Rolls-Royce earnings lift guidance as defense and AI power demand grow

Rolls-Royce earnings gave investors a clearer look at how the British engineering group is benefiting from two powerful spending cycles: defense budgets and AI data center construction. The FTSE 100 company raised its full-year profit and cash flow outlook on Thursday after reporting stronger first-half results across civil aerospace, defense and power systems.

Rolls-Royce reported underlying operating profit of £2.5 billion, or about $3.3 billion, for the first six months of the year. That was 46% higher than a year earlier, according to the company. Revenue rose more than 24% to £11.3 billion.

Underlying operating profit is a measure companies use to show profit from their main business activities while excluding some items. Investors watch it because it can give a cleaner view of how the operating business is performing, though the exact adjustments depend on the company’s reporting.

The stock reacted quickly. Rolls-Royce shares climbed as much as 6% after the update and were last trading 3.6% higher, according to CNBC.

Why is Rolls-Royce stock rising?

Investors were responding to the combination of stronger first-half numbers and higher full-year targets. Rolls-Royce now expects underlying operating profit of £4.7 billion to £4.9 billion for the year, above its previous forecast range of £4 billion to £4.2 billion.

The company also lifted its free cash flow guidance to £3.8 billion to £4 billion, compared with its prior range of £3.6 billion to £3.8 billion. Free cash flow is the cash a company generates after spending needed to keep the business running and investing. It matters because it can support debt reduction, dividends, buybacks or reinvestment.

The upgraded outlook points to demand that is not coming from just one corner of the company. Rolls-Royce said its civil aerospace, defense and power systems businesses all contributed to the stronger first-half performance.

How AI data centers fit into the Rolls-Royce story

Rolls-Royce is getting a lift from the buildout of AI data centers through its power systems business. AI data centers require large amounts of electricity, and operators often need backup or on-site power because local grids can be constrained.

Chief Financial Officer Helen McCabe told CNBC after the results that orders in the company’s data center power business rose more than 50% in the first half. She said operators are increasingly looking for backup and on-site power options as grid constraints become a bigger issue.

That gives Rolls-Royce exposure to a part of the AI investment boom beyond chips and cloud software. For investors, the key point is that AI infrastructure spending can flow into industrial suppliers that provide power and reliability equipment, not only technology companies.

Defense spending is another tailwind

McCabe also pointed to opportunities tied to higher defense spending. She cited long-term commitments under the U.K.’s defense investment plan and NATO’s push for greater military investment, according to CNBC.

For Rolls-Royce, that defense theme sits alongside civil aerospace demand and data center power orders. The company’s raised guidance shows management expects those businesses together to produce more profit and cash this year than it previously forecast.

This story draws on original reporting from CNBC.