Hexagon: “extraordinary times” led to Q1 down 7%, cost-cutting plan
Hexagon reported FQ1 2020 results last week that really reflect the slowdown CEO Ola Rollén noted on his February call about the 2019 results and reinforced with the announcement that the company would defer a decision on paying a dividend until more of 2020 was in the books.
First, the details:
- Total revenue was €890 million, down 3% as reported and down 7% on an organic basis. Across the many facets of its business, Hexagon saw a (not surprising) slowdown in demand as Covid-19 caused production disturbances, and government-mandated shutdowns
- Even so, Mr. Rollén noted that there was solid organic growth across the software portfolios, singling out PPM (up 8%) and Safety & Infrastructure (up 24%), which he said grew in the double digits in EMEA
- By geo, revenue was up 6% in the Americas, down 6% in EMEA, and down 18% in Asia (down a staggering 40% in China). Excluding China and western Europe, the rest of the world recorded 4% organic growth. China dropped from 15% of sales in Q1 2019 to 8% in Q1 2020, completely shifting Hexagon’s revenue map; North America in Q1 2020, made up 34% of total revenue taking share, if you will, from Europe and China. Hexagon used arrows and colors to show regional growth rates; in Q1 2020, only South America’s arrow was green, signifying growth of over 8% — but since South America represents only 4% of total sales, it didn’t move the overall needle at all
- Mr. Rollén’s remarks about geo performance basically detailed how the virus moved around the world, with China shutting down first and then starting to reopen in March, leading to a positive book-to-bill ratio for the quarter, meaning sales booked to be billed (and paid) in future quarters — a good thing. South Korea and Japan, he said, recovered quickly and reported “solid organic growth”
- By division, Geospatial Enterprise Solutions (GES) revenue was €454 million, down 4% organically. By region, GES organic revenue was up 6% in the Americas, down 6% in EMEA, and down 18% in Asia
- With GES, revenue from the Geosystems business was down 11% as the weakness in some construction markets and the government restrictions due to Covid-19 hindered growth
- Safety & Infrastructure recorded strong growth of 24% as a result of new contract wins and continued positive momentum for the recently launched OnCall platform
- Positioning Intelligence was down -1% due to weaker demand in automotive and marine, while defense and agriculture recorded solid demand
- Industrial Enterprise Solutions (IES) revenue was €436 million, down 9% organically, with revenue up 5% in the Americas, down 6% in EMEA, and down22% in Asia
- In IES, revenue from Manufacturing Intelligence was down 14%, largely reflecting the decline in China offset by “solid growth” in North America. driven by sales to aerospace. The software portfolio was described as “resilient“
- PPM grew 8% due to “a strong development in the design and asset management portfolios in AEC and process industries”
- Mr. Rollen specifically called out BrisCAD and EcoSys as performing well and later added that “all our pure software businesses in SI and PPM operated very close to normal” in Q1.
Along with Q1 results, Hexagon announced a cost savings program that will result in annualized cost savings of €125 million to €150m by the end of 2020. Some of these are short-term, such as short work week, furloughs, and reductions in discretionary spend — involving, Mr. Rollén said, about 60% of Hexagon’s workforce. He sees Covid-19 as a long-term stressor and so has started to move people from underperforming to new business opportunities, merging offices and reducing staffing levels, though Hexagon gave no more details about how many individuals would be affected.
OK. So. What does it all mean? As we all expected, China slowed early in the quarter and the rest of the world followed as Covid-19 moved across the planet. Hexagon has greater exposure to physical products than is typical in our PLMish world because it supplies measurement devices, total stations, airborne sensors, and the like to AEC and manufacturing companies. That stuff needs to be made, sold, and shipped — hard to do when the manufacturing capabilities in China are shuttered. Also expected: software businesses did better than hardware businesses. And most surprising: a cost-control plan to keep expenses in line with lowered revenue expectations.
What was not expected? That PPM did so well. When the price of oil goes down as drastically as it did over this period, one could reasonably expect PPM’s oil-related sales to decline. That strength could be related to subscriptions, to PPM’s focus on downstream refining rather than upstream exploration, or specific customers’ digitalization efforts. We’ll need to watch that.
Hexagon doesn’t give forecasts and Mr. Rollén didn’t want to play when analysts tried to tease out comments that would lead them to a forecast. All he would say is that “we have to believe that there’s a recovery in the second half” and that he’s seen a V-shaped recovery so far in China but didn’t want to extrapolate to the rest of the world.
Towards the end of the call, Mr. Rollén was asked how Covid-19 compares to the slowdown of 2009/2010, when Hexagon’s revenue dropped 20%. Mr. Rollén said that he’s “looked at the product lines that we had in 2009, and how they faired in the first quarter. And we see a similar pattern. But for Hexagon we see that everything we’ve added after 2009 was much more resilient and actually grew — recorded growth 12% in the quarter.”