Hexagon’s Q1 shows industry and geo pockets, both good & bad

May 10, 2016 | Hot Topics

Sometimes, being a conglomerate is a good thing and sometimes … not so much. It’s good when a diverse offering lets a company balance out slow industries with ones that are still growing, or hot geos with cold ones. Hexagon today reported Q1 revenues of €724 million, a tad below expectations, with organic revenue growth of 2%. That sounds OK, but is actually a deceleration from 3% in Q4 and 5% in Q3. What’s a CEO to do? Hexagon’s Ola Rollén said that he thinks Hexagon is in a trough and that the company should “return to somewhat stronger growth rates later in the year as a result of new product launches and regional initiatives.”

The details:

  • Total revenue was €724 million, up 3% as reported with organic constant currency growth of 2%. Hexagon estimates that currency movements cost the company 1% or so of growth in Q1
  • The company gives total revenue by geo as well as geo color by division, but on the total company view what was striking is that revenue from South America was cut in half in Q1 when compared to Q1 2015 — it went from 4% to 2% so not a huge impact, but a stark reminder that the political and economic climate in countries like Brazil and Venezuela has global ripple effects. Hexagon reports that revenue there was down 23% year/year. Contrast that with Russia, where Hexagon reports a continued recovery and strong growth of 54% (on a small base) — not at all what we’re hearing from other software suppliers. Mr. Rollén also said that a 23% contraction in revenue from the Middle East “shaved 1% of organic sales from the entire Hexagon group”. He sees this as due not a decline in the power and energy business (so PP&M), but in stalled infrastructure and construction projects that result from budget cuts due to weak sentiment in the region
  • By line of business,  Industrial Enterprise Solutions (IES) reported revenue of €355 million, up 1%. The Manufacturing Intelligence business reported that revenue was up 1%, with strength in aerospace but sluggishness in electronics
  • PP&M revenue was “good”, up 1% “despite turmoil in oil & gas” — recall that while PP&M gets perhaps 50% of revenue from the sector, the majority of that comes from on-land projects, so not the risky projects that the oil companies have cancelled or stalled until the price of oil rises again — and “negative growth in China” for all of Hexagon’s energy-related offerings. Mr. Rollén said that PP&M’s margins are improving as customers convert from legacy products to Smart Plant; we’re still seeing the stickiness of legacy CAD products, especially in oil and gas. Mr. Rollén said that Ecosys, a recent acquisition, is doing “OK but not as good as it could be”; PP&M sales teams are introducing to broader, global PP&M customer base with good uptake
  • For IES as a whole, revenue from Asia was up 5%, on strength in China and Japan and from the automotive, aerospace and manufacturing industries. Revenue from EMEA was up 1%, on growth in Eastern Europe and Russia; revenue from Western Europe was flat. Finally, revenue from the Americas was down 4% on weakness in the American manufacturing industry while the process industries were solid
  • Geospatial Enterprise Solutions (GES) revenue was €369 million, up 4% organically
  • Within that umbrella grouping, Geosystems grew 5% organically, mainly due to strong growth in infrastructure and construction in Asian and North America. Safety & Infrastructure  revenue as up 6% on an organic basis and revenue from the Positioning  business was down 3% on weaker demand from offshore-related business. (You may recall that Positioning is a major player in precise global locating for offshore oil facilities; with less activity there, this decline isn’t unexpected.)
  • Within GES, revenue from EMEA was up 3%; from Asia, up 6% as China recorded double-digit growth due to infrastructure projects and Hexagon’s Digital City initiative); and from the Americas, up 5%, as strong demand in US construction was offset by weakness in Brazil. (All % reflect organic, constant currency data unless otherwise noted)

Hexagon closed 5 acquisitions in Q1, the most interesting of which was FTI, Forming Technologies Inc. Mr. Rollén said that FTI’s manufacturing software solutions designed bridge CAD and CAM with CAE — customers simulate and validate designs before production in order to reduce material, time and labor costs. He sees FTI being the start of a closed feedback loop, that will combine FTI’s CAE solutions with the Hexagon’s Vero CAM and the Manufacturing Intelligence metrology solutions. My interpretation of his remarks: a sheetmetal CAD design (perhaps from Vero’s built-in CAD but likelier from a third party) is analyzed by FTI’s solution to predict cost and feasibility. At some point, a prototype form is built and a test run is stamped; those parts are measured and the cycle begins again. This loop is hugely important, and many of the most advanced companies already do something like this — perhaps more will be inclined to do so if all of the pieces come from a single vendor. There are many other manufacturing processes besides stamping, so it would be reasonable to presume future acquisitions to fill out this part of the feedback loop.

Hexagon doesn’t give guidance, but Mr. Rollén did say that PP&M, which reported 1% cc growth in Q1, has bottomed out and has a “bright forecast for the remainder of the year”. He did caution that this may be hard to see as Hexagon closed two very large orders in Q2 2015 and Q3 2015 that will be hard to repeat this year. But growth should be visible from “Q4 into 2017”.

So, many moving parts, some boosting the totals while others don’t — but, in all, it wasn’t a bad quarter. Investors seem to agree, holding the share price more or less level.