Is Hexagon’s strategy starting to pay off?

EarningsHexagon has been on a quite a buying spree lately, adding point solutions for precision agriculture (Arvus) and mine modeling (Mintec), traffic safety (SAFEmine, initially targeted at mines) and multicopters (Aibotix), as well as precise positioning for all sorts of industries (VERIPOS).

As I’ve written before, Hexagon started as an old-school manufacturing conglomerate and has added and sold assets to re-create itself as an information and metrology powerhouse. Its 2007 acquisition of Intergraph moved it into the big leagues, and led a lot of investors and industry watchers to wonder why these particular assets could amount to anything more than individual assets in a portfolio — now, Hexagon is starting to answer those concerns. There is a method to this madness, as Hexagon has started to introduce the first of its “Smart” solutions, which bring together measurement, design, management and other technologies from across its portfolio to water infrastructure management, crop management and production, and modular assembly in infrastructure and other construction industries. One can see similar things happening in other verticals — such as in mining with Mintec plus SAFEmine plus metrology plus data mining. We’ll learn more at the company’s capital markets day net month.

CEO Ola Rollén says that Hexagon is considering how to report revenue going forward, but declined to break out Smart revenue. He did say that Smart Solutions revenue grew.
The Q1 details:

  • Total revenue in Q2 was €595 million, up 1% as reported and up 5% in constant currencies (cc).
  • Measurement Technologies (MT), the group’s core continuing business, reported revenue of €582 million, up 2% as reported and up 5% on an organic basis. Acquisitions contributed 2% of growth in Q1.
  • Geosystems revenue was up 9% in an organic basis, to €208 million, as the European construction market improved.
  • Metrology reported revenue of €180 million, up 6% on demand in Asia and South American and increased demand from automotive customers.
  • Technology, an umbrella division, reported revenue €194 million, up 2% on an organic basis. Hexagon does not break out specific brand revenue, but did say that Intergraph SG&I reported slight growth in the quarter (the first positive movement in 5 quarters, though just 1% or so), Intergraph PP&M reported solid growth (likely 6% or so) even as customers shift towards a software rentals. NovAtel reported a 25% y/y revenue decline because of delays in Unmanned Aerial Vehicle acquisition programs.
  • During the Q3 earnings call, Hexagon made waves by saying that Shell was standardizing on SmartPlant Cloud. Mr. Rollén gave an update, saying that Shell’s SmartPlant Cloud installation is now hosting its first project. “So far,” he said, “so good”.
  • Hexagon reports that MT revenue was flat year/year in Europe, even as construction and the automotive sector slowed from Q4. The UK, Germany and France reported growth while revenue from Spain and Italy declined*. Revenue from Western Europe was €180 million and from the rest of Europe, the Middle East and Africa, €51 million. Mr. Rollén said that Eastern Europe reported record growth for the quarter even with a weak finish due to the turmoil in the Crimea.
  • The Americas reported 6% organic growth in revenue in Q1.Hexagon saw growth in North America in automotive, aerospace and general engineering. First time in 5 consecutive quarters saw growth from the US defense segment.
  • Harsh weather caused construction delays in North America, which slowed growth in the region. Even so, Hexagon says it continues to see a recovery in the US construction sector while strong demand South America, notably Brazil, Chile and Venezuela, drove the region to double-digit growth. Revenue from North America was €157 million; from South America, €29 million.
  • Increased demand across all businesses, especially energy, automotive and aerospace, and in Japan, Korea, South East Asia and India, led to 13% organic revenue growth in Asia. China reported 5% organic revenue growth on favorable demand in the electronics, automotive, aerospace, power and energy markets. Revenue from China was €87 million; from the rest of Asia, €76 million.

Mr. Rollén laid out an “ugly fish” scenario a couple of years ago, when he said that Hexagon would consider doing a larger acquisition to boost growth, if organic growth wasn’t strong enough to meet the company’s objectives for 2015 and beyond. Investors asked, but Mr. Rollén wasn’t budging on specifics — but he didn’t rule out a larger deal in the near future.

Hexagon doesn’t give specific guidance per quarter,  but analyst consensus for Q2 is revenue of €647 million, an increase of 2%. For the year, consensus is €2.54 billion.

* Hexagon actually said “negative growth” …

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