Having delivered a second year of both revenue and profit growth for the year to end March 2018 and that included a sizable increase in international revenues, having also won a number of important sales campaigns, improved cash flow and net cash, raised the dividend and announced the agreed acquisition of E.I.S Aircraft Operations in Germany, let there be no doubt that QinetiQ is now on a mission to achieve sustainable growth.
With the core values of QinetiQ being those of integrity, collaboration and performance, CEO Steve Wadey can in my view be very proud of what he has so achieved in his first two years at the helm. On a recent visit to QinetiQ’s Farnborough offices, the ‘feel’ of innovation was very prevalent wherever I went. QinetiQ is a company that thrives on innovation and one that has research and development, training, disruptive technology, test and evaluation plus other specialisms writ large in its DNA.
Increasing profits last year and reversing what has been a far too long period of declining or flat revenues was an important statement of intent – all the more so in my view because it was accompanied by a well thought-out plan designed to produce sustainable long term growth.
To that end QinetiQ has put in place what I believe to be a deliverable and sustainable future growth strategy. Of course, to achieve success always requires hard work, effort and determination, none of which are in short supply at QinetiQ. Motivation to succeed is writ large on the faces of all those that I met at QinetiQ and given the strength of leadership and a plan for growth that perfectly well fits the culture of this fascinating organisation, I am in no doubt that future results will match the objective.
Focussing on targeted markets in the primary sectors of Defence, Security and Critical Infrastructure and within existing home countries such as the UK, USA and Australia together with already identified additional countries in Europe, Middle East and Asia-Pacific that will no doubt become ‘home markets’ in the future, QinetiQ’s growth vision is as bold as it is in my view potentially fully deliverable.
With the primary focus being to expand into deliverable markets, focus on core offerings that, for instance, include Research & Development and Test and Evaluation plus Training – Integrated Capability Generation & Assurance, Services and Products and Disruptive Technology QinetiQ believe that the potential of the addressable markets targeted in its forward strategy are worth potentially in excess of £8 billion per annum.
In essence QinetiQ is seeking to be the chosen partner around the world for mission critical solutions and it has set itself harsh objectives such as improving customer focus and competitiveness, modernising and reinvigorating the Long Term Partnering Agreement (LTPA) for the MOD, to build agile, competitive Test and Evaluation services for industry, grow Cyber, Information and Training businesses, accelerate growth in the US and Australian businesses, establish key partnerships in the Middle East in countries such as for instance, Saudi Arabia, Qatar, UAE and Oman, win new export sales whilst at the same time improve business winning approach through campaigns.
QinetiQ has taken a considerable amount of time in collating a forward strategy that is both long term and deliverable. In the UK where the company is best known QinetiQ seeks to lead and modernise the UK defence Test and Evaluation enterprise by working in partnership with government and prime contractors. Internationally QinetiQ wants to build a much larger footprint in its chosen areas of expertise and that can deliver additional value to customers. In addition and as mentioned above, the company wants to expand the number of ‘home countries’ it operates in. Finally and hugely important is innovation where the company seeks to invest in and apply inherent strengths for customer advantage in the defence, security and critical infrastructure markets.
In terms of future capital allocation, an important part of QinetiQ forward strategy is to invest in organics capabilities and to complement this through bolt-on acquisitions where there may be a strong strategic fit. Sitting on net cash and a pension surplus, QinetiQ is very well placed to achieve these objectives.
Having a clear, precise and well-thought out strategy as this clearly is requires excellent communication both internally and across the customer and investment community. QinetiQ management is very aware of this and is clearly on the case.
Back in 2010 when he was brought in as QinetiQ CEO to revive the fortunes of what by then can best be described as a poorly performing entity, Leo Quinn took the view that the ‘fix’ would require a virtually complete rebuilding from the ground up. In doing so, Quinn undoubtedly succeeded in making QinetiQ leaner, fitter and stronger and in the process, he also significantly reduced debt and put in place a new set of financial disciplines.
From a broader strategy viewpoint, Quinn chose to refocus the portfolio, to dispose of the US services businesses, to reposition US Global products, cut staff numbers across the board and importantly, to develop new activities such as Cyber Security.
But if it was Leo Quinn who reset financial principles that would allow QinetiQ to move forward on a much sounder footing it has been his successor, Steve Wadey who repositioned the company for a strategy of growth. Importantly, QinetiQ can, in my view, move forward from a position of achieved financial strength and that, on the back of a credible, workable and sustainable agreed forward growth strategy, it can achieve the ideals that it has set for itself.
That QinetiQ has been forced to go through some very difficult internally based wars, some of which were undoubtedly of its own making ten and more years ago, is undeniable and when this is perhaps set against a background of what had been several years when defence related markets in the UK and US were in the doldrums, it is perhaps no surprise that the company would struggle.
Having known QinetiQ through all the years since the company was floated in 2006 on the London Stock Exchange, I suspect that one observation I can easily make about the past was that I was personally never quite sure what the forward strategy was.
Not so today though and two years into the role as CEO and having sorted the wheat from the chaff in order to build a solid team of people around him to take the company forward, Steve Wadey has with his team produced an excellent forward strategy, one that in my view is built on solid foundations and that, if executed correctly, will not only produce excellent long term results but that is also sustainable.
While the QinetiQ that Wadey joined two years ago was in a far better state than the one that existed two years earlier, it is fair to say that it lacked a long term forward strategy for growth. Two years on and having demonstrated to investors that QinetiQ today is leaner and fitter than ever before, the workable and agreed strategy that Wadey has created deserves to be fully supported.
While there remains much within the QinetiQ portfolio that is still recognisable from the past, as I look at the company today I see one that is brimming with innovative ideas and determined to be the leader in all of its various specialist fields.
One of many specific areas of activity that I would point to, one that is to an extent still recognisable to how it has always been in the past but also one that in 2018 can be described as being very much changed is that of the Empire Test Pilot School (ETPS) whose main home is at Boscombe Down.
Here military and civil, fixed wing and rotary, fast jet and multi engine, real and simulated provides arguably some of the best training in the world. In partnership with other test centres and organisations around the world gives students access to abroad range of training platforms. I will write on ETPS again separately in due course as I will on the other aviation and safety elements that QinetiQ is involved but in short, new investment in aircraft and simulation equipment together with a plan to increase numbers of foreign pilots trained here in the UK makes this a very interesting QinetiQ unit to observe.
Back to the wider group and of course, when recovery is the main part of the job in hand, deciding longer term strategy and of where and what the company wants to be in the future is often required to take second place. It takes time, discussion, planning and agreement to get it right and even if well thought out and agreed, there are no short cuts to ensuring that it is then properly communicated.
Asked a personal question recently about what QinetiQ actually does I observed that its core strength is one of being a large group of scientists and specialist people that have unique knowledge and capabilities in order to create value through making their expertise and know-how of its people available to the customers.
Put another way would be to say that QinetiQ is about research, development, technology creation, innovation and providing evidence based advice. Suffice to say that nationally and internationally, QinetiQ helps to create competitive advantage for the customer that in turn brings reward for the company itself.
While QinetiQ does not manufacture on any great scale, it both creates and holds IP. And having mentioned this earlier, I should remind here that the Long Term Partnering Agreement (LTPA) with the MOD is a 25 year contract that runs until 2028. Worth in the region of £300 million per annum, the LPTA operates at 17 primary sites in the UK including ETPS Boscombe Down and involves some 1,800 personnel. The primary aim behind LTPA is delivery of critical skills and facilities to enable generation and assurance of national defence capabilities. A billion amendment was signed in December 2016 in which QinetiQ is responsible for modernising and delivery of world-class air ranges and test aircrew training.
In North America QinetiQ is heavily involved on maritime systems and Talon upgrades, also on the upgrade of sub-systems on Virginia Class submarines and recently won the first phase of the Common Robotic System Individual (CRS-I) programme of record. The Australian business activities include the integrated logistics support provider RubiKon which was acquired early in 2017. Middle East activities are based in part on leveraging of key skills and experience honed in the UK. A number of orders with a reported value in excess of $30 million have been received.
Having acquired Target Systems, a company that is a market leader in target systems and services market, from Meggitt plc in December 2016 QinetiQ believe that this could open the door to in excess of 40 new international customers. Recent reported new customers include South Korean Air Force and the Japanese Air Self Defence Force.
So, what does QinetiQ do now and what will it be doing in the future? Research and Development work, agile experimentation, threat representation, live synthetics, evidence analysis, providing advice, intelligence, information, systems, protection, unmanned systems, developing Space systems and communication, engagement Disruptive Technology – advanced materials, sensing, communications, autonomy, analytics and directed energy, Test and Evaluation, Training and Rehearsal. Engaging in areas of defence and security that are now considered as priorities such as Cyber security and Cyber-attack, protecting undersea wireless network for navy and commercial maritime customers, mine warfare facilities management, berthing and docking mechanisms, secured navigation and creating joint ventures with partners in new countries. You get the picture I am sure!
Importantly here in the UK QinetiQ is, amongst the many other areas of research and test evaluation activities that the company is actively involved, both leading and modernising the defence test and evaluation enterprise through working in partnership with government and prime contractors whilst internationally, the company is building an international group of activities that delivers additional value to customers by developing home countries and with an intent to create new home countries and increase exports
So the bottom line of all this intention? Innovation remains at the heart of all that QinetiQ does. Moreover, it is about investing in and applying inherent strengths for customer advantage in defence, security and critical infrastructure markets. In respect of the objectives, my answer would be this is about improving customer focus and competitiveness, modernising and reinvigorating LTPA for UK MOD, building agile and competitive Test and Evaluation services for industry, improving the business winning approach through campaigns, growing Cyber, Information & Training business, accelerating growth in US and Australian business, establishing key partnerships in the Middle East and of course, win new export sales.
CHW (London – 9th July 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785