Hexagon AB, the parent company of Intergraph, Leica and other brands, reported results for the March quarter earlier this week. CEO Ola Rollén characterized the group’s overall performance as a good start to the year, but reflecting uneven performance across regions and product lines: ”Regionally, it’s a mixed message with double digit growth in North and South America, and slower, single digit growth in EMEA and Asia … The revenue synergy initiatives involving Intergraph [and Leica] continue to progress at full speed.” This last wasn’t really covered in the earnings materials or the analyst conference call, but I hear some cool stuff will be unveiled at Hexagon 2012, the user conference next month in Las Vegas.
The earnings details:
- Total revenue was €566 million, up 9% as reported and up 6% on a constant currency basis.
- Technology segment (which includes the Intergraph and NovAtel product lines and the Sisgraph representation in Brazil) revenue was €193 million, up 3%. Intergraph PP&M revenue grew in the “strong double digits” to an all-time high for Q1, while SG&I reported “slightly negative growth”.
- Hexagon is in the process of restructuring the SG&I division as part of a program called “Get Fit”, which, in Hexagon-speak, seems to mean getting the division’s EBIT (earnings before interest and taxes, or those parts of the revenue/expenses picture that it can control) margin from 13% to 20% over the next three years. In Q1, this restructuring involved making 190 positions redundant “in an effort to reduce cost and better balance the global distribution of headcount”.
- In its end-markets, SG&I is seeing “favorable order intake but negative invoice growth”, according to Mr. Rollén, with a backlog equivalent to roughly one year’s revenue. In other words, the company is signing orders for products and services but cannot invoice, since delivery has not been made. During the Q&A portion of the earnings call, he said that this is due to a combination of technology delivery and implementation issues on SG&I’s end and customer delays. He was optimistic; Hexagon thinks Q1 was the last quarter in which such delays will be seen.
- PP&I seems to be steaming along. Mr. Rollén said that strong demand in the development of the Canadian olisands helped propel Intergraph PP&M to strong double digit growth. One Chinese power order did slip out of Q1, but was closed in April.
- Geosystems reported revenue of €188 million, down 1% from last year, as comparables continues to be difficult because of delays high-speed rail projects in China. Hexagon doesn’t see this work resuming any time soon, and is focusing on a return to growth in the Geosystems business that is not built on China’s high-speed rail. Rather, Mr. Rollén sees growth coming from machine controls, which saw “strong double digit” growth in Q1 in Europe and has the potential for significant growth as Hexagon works to broaden distribution outside Europe. Infrastructure projects in North America could not mitigate the effects of the lost revenue from China.
- Metrology reported revenue of €167 million, up 19%. This business had “another record quarter, with strong demand in the automotive and aerospace markets”, said Mr. Rollén. In the Americas, power, energy, manufacturing and medical technologies were the primary growth drivers for Metrology in Q1.
On a regional basis, results were decidedly mixed. Mr. Rollén cited the ongoing recovery in North America and northern parts of Western Europe as core themes, but with pockets of weakness and demand throughout. Revenue from EMEA was €232 million, up 1%. Sales in Q1 were driven by demand for measurement solutions for automotive, aerospace and manufacturing and by demand for engineering, construction and data management software used in power and process industries. In general, however, construction-related activities and government-related sales remained weak. Within EMEA, Southern Europe was weak; Northern and Eastern Europe, Russia and the Middle East were, to varying degrees, stronger.
Revenue from the Americas was €187 million, up 17% in constant currency, on strong growth in all end-markets except defense and security. Mr. Rollén sees many opportunities in South America, including “the exploration and production of Brazil’s massive offshore oil reserves” and projects for the 2014 World Cup and the 2016 Olympics.
Revenue from Asia was up 2% in constant currency in the first quarter, to €147 million. The slow growth reflects the “lack of activity” in the Chinese high-speed rail project as well as a general slowdown in the construction sector there and a large mining order from India that was recorded in Q1 2011 but not replaced in Q1 2012. Excluding that high-speed rail project, organic revenue growth in China was 7% in Q1 2012.
Mr. Rollén also set expectations for R&D expenditure going forward, saying that expensed plus capitalized R&D “shouldn’t be more than 13% in 2012”. The company has added 100 people to its India R&D center since December, bringing the total to “slightly shy of 1000, that could expand to 1500”. Hexagon isn’t a pureplay software company, so comparisons aren’t exactly fair, but AVEVA invested 16% of revenue in R&D in fiscal 2011 and Bentley says it invests around 20% of revenue every year. Investors want a lower level of investment; customers want more. Hard balance to strike.
I was at Siemens’ user conference when the earnings release came out and first read about the results in the financial media. I usually don’t do that, since I want my opinions to be uninfluenced, but was surprised at the different story leads. Reuters* led with “Measurement technology group Hexagon AB painted an upbeat picture of growth this year after a firming U.S. recovery lifted sales to a record in the first quarter, outshining lacklustre activity in both Asia and Europe.” Dow Jones*, meanwhile, led with “Swedish measurement technology group Hexagon AB (HEXA-B.SK) said Wednesday growth in its Chinese business will gradually recover, as the company posted a higher first-quarter net profit helped by double-digit growth in North and South America.”
Which is it? “Upbeat” or “gradual recovery”? If I were an investor, I would be eager to read a variety of different media to get a rounded picture and multiple perspectives. I don’t think Reuters and Dow Jones have any particular slant they want to promote; they just selected different factoids for their lead statements.
My take? In its own way, Hexagon is a portfolio company like Autodesk, with many brands and a global reach to smooth out economic bumps. AEC not doing so well? Defense can pick up the slack. China not so hot? Try North America. Hexagon’s management team (not only Mr. Rollén, though he is very clearly the “front man”) is doing a good job absorbing acquisitions and trying to maximize opportunities where his brands can work together to make a sale — but without diluting each brand’s unique features for their own end-markets. i doubt that the Hexagon team looks at its strategy on anything close to a quarter-by-quarter basis; I would imagine 5 and 10-year plans are more their style. On that basis, both “gradual recovery” and the more immediate “upbeat” come into play. Immediate results and reasonable guidance with little uncertainty make investors happy. Most customers take the longer view, and want a partner for their long project cycles.
True to form, Hexagon’s Q1 results beat the Swedish analyst consensus for total revenue, EBIT and a couple of other metrics, yet the share price fell anyway. The mixed economic picture and problems at SG&I were apparently enough to push investors into sell mode. I guess they’re not interested in the long view.
[*Apologies – I get to these news stories via a fee-based service that I cannot link to.]