Hexagon’s Q2 was better than expected — and it adds TACTICAWARE 3D LIDAR to its portfolio

Aug 3, 2020 | Hot Topics

Hexagon reported results a few weeks ago and I am just now getting to a quick blog about it — will work this week to catch up on ALL the earnings – yikes — and they were pretty much as expected, especially since the company has preannounced on July 13. The real news was in expectations for the rest of the year.

The details:

  • Total revenue in Q2 was €897 million, down 8% as reported and down 10% on an organic constant currency basis (cc). While that’s not awesome on the face of it, it IS better than expected — analyst had modeled a cc decline of 16%
  • During the earnings call, CEO Ola Rollén said that April was the low point of the quarter and that some regions had returned to year/year growth by June. China, which locked down first, reports growth rates exceeding 8% year/year, with modest growth across all verticals except automotive and aerospace/defense, which continue to lag
  • By segment, Industrial Enterprise Solutions (IES) reported a decline of 10% cc while Geospatial Enterprise Solutions (GES) reported a 9% cc decline — though down, both were better than expected
  • GES reported revenue of €458 million, down 8% as reported and down 9% cc. The regional mix followed global shutdowns ad reopenings: revenue was UP 3% cc in Asia (see below for comments), down 7% in the Americas, and down 16% in EMEA. Much of the growth in Asia in Q2 was in China, up 30% cc, “driven by strong growth in infrastructure and construction” — but Hexagon says Japan and South Korea also saw solid organic growth. North America reported a “high single-digit decline, mainly impacted by government restrictions affecting the construction market”. South America, on the other hand, recorded high single-digit organic growth, on “strong demand for mining and public safety solutions”. Western Europe recorded a 20% cc drop, “with weakness in all segments except for public safety which recorded strong growth. Russia, the Middle East and Africa recorded favorable organic growth”
  • Within GES, Geosystems reported a 16% cc decline, as “government restrictions related to the COVID-19 pandemic, especially in Europe and the US” halted projects and hampered sales efforts. Safety & Infrastructure had a strong quarter, with revenue up 14$ cc, but Autonomy & Positioning reported an 8% cc drop
  • IES reported revenue of €439 million, down 8% as reported, and down10% cc. By geo, cc revenue was down 4% in Asia, down 12% in the Americas, and down 22% in EMEA. But, again China’s earliest reopening led to 11% cc growth, led by “a recovery in the electronics segment and a solid development in the power and energy segment.” In IES, revenue from Japan was up “low single-digits, while revenue from South Korea, India, and SouthEastern Asia declined”. Revenue from North America was down 12% cc, “hampered by a weak development in manufacturing even as “the power and energy segment recorded favorable growth. Revenue from South America was down in the double-digits cc, while Western Europe reported a 21% cc decline, also on weakness in the manufacturing segment even as the power and energy segment recorded solid growth. Eastern Europe, Russia, the Middle East and Africa also recorded double-digit declines
  • Within IES, Manufacturing Intelligence revenue was down 14% cc, “largely driven by the declines in Europe and the US related to the COVID-19 pandemic. China, however, recorded solid organic growth, driven by a recovery in the electronics segment”
  • Software continues to be a bright spot, as revenue from PPM was up 1% cc, “supported by strong development in the asset information management and AEC (architect, engineering and construction) design software portfolios”.

So what does this all mean? The overall decline of 10%cc is, just as we expected, regionaL With minor bumps for individual industrial dominance of a region and the timing of shutdowns/reopenings, Revenue was up 4% cc in Asia, down 9% cc in the Americas and down 19% cc in EMEA. China, which shut down inQ1 and reopened in Q2 (only to shut again in parts now, in Q3), recorded 16% cc for Q2, “mainly driven by strong growth in infrastructure and construction and a recovery in the electronics segment. In such a mixed environment, with each geo and country on its own rollercoaster ride, we have to come back to (1) diversification in end-markets matters, (2) geographic diversity helps a LOT, and (3), software rules. You cal sell software (nowadays) in a much lower-touch way than other types of products and, in many cases, we’re going to seel accelerating demand for solutions that let workers do their jobs remotely, while economies are shut.

What does all of that mean? That Hexagon’s cash flow from operations was UP even though revenue declined. Yes, part of the increase was from cost-saving measures (less cash outflow), but it’s also due to product shifts: more software at higher margins means more cash. In answering an investor question about the software business, Mr. Rollén said that Hexagon has three types of offerings: “pure industrial software, which is SI, PPM, Geospatial products, and so on. Then we have a combined offering where we embed software products into hardware, and then we have pure hardware. And the pure software business amounted to €337 million out of the €897 million. [That’s] almost 40%. And that grew in the quarter, and I would say that this is just my guess from top of my head, but I would say 80% of that was recurring revenue.” Later he added, “recorded growth in the pure software portfolio was around 5%. So I think organic, it was slightly lower because we had some small acquisitions, but it was stronger than the 1% we report in PP&M” AND he said “Our OnCall product, the new dispatch software, is having a small success in the quarter. I also think MSC did well given the market performance. And I think that in our AEC segment, which is reported [in] PP&M, we see solid growth.”That’s the most detail we’ve ever gotten from Hexagon — and highlights how much more diverse the software part of the business is today. It used to be almost all PP&M and Geomedia … I hope Hexagon keeps up this level of disclosure.

Mr. Rollén’s also told investors that he saw strengthening across the portfolio towards the end of the quarter – and that the trough may be behind them. He said, “We do not expect organic growth to get worse. We might be wrong, but this is the view we’ve got right now. We believe our organic growth will improve quarter-on-quarter when we do return to growth — now it’s all about the road to recovery and how quickly the global economy can recover from where we are right now.”

As you know, Hexagon doesn’t give guidance but the investment analyst data I have access to revenue of €3760 or so for 2020, down 3% to 4% for the year. Not bad for a year that started so inauspiciously.

And then, earlier today, Hexagon announced the acquisition of TACTICAWARE, maker of LiDAR-based 3D surveillance software that’s used to monitor critical infrastructure and buildings such as power plants and airports, in addition to commercial and residential properties. I don’t know much about security LIDAR, focusing more on its use in AEC projects, and found this fascinating: TACTICAWARE’s flagship solution, called Accur8vision, uses volumetric, 3D modeling to determine an intruder’s exact location, size, speed and movement trajectory, which can then be visualized in a virtual model of the area under surveillance. When I last tuned into the security use of LIDAR and photogrammetry, elaborate models had to be built of a space to triangulate an intruder’s height and path, comparing both to objects in the space. Sort of, “she’s taller than the plant but shorter than the door frame”. This sounds both more efficient and a little bit CSI-ish, as TV comes to real life.

Details of the acquisition were not disclosed but TACTICAWARE will join Hexagon’s Geosystems division.