With power systems orders tied to data center expansion and defense revenue supported by multi-year government commitments, the company's cash flow profile is growing more predictable. The raised free cash flow target strengthens the balance sheet and could accelerate capital returns to shareholders, a factor that may drive a re-rating of the stock.
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