We’ve recently heard from three of the main publicly traded players in infrastructure software and this week we start hearing from some of their main customers. It seems, therefore, like a good time to review what’s being said about the climate for software spend on the technologies used to design, build and maintain the world’s power plants, process manufacturing facilities, roads, bridges and railways. We hear from Autodesk next week and AVEVA in May. Bentley Systems is privately-held but will likely speak about 2012 sometime in March or April.
Hexagon AB reported decent results for its fourth quarter –slightly below analyst consensus– and said that it is “cautiously optimistic about 2013 following good start in January.” The details:
- Total revenue in Q4 was €629 million, up 6% as reported and up 4% on a constant currency, organic basis.
- Hexagon operates in three divisions, Geosystems (Leica and Z/I), Metrology (Leica, Brown & Sharpe and other brands) and Technology (primarily Intergraph SG&I and PPM).
- Geosystems revenue was flat year/year in Q4 2012, at €221 million.
- Metrology, which coincidentally also had revenue of €221 million reported organic, constant currency growth of 6%, “in spite of tough comparison numbers from 2011”.
- The Technology division reported revenue of 228 million , up 7% in organic, constant currencies. Intergraph SG&I is still working to get back on track and “prioritized profitability over growth in the quarter and reached a margin in line with company average”. The PP&M division “continued to outgrow its underlying market”.
- CEO Ola Rollén said that, in general, customer demand in the engineering sector improved in Europe in Q4 when compared to Q3 and that growth in the Americas came from a recovery in the U.S. construction sector coupled with strong demand in South America for its PP&M solutions. Demand in Asia also accelerated, with China growing in strong double digits.
- Specifically with regards to infrastructure in Q4, Mr. Rollén reports that revenue from power/energy was up in Western Europe, as demand for enterprise engineering, construction and data management software “remained high” in power and process industries. Geosystems has seen a significant double-digit downturn in Southern Europe because of a decline in EU-funded projects. Mr. Rollén believes that this has bottomed out and that growth might resume with a combination of new projects and new product releases.
- In the Americas, demand in the North primarily came from a recovery in the residential construction sector. In the South America, significant growth came from Intergraph (presumably PP&M) in Brazil even though construction projects have been delayed –as Mr. Rollén said, Intergraph PP&M operates primarily in design– while surveying and construction are “coming back” in the region as a whole.
- China saw double digit growth across all brands, especially in infrastructure-related businesses including rail (but not high-speed). Mr. Rollén said that in China, surveying, construction and power/energy are “recovering” while in the rest of Asia, the company reports seeing strong demand in surveying, and construction. India, Japan and Korea reported strong growth, although Mr. Rollén didn’t specify that it was in infrastructure specifically.
One analyst on the call asked about Integraph’s competitors, as Trimble and Autodesk have acquired smaller companies that could be considered to compete. Mr. Rollén said that he saw little to no change as a result of these combinations, and that Hexagon maintains a first-mover advantage because it can combine technologies like the Leica TruView with Intergraph PP&M SmartPlant Enterprise to create photorealistic representations of plant assets.
Even though many indicators are looking positive, Mr. Rollén did not feel the time was right to predict 2013 but told analysts that “there is no reason to presume the arrow will point down.” Analysts took this to mean that there will be growth of about 5% in 2013, coming to a consensus revenue forecast of about €2.508 billion.
Trimble is also a very diverse company, but more of its businesses are directly tied to infrastructure than is the case with Hexagon, although things are skewed a bit by its sales to agribusiness. Trimble has also grown far more by acquisition, making its core results harder to tease out.
Overall, the results for Q4 and 2012 were good and, as CEO Steve Berglund put it, reflected “an improving picture in residential and commercial production in the U.S. and continued macro uncertainties in both Europe and the U.S. … Revenue growth for total 2012 was 24%, which consisted of organic growth at 15% measured with constant exchange rates and 9% attributable to the combination of acquisitions and exchange rate effects.” The details for Q4, 2012:
- Total revenue was $516 million, 18% from last year.
- Trimble operates in four divisions, Engineering & Construction, which makes up over half of the company’s revenue; Field Solutions, which is just over a quarter and the much smaller Mobile Solutions (12%) and Advanced Devices (7%) businesses.
- Engineering & Construction focuses on the “connected construction site” and includes surveying equipment as well as the Tekla BIM business. Q4 2012 E&C revenue was $269 million, up 13% including acquisitions. Growth in E&C revenue came primarily from sales of heavy and highway and building construction solutions, as well as acquisitions. Mr. Berglund said that “software revenue trends in the sector were positive, [while] surveyors, who tend to be sensitive to headline effects have a propensity to postpone investments when uncertainty increases.” But Q4 revenue still came in as planned, so “heavy civil and machine control were points of strength”.
- Field Solutions revenue in Q4 was $108 million, up 13% on strong demand from the agricultural sector. Mr. Berglund said that “GIS was relatively flat for the year and our new electrical utility vertical provided significant percentage growth partly through acquisition.”
- Mobile Solutions Q4 revenue was $105 million, up 38% due primarily to higher subscription revenue and the impact of the recent trucking solutions acquisitions. TMW contributed about $15 million for the quarter.
- Advanced Devices reported Q4 revenue of $34 million, up 34% due to stronger sales of embedded devices and timing devices.
- On a geo basis, Mr. Berglund said that Trimble saw investment deferrals in the US in Q4, as companies sought “clarity on tax policy, funding levels and a general resolution of the budgetary impasse.” He said that it is not clear when this will be resolved, but sees it as a short-term, localized effect.
- Overall, said CFO Raj Bahri, 55% of Q4 revenue came from North America, 22% from Europe, 16% from Asia-Pacific and 8% from rest of the world. Q4 revenue was up 25% in North America; up 12% in Asia-Pacific; up 12% in Europe and up 9% in rest of the world.
- Trimble is seeing an upswing in commercial and residential development in the US and is expecting an improving environment during 2013. But Mr. Berglund was cautious, saying that “it’s hard to really understand how strong, how pervasive it might be and I think it’s still being held hostage to kind of macro events as well”.
In a bit of teasing news for Trimble customers, Mr. Berglund said that “we have launched a project to integrate our various software capabilities around a common platform, which will place our concept of the constructible model at the center of the design-build-operate continuum. Although the project is multi-year, we expect first releases in 2013.”
Mr. Berglund also address the willingness and ability of contractors to invest in new technologies, saying that “the appetite for investment overall, short-term considerations aside, is strong. If you look at construction we’re selling productivity – there is a strong and growing appetite to invest in technology to capture the ROIs in construction. Those contractors that are able and willing to invest in technology will get the upper hand competitively over time.”
Trimble confounded many people when it purchased SketchUp from Google a couple of years ago. Mr. Berglund spoke about Trimble’s offering for the construction industry saying that “The acquisitions of SketchUp, Plancal and Tekla, have all been aimed at the goal of what we’re calling constructible model, which to us is something different than the conceptual models. A constructible model in our view is a lot more than lines and vectors and angles and that sort of thing, but actually encompasses a much richer information solution. Everything that’s being installed on the construction site has a history. And so the solution can essentially reach out and capture a history as well as just the current as-designed plan.”
Trimble does give outlook, and guided investors to Q1 2013 revenue of $575 million to $580 million. Said Mr. Berglund, “Our outlook assumes modest improvements in the U.S. residential and commercial construction markets relative to 2012 … We are assuming Europe will continue to limp along in its current state and we therefore remain cautious about what the continent can deliver … The most likely meaningful immediate sources of upside would be the Nordic countries, Germany, the U.K. and Netherlands. We anticipate that rest of the world beyond Europe and the U.S. will continue to provide a strong platform for ongoing growth.”
Finally, Nemetschek, the least complicated of these three companies serving infrastructure designers, builders and operators. Nemetschek reported preliminary total revenue of €175 million for 2012, slightly below analyst expectations but still up 7% as reported. More details about 2012 will come out on March 28, but the company has issued guidance for 2013 which is based on performance so far this year: the company sees strong growth prospects in Asia, North and South America, which lead it to a revenue forecast of €185 million to €190 million in 2013.
Bottom line, what does it all mean? There are pockets of strength both on a geographic and vertical basis — nervous buyers and uncertain public spending balanced by projects that just have to happen to support expanding economies and their demand for resources. Trimble’s Mr. Berglund is right: any technology (hardware, software or a combination of the two) that gives a competitive advantage will at least be considered, and at best, wholeheartedly embraced by design firms, construction contractors and asset operators.
Infrastructure design software sellers are bullish on the future. Tonight we start hearing from their customers.