Hexagon’s Q3 was flat year/year on an organic, constant currency basis!!

Is that awesome? No, but in the current economy, we’ll take it.

Hexagon reported results today that continue the theme of less-bad-than-before, though not yet upward trending. Total revenue in Q3 was €940 million, flat on an organic and constant currency basis with the year-ago quarter, after 5 quarters of declines. More details below, but the economic reopening and return to a more normal manufacturing sector in China was the biggest contributor in Q3, with increases in revenue in the Geospatial division partially offsetting weakness in Manufacturing Intelligence. Hexagon says that its automotive, aerospace, and oil and gas sectors continue to be weak.

CEO Ola Rollén pointed out that this was the company’s best-ever Q3 in terms of earnings and profitability: “We’ve been able to navigate a challenging environment with great resilience – adapting the cost structure by implementing short-term and long-term cost savings measures and at the same time expanding our gross margin through a richer product mix. We saw a robust sequential improvement in sales growth, supported by a broad-based recovery in China and a solid development in our geospatial segments. What we call the “two-speed world” has never been as evident as it is today, where our newer automation applications in construction, mining, public safety, and agriculture are growing, while certain sectors such as traditional automotive, aerospace, and oil and gas are still facing a tough demand situation. The increased focus on a low carbon economy is also apparent, where we see our applications within renewable energy, electric vehicles, and rail gaining traction.”

Let’s get to the details — and, since it’s such a diverse company, I’m going to focus on the details for each part of the business rather than on the whole:

• Total revenue of €940 million was down 2% as reported and flat on an organic, constant currency (cc) basis
• Geospatial Enterprise Solutions (GES) revenue was €487 million, up 3% (up 6% cc organic)
• Within that GES total, Geosystems revenue was up 5% cc organic, on strong demand in China and South America. By end-industry, surveying and mining reported solid growth. The Safety & Infrastructure business reported revenue up 9% cc organic, on growth in public safety and mapping. Finally, revenue from the Autonomy & Positioning business was up 6% cc organic, driven by demand from the defense and agriculture sectors while weak demand from the automotive and marine industries dragged down growth
• By geo in GES, revenue was up 8% cc organic in the Americas, up 3% in EMEA, and up 8% in Asia. Again, Mr. Rollén singled out China, saying revenue there (in GES) was up +35%, driven by demand in infrastructure and construction. Revenue from Western Europe was up 1%, as weaker demand in positioning (likely automotive, though he didn’t say) offset growth in surveying and public safety
• Industrial Enterprise Solutions (IES) didn’t have as good a quarter. Revenue was down 6% as reported to €453 million (down 5% cc organic).
• Within IES, Manufacturing Intelligence revenue declined 4%, due to weak demand in automotive and aerospace — though, again, China reported solid organic growth due to a gradual recovery in electronics and general manufacturing. PPM revenue was down 7% because a good quarter a year ago makes the math look bad, and because the continuing challenging oil and gas market. Mr. Rollén did say that PPM saw continued improvement in the AEC software portfolio. No comments on MSC or its acquisitions,
• By geo in IES, revenue was down 14% cc organic in the Americas, down 6% in EMEA but up 4% in Asia, with China reporting organic cc revenue up 13% driven by (again) that recovery in electronics and general manufacturing. Revenue from Western Europe was down 9% cc organic due to weakness in the automotive and aerospace sectors, and tough comparables to Q3 2019 in the power and energy segment. Revenue from North America was down 16% cc organic due to weakness in all segments
• And, in general, Hexagon said “Software recorded organic growth whilst hardware declined“. Mr. Rollén said that software (license, subscriptions, and maintenance) now accounts for about 40% of total revenue and that subscriptions are growing faster than traditional license models.

One of the things we often underrate is just how acquisitive Hexagon is. In its Q3 report, Hexagon lists the following as having been closed in the first 9 months of 2020:

• Blast Movement Technology, a developer of blast movement monitoring and analysis solutions for open-pit mines
• Geopraevent AG, a provider of natural hazard monitoring and alarm systems
• CAEfatigue Limited, a provider of mechanical fatigue simulation solutions
• Alas Ing SA, a distributor of Hexagon PPM solutions
• COWI’s mapping business, a provider airborne surveying and spatial data processing
• Romax Technology, a provider of Computer Aided Engineering (CAE) software
• Tactiaware, a provider of LiDAR-based 3D surveillance software
• MDE, a distributor of solutions for operations management and optimization

I wrote about some of these when they were announced, but it’s easy to lose the overall picture — and it’s also easy to assume that the current difficulties have slowed down this facet of Hexagon’s strategy. Clearly not. No one of them is expected to be material to revenue but added together …. An investor asked if this pace was enough — Mr. Rollén suggested that we all wait and see.

During the Q&A, Mr. Rollén told investors that he doesn’t see a rapid recovery of the end-industries that struggled in Q3: oil and gas, traditional automotive, aerospace. He believes that PPM needs to diversify into AEC, for example, and that Hexagon, in general, needs to push harder into new areas like electric vehicles, solar and wind power — basically, grow into new sectors that can pick up the slack while we all see what kind of a recovery traditional aerospace will see. Oil and gas is 30% of IES’s business today–so the diversification has already begun.

No real comments on Q4, except that Mr. Rollén expects it to continue the way that Q3 ended — pockets of recovery, growing interest in new products, greater interest in Heagon’s products and services September than in August, software continuing to grow in importance in the overall revenue picture … but he made no predictions or forecasts.