QinetiQ Group PLC

LSE:QQ

Q2-2026 Earnings Call

[Steve Wadey, executive]

Thank you, Stephen, and good morning, everybody, and welcome to our half year results for FY '26. Whilst we continue to operate in challenging market conditions, we have taken decisive action to improve our short-term performance and drive long-term growth, creating value for shareholders. And thanks to the dedication and hard work of our highly skilled employees, we've continued to support our customers' operational needs, delivering mission-critical technologies and services.

Today, we'll take you through our half one results and the actions we've taken to address both near-term challenges and strengthen our market positioning for the long term. A great example is shown here, which illustrates the successful completion of the synthetic trials we undertook with BA Systems to demonstrate how drones can operate alongside combat aircraft like Typhoon.

This was a significant milestone in developing critical sovereign capabilities needed to defend the U.K.'s national interests. Let me start with our key messages for today. First, in tough near-term market conditions that have delayed orders in the U.K., we have delivered robust operational performance and our restructuring program in the U.S. is on track.

Secondly, our mission-critical capabilities remain highly relevant to our customers' needs in a growing defense market and combined with our significant order book and substantial pipeline, provide very good visibility for for long-term growth. Thirdly, despite near-term headwinds in our home markets, we have focus and visibility to maintain our full year guidance, and we continue to deploy capital with discipline.

In summary, we are delivering the actions to improve business performance in the short term and are well positioned to capitalize on increasing defense spending so that we deliver compelling value creation for shareholders. Our agenda this morning expands on these messages. I'll start by giving you our half year in review. Martin will provide a commentary on our financial results. I'll then come back and give you an overview of our strategic outlook. Finally, we'll open up for questions.

So to our review of the half year performance. In response to the market backdrop, we have taken proactive and disciplined portfolio actions, achieving good progress on our U.S. restructuring program as well as rightsizing other areas of the business. The improvement actions are delivering benefits and building resilience that will improve both short- and long-term performance. Overall, our first half financial performance was robust in tough near-term markets. We saw this particularly in the U.K., where we experienced delays to orders on our engineering services and R&D framework contracts, in part due to our customers prioritizing major equipment programs.

This reduced our underlying book-to-bill to less than one, excluding the LTPA contract award. We achieved 2 strategic milestones that strengthen our company for the long term. In May, we secured the GBP 1.5 billion extension to transform the LTPA for future warfare through to 2033. As a result, we closed the half with a significant order backlog and substantial pipeline, providing very good visibility for long-term growth. And in September, we announced the strengthening of the EDP contract to accelerate defense productivity by expanding the partnership and augmenting our high-value engineering skills with artificial intelligence.

Together, these strategic milestones show how we are playing our part in delivering on the ambitions of the U.K. government's strategic defense review. As normal, we delivered a healthy cash conversion, enabling investment in the business and increased shareholder returns through our progressive dividend and multiyear share buyback program. Looking forward, we have approximately 90% of revenue under contract for this year, which is the same as last year. Whilst market headwinds continue, we're focused on execution and have visibility to deliver our full year forecast. Martin will take you through a bridge of this later in the presentation.

I now want to address our half one performance and the progress we are making in each of our segments. Starting with EMEA Services. Due to market conditions in the U.K. and ongoing defense budget pressures in the Australian market, we delivered flat revenue with good margin. In the U.K., we grew 2% as a result of delayed orders on our framework contracts. And in Australia, our revenue was lower, predominantly due to the loss of the Land Systems work package under the MSP framework.

In response to these dynamics, we took some resizing actions to build resilience whilst protecting core skills for the future. Our performance was underpinned by successful program execution across our long-term contracts. On the EDP contract, delivery performance was strong with 98% of all milestones delivered on or ahead of schedule. In September, we announced changes to the LTPA that will make it easier and cheaper for SMEs and new entrants to use our test and evaluation capabilities across the U.K. The launch of our T&E Innovation Gateway will help drive greater defense innovation and support wider economic growth across the U.K.

Notable new contracts in the half include the strategic win GBP 25 million to deliver collective training for the Royal Navy to improve war fighting readiness at pace. This 5-year contract will see us deliver an immersive virtual training environment that realistically simulates the threats and missions that Navy personnel can expect to undertake in the future. Whilst near-term trading conditions remain tough, we have a clear pipeline of orders to win and deliver in the second half.

Turning to Global Solutions. During the first half of the year, we've been focused on executing our plan to address the market challenges and operational issues that we highlighted in May. We've made good progress on the U.S. restructuring program. Key actions completed include the disposal of the U.S. Fed IT business, significant headcount resizing and cost base reduction as well as an improved control of labor rates and inventory. This progress puts us on a stronger foundation to move forward.

As we forecast, revenue declined with lower margin compared to the prior year. Half of the decline was due to a lower volume of non-U.S. product sales versus a strong prior year comparator and the other half was in the U.S., principally due to the impact of Doge on our Fed IT business that we have now disposed of and our planned resizing actions. As the U.S. market changed, we repositioned the business to build resilience and be better aligned to national security priorities. Our strategy is now focused on 4 capabilities where we have differentiated long-term incumbent positions and see good growth potential. These 4 areas are space and missile defense, maritime systems, advanced sensors and persistent surveillance.

During the half, we secured $290 million of funded orders with a U.S. book-to-bill of 1.5x. Whilst we continue to focus on improving operational performance and winning longer-term programs, this strong book-to-bill underpins our second half forecast for Global Solutions.

To summarize, we're making good progress. Whilst we finished the half with a smaller U.S. business, it is more aligned to national priorities and is well positioned to deliver long-term growth.

I'll now hand over to Martin to take us through our financial results.

[Martin Cooper, executive]

Thanks, Steve, and good morning, everyone. As usual, I'll start with the financial highlights before moving on to the key financial metrics at a group level and details on our 2 reporting segments. I'll finish with capital allocation and guidance. And for reference, the U.S. dollar rate for the half averaged 1.34 compared to 1.29 last year, which has provided a headwind to the reported values. So turning to the results for the half. Order intake for the half was GBP 2.4 billion, which drove a closing order backlog of GBP 4.8 billion, both reported records for the group. Revenue was 3% down on an organic basis at GBP 900 million, resulting in a book-to-bill of 0.9x, reflecting the sale of our Fed IT business and trading conditions in H1, which impacted contract awards.

Underlying profit was down GBP 10 million versus H1 last year at GBP 96 million, but margin at 10.7% was ahead of our half year expectations and underpins our full year target of around 11%. Underlying basic earnings per share of 14.2p were in line with last half as the lower profit was offset by the enduring benefit of the enhanced level of share buyback. Turning profit into cash remains strong at 85%, which again underpins our full year guide of around 90%. The strong operating cash performance, combined with the sale of our U.S. Fed IT business has enabled effective and value-accretive capital deployment. This has enabled us to not only reduce net debt half-on-half, but also to significantly enhance shareholder returns, which totaled GBP 101 million as we made excellent progress on our ongoing 2-year share buyback program and paid the final dividend.

And return on capital employed remained strong at 21.1%. Moving to the key group financials and starting with orders. The book-to-bill of 0.9x, as Steve raised, resulted from delays in contract awards in the U.K. impacting EMEA Services. And within Global Solutions, the year-on-year impact on the federal IT market was particularly stark in the order flow in the business we have now disposed of. Whilst book-to-bill was down, total orders at GBP 2.4 billion was a record when incorporating the 5-year LTPA award. This meant we closed the half with an order backlog of GBP 4.8 billion, which does include GBP 0.4 billion of U.S. unfunded backlog, providing good visibility for future growth of core long-term business frameworks.

Revenue at GBP 900 million is down 3% on a like-for-like basis when adjusting for FX and the sale of the Fed IT business. EMEA was lower on reduced volumes in Australia, where we lost a competitive land systems work package. And as Steve mentioned, despite being impacted by delays in orders, the U.K. business did grow 2% half-on-half. Global Solutions declined due to U.S. short-cycle revenues, of which a significant part was in the business now disposed of. In addition, our restructuring activities have resulted in us exiting some business lines as we focus on 4 major areas for long-term profitable growth.

Within Global Solutions, our products business was lower against a high year-on-year comparative, but demand and outlook remains robust, and we expect a better second half. Recognizing the step-up required in H2 to deliver our revenue guidance, we have detailed on the chart the drivers that bridge us from half year to our year-end assumption of circa 3% organic growth -- like-for-like growth. So taking each in turn. Revenue cover at the half stood at 89%, in line with last year's assumed outturn at this stage, and that includes the core frameworks of EDP and LTPA, established positions on the likes of Naval Combat Systems and MSCA, Maritime training following the Mcast win and in the U.S., the TAS Persistence Surveillance contract and the work we do with the Space Development Agency.

Secondly, our Period 7 order flow has added a further 2% to the cover and includes the mission-critical Typhoon support uplift. Thirdly, we have around 7% of orders, which are extensions of current positions or where we are close to finalizing the awards. Examples include the Dragonfire laser weapons contract and target sales with predominantly repeat customers. Finally, we have a good visibility on a pipeline of further awards that we assume we shall win and deliver in year to cover the remaining around 2%. Whilst there are clearly market headwinds prevailing in the U.S., U.K. and Australia, we currently have good visibility and are hence maintaining our full year guidance.

Moving to operating profit, which was down GBP 10.6 million against last year, reflecting lower revenue and the impact of the group's restructuring activities. Margin at 10.7% was ahead of expectations at the half with good consistent program execution against our backlog, especially in EMEA Services. In May, I talked about rebuilding margin from 9.6% to around 11%, and we are on track through driving strong program execution, cost base efficiency actions and the portfolio actions in the U.S. As usual, we have detailed the table reconciling underlying operating profit from segments to statutory profit. The income from RDEC and intangible amortization are standard reconciling items and predictable.

The other 2 major reconciling items reflect the actions being taken to improve the long-term performance of the business. Firstly, our digital investment has increased in the half, driven by a major rollout to over 60% of the business. As a reminder, this is part of a wide -- of a program to enable growth strategy and wider business efficiency. Secondly, we have booked a further GBP 22.6 million of restructuring costs, driven by the portfolio work in the U.S., coupled with the rightsizing activity in Australia and ongoing efficiency activity in the U.K. To complete profit, the sale of the Fed IT business led to a GBP 0.5 million profit on disposal. Now turning to the segmental split of the group performance, starting with EMEA Services, which had a good operational half in difficult near-term market conditions. Orders increased to GBP 2.2 billion. Excluding LTPA, the book-to-bill was down to 0.8x with delays in contract awards in the U.K. and Australia driving the shortfall, albeit as mentioned in the revenue bridge, some of those orders have come through since period end.

Revenue was broadly stable with the U.K. defense delivering growth, but this was offset by order delays and lower revenue in Australia with the loss of the land MSP work package. Program performance and cost control was good, ensuring consistent margins at 11.5% and funded backlog is now at a record high GBP 3.9 billion, which supports second half delivery and longer-term visibility.

Next, Global Solutions, which posted orders of GBP 247 million at a book-to-bill of 1.3x, including annual funding on our core U.S. franchise contracts of Tethered Aerostat Radar System, Strategic Capabilities Office and Space Development Agency. These contracts also saw good on-contract growth. Securing these orders in the half helps to derisk second half revenue given the ongoing government shutdown. Orders were down half-on-half due to restructuring of the U.S. portfolio and timing of targets and product awards. These dynamics impacted revenue, which was 16% lower at GBP 192 million. And as covered in the bridge, the book-to-bill gives us a foundation to drive the required second half performance. Margin was down half-on-half at 7.4%, but up from last year as we work through the U.S. restructuring actions and was in line with our expectations at this stage.

Moving to cash, where operating cash flow continued to be good at GBP 128 million and was in line with last year, delivering a high conversion ratio of 85%. Capital expenditure was GBP 36 million, of which GBP 21 million related to the LTPA. And in line with guidance, we would expect higher spend in the second half with a total for the year around GBP 100 million. To complete the cash analysis, the movement in net debt from year-end is shown here. We generated GBP 63 million of free cash flow. And with the proceeds from the Fed IT sale, that allowed us to deliver a significant step-up in shareholder returns at GBP 101 million as we accelerated the pace of the buyback program and grew the dividend 7%, in line with our progressive policy.

Net debt, therefore, closed at GBP 180 million at a leverage ratio of 0.6x, up from year-end, but a GBP 10 million lower net debt than last half year. Turning to capital allocation, which is unchanged. The business is delivering good consistent cash flow and the focus and priority is driving sustainable organic growth at good margins whilst investing in the business. We maintain a rigorous approach to the deployment of our capital, scrutinizing organic investments against shareholder returns and ensuring we have a balanced and value-accretive deployment of capital.

During H1, we've demonstrated our disciplined capital allocation policy by investing in our organic growth through CapEx, research and development, digital and major competitive bids. We provided a 7% progressive dividend, completed the sale of our noncore Fed IT business in the U.S. and used the funds from the sale to accelerate our share buyback program. We have a strong balance sheet, which gives us flexibility to drive organic growth and provides optionality for value-accretive capital deployment in excess of the GBP 200 million share buyback already announced.

So pulling all that together and moving to guidance, which is unchanged. For the revenue bridge, we still expect to deliver a circa 3% organic growth on a like-for-like basis when adjusting for the sale of the Fed IT business and the higher exchange rate versus original guidance. Margin, we expect to be around 11% and with the buyback progressing at pace, EPS growth of 15% to 20%. Cash, we expect to be around the 90% conversion level and leverage around 0.5x at year-end. As usual, to help with your models, we've included additional technical guidance in the backup slides. This has been a robust half against a difficult market backdrop. And with the action taken and in train, have the visibility to deliver this full year guidance. I'd like to thank all our teams for delivering critical capabilities to our customers and for this half year result.

With that, back to you, Steve.

[Steve Wadey, executive]

Great. Thank you, Martin. So to our strategic outlook. Let me start by explaining why we are a differentiated company, highly relevant to the increasing threat with strong fundamental growth drivers structurally aligned to the increasing defense spend. The threat environment has changed the market dynamics. We are in a new era of defense. Our customers have committed to long-term spending increases as we have seen across NATO and are driving major procurement reforms as they seek to rapidly scale existing capabilities and create new disruptive capabilities to overmatch the threat at wartime pace.

We are not standing still. Our mission-critical capabilities shown here on the right are highly relevant and are directly aligned to our customers' priorities. We are a horizontal integrator, developing new technologies, testing new platforms and delivering frontline mission support. We play an essential and vital role in helping our customers accelerate capabilities into service and increase war fighting readiness to counter the threat. As the market is changing, we have adjusted our strategy to increase focus in 3 areas: firstly, partnering more closely with our customers to help them build greater resilience, rapidly modernize and deliver innovation at pace; secondly, continuing to pursue focused growth in each of our key domestic markets; and thirdly, leveraging our capabilities to expand and grow into European NATO markets.

Let me take each of those in turn. We are increasing our competitive advantage through greater partnering and innovation with our customers and industry to deliver operational advantage and drive growth. We are a strategic partner to the U.K. government and the fourth largest defense supplier to the U.K. MoD. Our capabilities are aligned to the ambitions of the Strategic Defense Review, and we have increasing opportunities to leverage our expertise in partnership with the government into major export programs, such as our engineering services and mission data capabilities into the recent win of Typhoon into Tokia.

On Monday this week, Luke Pollard, the Minister for Defense, Readiness and Industry, visited us in Farborough and has welcomed our commitment to proactively transform the way that mission-critical engineering services are provided to the U.K.'s armed forces that I mentioned earlier. This includes our investment in new digital and AI technologies to augment our high-value engineering skills, significantly increasing U.K. productivity and innovation.

To stay ahead for the long term, we remain focused on investing capital into our people, technology and capabilities. We achieved a major milestone in the half with the successful transition of U.K. and Australian employees onto our new digital workplace to improve our ways of working and business efficiency. And investing in cutting-edge defense technology continues to be a key driver for our future growth. Our long-term R&D created the laser technology that is critical to the growing Dragfar laser weapon program. Investing in the business is core to our strategy to ensure we have a differentiated portfolio and are well positioned to capitalize on increasing defense spending and drive organic growth.

The longer-term opportunity in our domestic markets remains significant, and our mission-critical capabilities are focused on areas of priority for our customers, which are robust and set to grow. In EMEA Services, we have deep expertise that we are leveraging on next-generation technologies, capabilities and programs. This includes the launch of our DroneWorks initiative to help SMEs access our expertise and facilities to accelerate drone development for rapid deployment. And we are delighted with a recent significant competitive win to further develop our disruptive laser technology for next-generation laser weapons beyond Dragonfire.

In Global Solutions, we now have a U.S. business with much greater focus on the 4 differentiated capabilities that I described earlier. As a result, we have delivered significant on-contract growth across our large multiyear contracts that Martin described, SCO, TAS and SDA. And we see significant growth potential for space and missile defense, where our capabilities are highly aligned to multiple U.S. space programs. From a wider product perspective, we are continuing to invest in our maritime, targets, sensors and secure navigation capabilities where we have differentiated offerings to drive organic growth.

Our portfolio is now focused and structurally aligned to national security priorities of our domestic customers, underpinning our long-term perspective. We're also increasing our focus to position the business and drive organic growth in adjacent markets by leveraging our core capabilities across the AUKUS nations and into European NATO and allies. We are collaborating with our customers across the AUKUS nations to develop new opportunities. Examples include sharing laser technology from the U.K. into Australia, leveraging our R&D expertise. We're also sharing our engineering services experience to help shape the future of the EDP and MSP contracts, and we are applying our world-leading maritime T&E capabilities in the U.K. to support the T&E opportunity for the AUKUS submarine program in Australia.

Over recent years, we have made good progress with European NATO and allies, where we have differentiated capabilities. We've grown the use of our unique U.K. test and training capabilities from nations such as Germany, Italy, Spain and most recently, Japan. We're also increasing our export focus and a key opportunity progressing well is the export of our electronic warfare and mission data expertise into Belgium. And whilst Poland remains an upside opportunity, we're actively shaping further persistent surveillance opportunities in Eastern Europe and the Middle East beyond our U.S. program.

We're also well positioned to capitalize on NATO's increasing defense spending, and we see our addressable market growing. With a focused approach to our international expansion, we are creating value across the company to drive further organic growth. Having secured the LTPA extension, we have a significant order backlog of GBP 4.8 billion, providing a firm foundation for the company. This backlog, combined with our qualified pipeline of GBP 11 billion, provides good long-term visibility at 8x our FY '25 revenue. We have built this visibility by focusing on our customers' needs, partnering with industry and winning larger, longer-term programs.

On the left, I'm showing our major domestic programs where we have strong incumbent positions that build up to approximately 70% of our annual revenue. This solid base in our domestic markets gives us a platform to deliver on-contract growth and win new programs in our pipeline. This solid base also gives the platform to leverage our capabilities to expand internationally, shown here on the right, including opportunities to leverage both our services and product capabilities into European NATO markets. Whilst we may not win all of these, our pipeline is robust and prudent with many additional growth opportunities beyond the GBP 11 billion shown here.

Overall, our significant backlog, combined with our healthy pipeline, gives us very good long-term revenue visibility and underpins our confidence in creating long-term value for shareholders. So in summary, we've taken the necessary actions in tough near-term market conditions, strengthening our portfolio to improve our performance. The fundamentals of the business remain strong, and our mission-critical capabilities continue to be highly aligned to our customers' needs in a growing defense market. Combined with our backlog and pipeline, this gives us very good visibility for long-term growth.

Whilst near-term headwinds continue, we're focused on execution and have visibility to maintain our full year guidance. 10 years ago, we launched our growth strategy. As you can see from the chart on the right, this year is a transition year. Having taken decisive action and significantly grown our backlog, we have a strong platform to capitalize on increasing defense spending. This gives us confidence to drive sustained long-term growth and deliver compelling value creation for shareholders.

Martin and I'd be happy to take your questions.

[Operator]

Okay. Rich, first question.

[Richard Paige, analyst]

It's Richard Page from Deutsche Numis. Could you just give a bit more detail about what's going on in Australia, please, and circumstances there? On -- second one on U.K. Intelligence, again, sort of dig between there because it feels as though you're reasonably confident that there hasn't been a significant deterioration in trading in that business. And then thirdly, just on exceptionals and digital innovation. If you could just outline thoughts for the full year on both of those numbers and particularly digital innovation, how they -- how long that persists as an exceptional charge, please?

[Steve Wadey, executive]

Okay. Maybe, Martin, I'll start on Australia. Maybe we do exceptionals, and I'll with U.K. Intel. Okay. So I mean, I think on Australia, I think it's a tough market. In some ways, the Australian market has been very similar to some of the dynamics that we've seen here in the U.K. It's absolutely not unique to us. As you heard in my presentation, right at the start of the year, we had a loss of a competitive work package. Whilst we're not the prime through the team that we're on under the MSP program, that has resulted in lower revenue for us. But I think we need to put that in perspective, Rich, Australia now about 6% of the group. And I think what's been important is that in understanding that market dynamic, whilst we've taken the resizing actions, we've also taken actions to strengthen the portfolio and focus on the programs that are going to give us long-term underpinning growth looking forward.

Those key areas, if you are interested in those, there are really 4 big drivers that we're focused on for the future in Australia. The customer is going through an exercise in the coming calendar year, so 2026, looking at what program will replace MSP. It's called future MSP. We expect there to be an RFI and RFP for that, and we're in a market shaping phase. I mentioned sharing experience between the U.K. and Australia customers to secure a prime role and position ourselves for the next phase of engineering services. Secondly, we're continuing and we're delivering really well on our threat representation business through the acquired Air Affairs business. That's under our JAS contract. We expect a renewal of that contract imminently, and that provides long-term underpinning growth.

Thirdly, you have heard me talk about lasers. We have quite a lot of progress on lasers. I'm sure we might get some questions on this in the U.K. in a moment. It's really a strong long-term growth driver, but there's a lot of collaboration between our customers and our teams looking at next-generation lasers in Australia, where we're very, very well positioned. And the final driver that I mentioned in my presentation is related to the AUKUS submarine program. again, where we expect over the next 1 to 2 years, a significant program opportunity on providing the range capability or the test and evaluation capability for both the AUKUS submarine program as well as surface fleet.

So yes, it's been a tough year. It's not unique to us. There are plenty of businesses, as you know, having to take resizing actions and improve business efficiency we have. But we need to put it in perspective, and we've got some really good solid positions to grow going forward. Do you want to do [indiscernible].

[Martin Cooper, executive]

Yes. Thanks, Rich. I mean I think on -- as I covered in my script, then we've had a pretty significant rollout in the first half across a lot of our workforce on one major work stream within that package. So it was GBP 12 million -- just over GBP 12 million in the half. I'd expect the second half to be a little bit less, but a few models, I'd model about GBP 22 million for the year, and then we'd expect it to start to step down next year and then finally complete in FY '28 for us.

Clearly not by the nature of exceptionals, but I mean, you'll notice just to cover the restructuring point, I mean, I think you -- that could be split into 2 major halves, one around sort of 50-50 around headcount impact and headcount reductions. And then as I mentioned, again, as a reflection of some of the work streams we've either exited or really rationalized down in the U.S., then there were around GBP 10 million plus of further write-downs in the U.S. that went through that line. So you should think a bit of headcount reduction and then sort of final balance sheet cleanups. But obviously, we wouldn't expect anything else material in the second half on either line.

[Steve Wadey, executive]

And I think on U.K. Intelligence, I mean, you'll know U.K. Intelligence had a tough year last year. So this year has very much been a transition year for U.K. Intelligence. And I describe the wider context of the U.K. market has been tough, and we've seen a delay to orders, particularly around the R&D, DSTL areas and engineering services. But I think that UKI is positioned well for this year. It actually did relatively well on its orders in the first half and has got a very good pipeline to deliver a much stronger second half performance that we are planning on. And included in that, the business is also well positioned. You would have seen me mention a couple of export-related orders, particularly in the EW emission data area where certainly in the next, let's call it, 1 year, we would expect some of those export-related orders to positively contribute to the rebuild and next phase of growth for U.K. Intelligence.

[George Mcwhirter, analyst]

George Mcwhirter from Berenberg. Maybe coming back to Australia again. Just in terms of the competitive land systems package that you mentioned that you lost, can you just talk about the size of that contract, please? And what lessons you can take from that loss? And the second question is on the U.S. What proportion of the business would you say is shorter cycle now that you've disposed of the federal IT services business? And have you seen any impact from the government shutdown?

[Steve Wadey, executive]

You need to start on the Australia side. I'm happy to talk about lessons.

[Martin Cooper, executive]

[indiscernible] So the value of package of work was about AUD 50 million. Most of that was reflected in our guidance at the start of the year. We had hoped to perhaps pick up a little bit of subcontract work, but that's not really materialized. So around $50 million impact, but it was baked into the guidance in essence at the start of the year.

[Steve Wadey, executive]

And I think lessons, George, I think, is similar to what we've discussed before and certainly, I'm seeing that is our focus in the U.K., which is really understanding the pressures and the drivers on our customers. All of our markets, our customers, whilst defense is a high priority, they're all trying to get more for less out of their budgets. So therefore, really thinking through innovative proposals and being focused on areas where we can differentiate and be more competitive is absolutely key. There are many examples I could talk about in the U.K. where we're doing that. And the 4 areas that I mentioned in answer to Rich's question is really about how we become more competitive and more innovative to differentiate and then build those longer, larger sustainable positions going forward. Start on the U.S. on short cycle.

[Martin Cooper, executive]

I mean I think George sort of turned it around a little bit. the 4 major sort of work streams we're focusing on now that Steve outlined reflects more than 80% of the revenue work that we now do in the U.S. And I think as you remember, as we went into this year, we didn't include really any material values on the likes of robots and sort of short-cycle book-to-bill work. And so the coverage that we've got through the half year book-to-bill relies very little on short-cycle impact at all, and that's where it is. Now you'll all know that in the U.S., you do also have annual contracting. So you could describe that as short cycle in some instances as to where it is.

But a lot of that real sort of what you would have traditionally called as short-cycle volatility was stripped out at the start of the year and is not in our bridge for full year as we look forward. And I think in respect of the government shutdown, the reflection that we had a very strong book-to-bill in the first half in most of those big contract awards on the likes of TAs, SCO, SDA, the forward-funded contracts came in, in September, which drove the strong book-to-bill, which has given us that cover now like all defense contractors and all contractors. If there's another government shutdown in January again and/or these things get protracted, then obviously, there could be impacts further down the line or for further orders. But in the short run, then we're fine.

[Steve Wadey, executive]

And I think more broadly, I think, as I said in the presentation, we're really pleased with the progress that we're making. I mean the U.S. restructuring program is on track. The disposal of the Fed IT business was a key milestone. As you heard, we've taken some significant cost out and headcount out to resize the business in line with the market that we see. Hence, my comment about we have now got a smaller business. But as Martin has just said, that smaller business is really well positioned because we've now focused on these 4 revenue streams. where we have long-term positions, and we can see that growth potential, which reduces the exposure to that short-cycle volatility that you are pointing out. And as Martin says, the book-to-bill of 1.5 gives us the ability this year to drive through that performance then really focus on these growth drivers for the long term. Hopefully, does that answer your question, George? Great..

[Joel Spungin, analyst]

It's Joel Spungin from Investec. Steve, one for you, sort of a big picture question, and I've got a couple for Martin as well. But I was wondering if you could talk maybe just sort of thinking out beyond FY '26 as we look into fiscal '27, '28. You go back and QinetiQ used to grow roughly double nominal sort of defense budget growth for a long time in terms of organic growth. Is that still something you think is achievable even in a world where nominal defense budgets in the West are rising at an unprecedented rate, i.e., could this business get back to being a high single, even low double-digit organic growth business?

[Steve Wadey, executive]

Yes. I think this is a good question. And I think there are a number of things to say. I think, first of all, we're very confident we've taken the right actions -- we've taken the right actions to deal with the dynamics as we came into this year. And that ultimately, hence, your question, puts us on the right trajectory to return to higher rates of growth. And we have an exceptionally strong backlog and exceptionally strong pipeline. You've seen that there with 8x FY '25 revenue cover. And therefore, I think your question is a question of timing.

And actually, how do we really make sure that we control the things that we can control. And what we've shared with you today is that we are in control of everything that we can. But there are some market dynamics that will determine partly the answer to your question about how quickly we will return to that from a timing perspective. But we're absolutely doing all the things that we can -- and then if you go further into that question and say, well, what are the drivers though? But what are the drivers that could -- that become the bridge from this year into that multiyear phase of returning to that higher level of growth. And it is worth just mentioning them because I think that it will help everybody understand how the company returns to those higher growth rates.

So the first one absolutely is in our core strength of test and evaluation. The long-term partnering agreement on a multiyear basis is absolutely going to be a contributor to our growth. The modernization work of bringing in hypersonics directed energy, autonomous systems, the increasing in tasking that we expect to see through our test and evaluation Innovation Gateway, the DoneWorks initiative that I mentioned. And I didn't mention it in the presentation, but we've just won a contract to expand quite considerably the capacity of the ETPS training school, which is going to be considerable increasing capacity both for our domestic and international customers. So that's a really important growth driver. The second is actually -- and we've talked about this as our strategy for several years, how do we leverage our test capability into training.

Note the strategic win of the MCAS contract. It's GBP 25 million. You might say, well, that's not big, but it's a strategic win as we move into training, and that training is absolutely complementing our test capabilities, and there are quite a considerable number of incremental opportunities above Mcast in a short-term period that will add to growth. The thirdly is U.S. I've mentioned this a few times actually in answers. I think we're really well positioned around space and missile defense. Our capabilities with the SDA. We have SATCOM capabilities, and we also have broader sensors capabilities.

Space is a very large growing opportunity in the U.S., and we're well positioned in that and alignment with programs that you all know such as Golden Dome, we're positioning to win a role on that. And -- separate to that, I think it's in our unfunded order bridge. We did actually win an option, a ceiling option with the Space Development Agency worth up to $95 million to provide additional support to them in this coming year. So that's the third growth driver.

Fourth one is around advanced weapons. You go back a year, we talked about -- in fact, it was May, wasn't it? We talked about the 2-year renewal on the weapons sector research framework. That is really starting over this next multiyear period to bring benefit, particularly in the directed energy area, both radar frequency as well as lasers. Martin mentioned the importance of Dragonfire and I just mentioned, we've had another win in next-generation laser technology.

And then finally, the focus on Europe and 2 particular areas I would highlight. The framework contract that we signed now 2 years ago with NATO to allow access to our T&E ranges continues to bring and be attractive to nations like Germany, Italy, Spain, Netherlands. And the second area I mentioned in response to Rich's question is our greater focus on export. And we're in a really mature partnering position with HMG and looking at exports together. I mentioned 2 examples around our EW emission data capability with Belgium and with Turkey opportunity on Typhoon, and those will contribute.

So those 5 areas, I think, answer your question is the bridge from this year to those higher rates of growth. Clearly, not everything there is under our control. So it's a matter of timing. But certainly, over that few year period that you've mentioned, I would expect us to really get back into much higher growth rate. So hopefully, that answers your question.

[Joel Spungin, analyst]

Can I -- sorry, just a couple of quick ones, Martin, I'm a bit more dull. The -- sorry, I lost you a bit on the guidance, the GBP 22 million. Is that the digital investment that you expect for the full year? Is that the...

[Martin Cooper, executive]

Yes. So the total cost of digital investment, I expect to be around the GBP 22 million.

[Joel Spungin, analyst]

Right. And you're not at the moment, expecting any more restructuring charges?

[Martin Cooper, executive]

Correct.

[Joel Spungin, analyst]

Okay. And then sorry, very final one. Fed IT, I was just wondering if you could say how much did Fed I contribute to revenue and profit in the half.

[Martin Cooper, executive]

Yes. So in revenue in the half, it was about -- you should have modeled around GBP 10 million to GBP 11 million, so around $13 million to $14 million. And it does have a second half weighting, which is why when you're adjusting your models, you'd expect more like $20-plus million in the second half, which is why we want obviously the adjustment in the full year guide. It is fairly low margin.

[Sash Tusa, analyst]

Sash Tusa from Agency Partners. Just a very quick one first. I think that you slightly implied that there have been some delays to target orders in the first half. If I understood that right, is that something that has subsequently occurred or that you sort of expect to occur in the second half?

[Steve Wadey, executive]

So do that one first. Yes. So you are right, there has been a slight slowdown. Nothing particular in the market other than a general slowdown. But as Martin showed in our bridge, targets are part of a pickup that we expect in the second half. It is worth saying that we did achieve some initial target sales in the U.S., relatively small in the half, but we did. And we expect to be focused on additional task orders through the ATS-3 contract that we signed 12 months ago in that second half bridge.

[Sash Tusa, analyst]

And then just a sort of broader question about U.S. space and Golden dome and so forth. I mean clearly, you've seen an awful lot of hopes for procurement reform over your careers. And it's possibly quite jaunded about sort of claims that politicians make for that. But Secretary Heif does seem to want to go faster and break a lot of things. And he doesn't seem to be particularly in favor of what he calls legacy contractors, which might be a category that you fall into. How do you make yourself relevant to new defense technology companies whose business model seems to be extravolant claims on PowerPoint, build stuff, it blows up, moves on as opposed to a rather more measured approach in terms of test and evaluation.

[Steve Wadey, executive]

How long have you got? You make a number of points. I mean, first of all, you touched on space and SDA. We have an excellent relationship with the SDA. We're the largest contractor working in with them. And therefore, we partner very closely with them, and we help them deliver their programs at pace. So by being relevant, by deeply partnering and helping them achieve, to your point, their programs faster, that's how you well. And I think SDA contract was an example of significant on-contract growth in the half. That comes down to good performance and good partnering. And please note what I mentioned about the option that we've had added to that contract for the next few years, which could build even greater on growth.

So I think the core in that is being close to your customers, understanding the drivers. I think more generally, I think all of our markets are looking for reform. I don't think that's specific in the U.S. And I think that is a nature of what is being driven by the threat. And therefore, all of our governments, whilst they want to spend more money, that money is going to take time to come. And therefore, they want to get more from their money quickly, and that means doing things differently. And I come back to how well positioned we are. And if you look at our 4 capabilities, we're creating new technologies that create disruptive military capabilities to overmatch the threat quickly. lasers, the case in point is really good.

Focused on engineering services. I mentioned, I think, twice the importance of proactively investing in how do we augment our high-value skills with artificial intelligence. That's not about replacing our people. That's about doing what we do faster and at greater scale to help them drive efficiencies and scale their capabilities. So I think these are the dynamics, Sash, I could go on further that by being really relevant and partnering, but coming up with different ways of working to support them on their reform, that's how you grow in difficult markets and position yourself well for the long term. I think that's the fundamental ethos.

We have 2 more questions behind you.

[Benjamin Pfannes-Varrow, analyst]

Ben Varrow, RBC. On the -- maybe kicking off with the second half growth, I think you've addressed it in the slides there, but just maybe on EMEA Services, looking at the second half, I think you need to grow around high single digit. Is the message from the slide there that those prospective orders coming in are pretty much derisked, so you're not concerned there of meeting those numbers. Is that the general takeaway?

[Steve Wadey, executive]

I'll do that one. Maybe I can start generally. I mean we've sort of talked about the market being difficult. And clearly, we've had delays then. But we've got really good focus on execution and what the bridge that Martin showed is the visibility. If you're referring to the 7%, there are really 3 main drivers for that. The first is around EDP-related task orders. Secondly is around laser-related programs. That's not just Dragonfire. It also includes the win that I've just mentioned on next-generation lasers because that was post AP7. In fact, it was last night. And then thirdly, targets. They are the 3 biggest drivers in there. And what really we're showing is in that 7%, they're really specific and identified, and therefore, they are high confidence. And we also have a pipeline of further awards that go beyond that and hence, the way that Martin presented it.

[Aymeric Poulain, analyst]

2 more. In terms of maybe asking Joel's question slightly differently over the next couple of years, you've spoken you can get back to that sort of high single digit, low double digit. Is there anything to be mindful of that's working against you or prevents you from getting there over the next couple of years to keep in mind?

[Steve Wadey, executive]

Well, I guess the most straightforward is the things that aren't in our control. So the market dynamics are partly the timing that I mentioned to the answer to Joel's question, but are we doing all the proactive thinking of investing, changing what we're offering, engaging with our customers. We're absolutely all over that. So we're doing everything in terms of the actions on short-term performance and positioning us to shape and win these proposals. So I think it's the things that aren't in our control, which is actually just the flow of orders really. But no, I think we're very well positioned, hence, the answer to Charles' question.

[Benjamin Pfannes-Varrow, analyst]

Last one on the sort of upcoming U.K. defense investment plan, thoughts or expectations what could come out there?

[Steve Wadey, executive]

Yes. I mean we've been through a lot in the U.K. market this year. We had a strategic defense review in June, defense industrial strategy in September, defense reform initiative, July, was it? And then we've got the defense investment plan let's say, before Christmas, wherever it's going to be. So we've been through a lot. And I think that getting through, in some ways, the last big block of this reset and renewal of defense in the U.K. will be good. I think it will bring clarity. It will bring confidence. And I think what we expect from it is with that clarity, I think there will be a lot of focus on innovation and R&D and building different capabilities. Clearly, we're well positioned for that.

And then more fundamentally, I think it will be calling even more so for initiatives of innovative capabilities to do more for less. And hence, some of the proactive changes that we've been making around the future of EDP and the AI-related investments. So I think clarity and confidence is going to be good. We'll welcome that. And then we really expect innovation and bringing proactive proposals to be part of the implementation and then sort of build that position as support to our government going forward.

[David Richard Farrell, analyst]

David Farrell from Jefferies. Two questions for me. Just going back to the exceptionals and the digital platform. Could you just remind us what capabilities that will give you as an organization? What exactly are you doing? What efficiencies does it drive?

[Steve Wadey, executive]

So if we go back a couple of years maybe to when this whole project was launched, I think we talked very openly that the company infrastructure had been built really on the back of a legacy IT infrastructure from the U.K. government. And it went back 20 years. Hence, why this was a fundamental discrete investment project to fundamentally build a digital platform and set of applications for the company globally. And really, that project has been in 3 phases. The first phase was to put a fundamentally different secure network in place across the company using state-of-the-art digital technologies. That is done. and complete.

Secondly, the next phase was then effectively migrating our people onto the new devices. As both Martin and I have said in our presentations, that is largely complete. And now we're on the sort of the final phase, which is really now all about migration of apps and then new tools, whether that is -- whether that's engineering tools or a project that's very close to Martin's heart, which is around the business system finance tools. So hence, this was that multiyear discrete project to really bring the company digital infrastructure into state-of-the-art capability. And I think it's going very well. And I think both of us use slightly different language. This will change the way that we work. It will allow us to share information, share technology, drive collaboration and also build greater business efficiency into the way that we operate. [indiscernible] add?

[Martin Cooper, executive]

Yes. I mean I think, David, I think -- I mean, this actually enables us to bid into some contracts as well and be prime lead in some areas. Steve mentioned Australia and other areas by having these advanced and better systems that will enable us to actually bid and hopefully win more work going forward as well. I would also make the point that we meant there, and you might be about to touch on margin anyway. But I mean, I think anyone who's been through these digital rollout programs, it is quite disruptive to organizations. And you'll remember at the start of the year, we were a little bit cautious, more cautious on margin just around that operational impact, and there has been some impact and that continue there will be for the rest of the year whilst we're going through that. But as Steve says, we're getting on with it and it will have long-term efficiency benefits as well.

[David Richard Farrell, analyst]

I see my second question was about growth. I've really touched on the Polish TAS opportunity. But can you just kind of detail how that works? Who selects the winner? Is it the U.S. government? Is it the Polish government? Has the U.S. government shutdown in any way delayed the award of that project?

[Steve Wadey, executive]

Yes. I mean the first thing is a reminder to ground us all, Poland is not in our base plan, and it is not in our forecast. So just to be really clear on that. In terms of the process, it's an FMS sale from the U.S. government to Poland. Therefore, the decision-making is with the U.S. government. But clearly, they will have dialogue and exchange with the Polish government. And to your point, partly related to shutdown, I mean, there is no public announcement -- so that remains, as I would think about it more as an upside opportunity.

But I think more important to that, you mentioned the phrase TARS is really thinking about our TARS capability, which if everybody is not familiar, this is where we are running a really significant national program along the Southern U.S. border, providing persistent surveillance between U.S. and and Mexico. That is another contract. There are 2, in fact, one called TARS, one called TAS. And both of those also have delivered good on-contract growth over recent years. And from our perspective, we're really positioning to grow that capability as one of our 4 priority streams, and we're positioning to grow that both domestically in the U.S. We expect further on-contract growth to come this year, and we also expect to grow it internationally, and we're actively shaping a number of opportunities in different countries around the world, both in Eastern Europe and Middle East.

[Unknown Analyst]

It's [indiscernible] from Barclays. Just coming back to the digital investments you've been doing. You mentioned the fact that you can increase your win rates because of that because of that investment on the line. So which is obviously good for growth. But just in terms of margin, is this investment going to generate any margin benefits down the line? Or is it just a function of making your business better positioned to win new contracts and fund growth? And then secondly, going back to the U.S. business with those 4 key areas you outlined before. Can you discuss the medium-term growth profile for the business there, compare that with the rest of the group? And then how should we think about the margin in the U.S. in the medium to long term? That would be very helpful.

[Martin Cooper, executive]

I'll start with the digital. I mean, just to be clear, I mean, this is -- as Steve says, this is around also building good long-term business resilience, and you'll all be very aware of, obviously, heightened cyber threats and other things. So this is predominantly around, obviously, having the right systems to be effective for our employees and other things. It does give us the opportunity in some parts of the world where we don't have the current capabilities to be able to bid into things, but this is predominantly an efficiency thing, but also we do need to clearly continue to invest in the business. So I wouldn't want you to think this is going to make a huge step-up in margin going forward as we work through this but it should definitely help efficiency drive as we go there.

Perhaps in the U.S., just on margins, and then I'll hand over to Steve around growth. I mean, clearly, all the actions we're taking are about designed to drive margin up in the long term. I referenced a couple of areas where we actually also actively took ourselves out of some contracts in the first half because they were lower margin and were noncore to us and things. But I think you should think about this business in the long run as more of the sort of high single-digit margin business in line with sort of peers, so sort of in the 7% to 9% would be the margin, and that would then, therefore, push Global Solutions more up into around the 10% level, as I think we've outlined in the past, but that's the kind of that we're pushing that business through these actions.

[Steve Wadey, executive]

Yes. And rather -- on the U.S., I mean, rather than giving growth rates and comparisons because as we know, we'll be giving an update on our growth in May. Maybe what I can talk about is the growth drivers. I've sort of talked about a few of them. So just to go back over. So space and missile defense is an absolute growth driver where we are positioned. And I use the phrase multiple space programs. It's worth just touching on. So clearly, we have the SDA program. We also have a SATCOM related engineering services program. And I've just briefly touched on Golden Dome, where we can see some of our engineering services and our sensors capability relevant for that. So we have a series of capabilities, and we're well positioned in our customer relationships to see good growth coming from that program.

Second one, maritime systems. We know if we look back in time, the company has been very well positioned in its relationship with General Atomics and the U.S. Navy as part of the electromagnetic launch and recovery system on the Ford-class carriers. The Ford-class carrier is a long-term franchise program for us, and we see good opportunity, particularly coming in the next year and bringing further growth on the carrier program.

Many of you will remember about 3 years ago, we said we would take those capabilities and position into the submarine program. We initially won some business on to the Virginia-class carriers. That has expanded on to 2 or 3 subsystems. And in the last 12 months, we're very pleased that our track record of performance in Maritime systems has led to us winning business on the Columbia class submarine. So we have strong performance with the carriers moving on to Virginia.

We've now moved on to Colombia, and we see that -- we see steady but good long-term growth coming on a multiyear basis and then moving into surface fleet programs as well. So that's the second driver. Third one is around advanced sensors. This is from our prior MTech capability where we have some really good advanced R&D and next-generation sensors. What might be a small win in the half was winning a a Phase 0 contract on a program called Falcons. This is the next generation of really long-range IR sensor for the U.S. Army.

It's potentially a very large program of record in the U.S. We've got a very novel and clever design, and we're delivering that Phase 0 program and looking at key strategic partnerships of how we will position ourselves to win. That's a multiyear opportunity. And the last really is the broader franchise opportunity that I discussed around persistent surveillance, which is TAS, TAS and the domestic growth that we expect on that and then our focus on the wider international expansion. Those really are a bit more color in the growth of those [indiscernible].

Any more questions? Any questions online from anyone?

[Operator]

There are no questions coming through from our conference call. I'd like to turn the conference back to Steve Wadey for any additional or closing remarks. Please go ahead.

[Steve Wadey, executive]

There's one more opportunity in the room. Okay. Well, thank you very much for your time. We'll both be hanging around if anybody in the room would like to follow up with any additional questions. Thank you.