Hexagon rides diversification wave, Q2 up 5%cc

Hexagon, the parent company of Intergraph, Leica, Vero and other brands you know, reported Q2 revenue of €781 million, up 23% as reported (hold on — the devil is in the details) and a tad ahead of expectations. On an organic, constant currency basis (cc), revenue was up 5% due mainly to 10% cc growth in Intergraph PP&M. The PP&M numbers come as a bit of a relief, since the news from oil and gas contractors and owners hasn’t been good for the last year or so, and many PP&M customers talk of retrenching as oil projects are postponed or cancelled. The details:

• Total revenue was €780.7 million, up 23% as reported and up 5% cc and using a comparable group structure. Of the 23% reported growth rate, 14% was currency related, and 4% is related to acquisitions. We don’t know what portion of that 4% came from Vero.
• By business line, revenue from the Industrial Enterprise Solutions (IES) was up 9% cc to €395 million. We don’t have numbers, but revenue from Metrology was up 8% cc on growth in W Europe and China while Intergraph PP&M was up 10% cc because of a €7 million perpetual license deal; without this, PP&M would have reported 5%ish cc organic growth. IES revenue from EMEA was up 12% cc; Americas, up 6% cc; Asia, up 9% cc.
• Revenue from the Geospatial Enterprise Solutions (GES) business was up 1% cc to €386 million. Within this total, Geosystems grew 2%, on strength in North America and Europe, hampered by Russia, China and Brazil. Intergraph SG&I grew 1% and Positioning (Novatel and Veripos) declined 1% (all cc). GES revenue from EMEA was down 1% cc; from the Americas, up 6% cc; from Asia, down 3% cc.
• Hexagon gives a broad overview of markets and regions –this slide is taken from the Q2 investor presentation– but no numbers. Still, we can learn quite a bit …
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• The percentages of total revenue are for 2014, so we can’t infer anything from them about Q2. But if we look at the geo vs end-indsutry performance, we see that
  • Surveying, the largest segment has picked up in North America and Asia, even tilting from negative to modestly positive in Asia for Q2
  • Power and energy is mixed: improving in North America but going negative in South America in Q2 due to the Petrobras crisis in Brazil
  • Electronics and manufacturing went green in Q2 (good) in Western Europe but turned downwards in the Americas. CEO Ola Rollén says this is Hexagon’s fastest growing vertical at the moment (makes sense, given the Vero acquisition).
  • Infrastructure is largely unchanged, but did flip from negative growth to more than 8% in Q2 in Asia (excluding China)
  • Safety and security (ie. Intergraph SG&I) turned red in EMEA because of Russia but is positive in Western Europe for the first time in a while. It went positive in North America and Asia (ex-China)
  • Finally, auto and aerospace seem to have picked up in Q2 in Western Europe but slowed in North and South America. Automotive also slowed in China.
• By geo, total Hexagon revenue from EMEA (excluding Wester Europe) was up 4% cc; Western Europe was up 5%; the Americas were up 6% cc and Asia was up 5% cc
• On a reported basis, revenue Western Europe was €234 million, up 19% (up 5% cc), while the rest of EMEA (ex-Western Europe) reported revenue of €63 million, down 2%. Mr. Rollén said that the “Big 5” (UK, Germany, France, Spain and Italy) grew at 9% while the Nordics were slightly slower and the rest of Western Europe reported negative growth. The Middle East, Africa and Eastern Europe grew while Russia declined 36%, especially in the geospatial products
• Revenue from North America was €242 million, up 41% as reported, and from South America, €31 million, down 2% as reported but up 4% cc. Mr. Rollén told investors that growth in NA was driven by the strong US dollar as well as expansion of the business in the US and Mexico; revenue from Canada declined because oil sands and minerals businesses have slowed. South America was dragged down by a 22% decline in Brazil, where low commodity prices in oil and minerals and political turmoil continue to pose challenges
• Revenue from Asia continues to be dominated by China, where reported revenue was €117 million, up 23% as reported but up only 2% cc driven by electronics, auto and aero; geospatial was down 24% in Q2 because of a weakening infrastructure market. The rest of Asia reported revenue of €94 million, up 23%, on strong performance in Japan, Australia and Vietnam
• Mr. Rollén said that emerging markets performed poorly in Q2: “We experienced lower growth rates in China, due to the weak construction market, and declines in Brazil and Russia.”

So. What does it all mean? A couple of things: First, diversity is good. Upstream oil (exploration and extraction) not so good? Focus on downstream refining or other verticals. Governments not releasing security-related funding in one geo? Focus on others. Hexagon’s huge product portfolio, industrial breadth and geographic reach help it weather many economic and political storms. Next, we’re not seeing much impact yet from the combining of products into what the company calls synergy or smart solutions. There are point successes, such the first sales of a Hexagon Mining solution that as combines sensing with location technology to alert drivers of potential collisions but no meaningful revenue contribution. One of the questions you’ve been asking about AVEVA plus Schneider Electric is how soon you can expect to see combined solutions; as Hexagon shows, well-integrated solutions can take years to bring to market. Finally, Hexagon’s combo platter of hardware and software means the occasional lumpy quarter and, in some cases, hardware margins. And that’s perfectly OK: 5% cc organic revenue growth with a commensurate bottom-line is respectable and, if it’s repeatable quarter in and quarter out, will attract a certain type of investor. It’s not Google or some other high flyer, but not everything can or should be. PP&M continues to be a terrific acquisition. During the investor Q&A, Mr. Rollén was asked if the problems in oil and gas, globally, plus PP&M’s good Q4 2014 could cause the division to report negative growth late in 2015. He gave a very credible answer: only 5% or 6% of the growth in Q2 2015 was from oil and gas (and the big deal was with Dow Chemical, so not oil and gas) — meaning that there is potential outside the troubled vertical. But even within oil and gas, not everything is exploration-related. PP&M has solutions that can help owner/operators (and their contractors) reduce operating costs in existing facilities, which is even more critical in a downturn of unknown duration. Mr. Rollén doesn’t give guidance but seemed to indicate that 5% cc organic growth was achievable for the year. He said that the company saw nearly 2% of growth come from new products in Q2 and that tough year/year comparables for China in Q3 and Q4 might be mitigated by improvement in Russia and continued growth in North America and Western Europe. The consensus seems to be that revenue in Q3 will be about €748 million, up 15%, and for the year, €3.06 billion, up 17% including currency effects. — The slide is reproduced from Hexagon’s Q2 results investor slide presentation, which you can find here.