Hexagon’s Q3, Shell & rentals

EarningsWhile I was wandering in East and North Yorkshire, 3D Systems, Accelrys, FARO, Hexagon, Nemetschek and other companies announced results for the September quarter. Time for recaps so, first up, in keeping with the Plant/Infrastructure theme we have going, let’s focus on Hexagon.

The big headlines for Hexagon‘s third quarter are that demand improved in Europe, construction is up in many parts of the world, and that there is optimism in some of its end industries. But it’s not all rosy: Hexagon CEO Ola Rollén says that the automotive vertical is in a “trough” that he expects to return to growth in 2014, eventually leading to new purchase orders for Hexagon’s metrology products should start coming back in 2014. Too, Intergraph SG&I continues to struggle amid US budget crises and stuck defense budgets.

In total, Q3 revenue was essentially flat as reported at €577 million. But that includes selling off one business and lots of currency fluctuations; using constant currencies and a comparable group structure, revenue was up 5% year/year. Net income was down 9% to €76 million; excluding one-time charges, net income was €89 million, up 6% year/year. It’s definitely a mixed bag; the company provides details in its materials, so rather than rehashing them at this late date, let’s get to the important stuff: Intergraph PP&M, Shell and rentals.

During the earnings call, Mr. Rollén mentioned that Royal Dutch Shell is “standardizing on Intergraph PP&M software” in an initiative to create a “platform for consolidating engineering information throughout the lifecycle of an asset … to reduce existing information barriers and raise efficiency and data quality of project hand over”. Since statements like these can be over-reaches, I checked with Shell and was told

All Capital Projects of a certain category (and that is not all projects in Shell) will be executed using the new Intergraph SmartPlant cloud services and indeed we expect the EPCs taking part in these projects to use this cloud service.

So.

Shell is creating a scheme that lets it control, to a very detailed level, how data is delivered at checkpoints along the design and construction of an asset and, certainly, at handover. The goal is to standardize what Shell gets and how the data is structured, all to ensure that the information is at the appropriate level of detail and quality. It’s part of a corporate-wide effort at Shell to make apps and data available to “any [authorized] user, on any device from any location accessing any service” — where “service” could be geological modeling or data, gas station sales or construction schedules. The engineering and design piece is part of a much larger vision that spans many of Shell’s functions and data creator/users.

For the design/engineering/construction side of things, the idea isn’t new. Most projects use a repository to holds all of the models, specs, drawings and lists to ensure consistency, provide access to the latest data and improve communications. Shell’s twist, announced in 2011, is that Shell intends to host the data center, that data structures are to be based on the Intergraph SmartPlant suite. Eventually, new projects will work within this scheme to create consistency across those projects, say an oilfield or operating group within Shell, for the life of the assets. Shell also wants to promulgate best practices from one project to another and monitor cost and schedule across its portfolio of projects and believes that having and controlling the data/processes can make that happen. This is a big cultural shift, perhaps more so than technological, and it’s not going to be easy. The benefits for Shell are clear: if this succeeds, the company is one step closer to its vision of “One Enterprise, One Data Model”.

Intergraph’s part in all of this is to create Citrix-based client-server versions of many of its products, and to build a data framework to support all of this multi-tenancy, on-demand, import/export, consistency checking and management. The Citrix deployment carries with it all of the benefits you’d expect: rapid deployment, scalability, global access and disaster recovery since the data is stored at regional data centers. Security, support, load balancing, managing bandwidth etc. are covered by a 24/7 team of Intergraph specialists. There’s a lot more about SmartPlant Cloud  here and a YouTube introduction, too.

What’s gotten lost in all of reaction to Hexagon’s earnings call is that a core tenet of Shell’s installation (and all of Intergraph’s own material about SmartPlant Cloud) is the ability to import and export data “between SmartPlant software products and customer in-house applications” — which truly may be in-house but are just as likely to be products from competing supplier, not that Intergraph is ever going to name them. Shell’s VP Architecture/Group IT Architect Johann Krebbers told us at Hexagon Live a couple of years ago that “EPCs, using their own systems, will load [their models, drawings, data, etc.] into SmartPlant” in the hosted environment.

What does this all mean? Shell is changing its contracts and project execution methodology to require all data be hosted in its environment. Projects will be configured according to Shell’s standards, which are defined using SmartPlant schemas and architectures. I can certainly see a scenario where a contractor works in a competing product and then exports to suit Shell’s standards as needed (that happens all the time today, between all of the design and engineering solutions out there), so I don’t think that this freezes out EPCs who use other vendors’ products, nor does it suddenly put other vendors at risk.

One additional question raised by Hexagon’s earnings release is that of a license model transition, as Shell’s ecosystem and other PP&M customers increasingly opt for license rentals instead of perpetual with maintenance payments. In Q3, PP&M reported organic growth of 7% over a strong quarter a year ago, which Mr. Rollén says is down a percentage point or two because customers chose rentals rather than perpetual.  It remains to be seen how Intergraph PPM’s revenue fluctuates as buyers switch from perpetual to rentals, and perhaps get some benefit from a Shell-specific pricing structure.

It also remains to be seen how EPCs, equipment suppliers and others respond to contracts put out there with Shell’s new requirements; I haven’t spoken to one EPC who likes this concept. They see being part of Shell’s scheme as restricting their ability to leverage competencies and processes built up over decades and worry that it gives Shell unprecedented visibility into those processes and practices. We’ll have to see how it all plays out.

If you’re part of a large design project, how do you see this level of specification from your client? Is it good to be so clear upfront about the requirements? Or does it restrict your ability to make use of competitive advantages you’ve built up over time? Sound off below or email to comment.

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