Hexagon’s 2020 showed sequential improvement — should continue in 2021

Feb 23, 2021 | Hot Topics

Continuing the earnings catchup, today we tune into Hexagon, the parent company of brands such as MSC Software, Leica, and PPM (fka Intergraph PPM). In all, 2020 was a mixed year for the company, which sells quite a bit of hardware into manufacturing and other industry verticals that were affected by the shutdowns that rippled around the globe during the year.

That said, the year got progressively better, enabling the company to end with revenue down 4% as reported at €3.77 billion in 2020. The details:

  • Q4 revenue was €1.04 billion in 2020, up 1% on an organic basis with an additional 3% of acquired growth — but currency headwinds of 5% led to a net 1% decline as reported. That’s a huge improvement from the prior 6 quarters, which had zero or negative growth
  • By division, Industrial Enterprise Solutions (IES; metrology hardware, CAD/CAM, CAE, and other software) reported revenue of €509 million, down 6% as reported and down 5% in constant currencies and a comparable group structure (ccc)
  • Regionally, within IES, organic revenue from Asia was up 9%, as China reported 25% organic growth, “mainly driven by a strong broad-based recovery in manufacturing”. Japan and South Korea declined in the quarter
  • IES revenue was down 11% in EMEA as Western Europe was down 14% on an organic basis on “weakness in the automotive and aerospace segments in Germany and France and high year-on-year comparisons in the power and energy segment”. That said, Eastern Europe, the Middle East, and Africa reported solid growth
  • FInal, IES revenue was down 13% in the Americas. Revenue from North America was down 13% on an organic basis, “driven by a weak development in the aerospace and oil and gas markets. South America recorded a double-digit decline”
  • By division within IES, Manufacturing Intelligence reported revenue down 2% on an organic basis. On the plus side was a “broad-based recovery in China and software growth” — but that couldn’t offset “weak demand in the automotive and aerospace segments in Europe and Americas”. Revenue from PPM was down 12%on an organic basis, “on the back of high year-on-year comparisons and a challenging oil and gas market”. Not a separate division, but notable: Hexagon’s AEC design software portfolio reported “strong growth in the quarter”
  • But it’s not all bleak: CEO Ola Rollén said that IES bookings were positive in Q4, and are expected to continue to improve
  • Geospatial Enterprise Solutions (GES) revenue was €535 million, up 4% as reported and up 7% ccc
  • Revenue was up in all geos, with organic revenue up 21% in Asia, up 5% in EMEA, and up 3% in the Americas. In Asia, China was a standout for GES as well, with revenue up 24% organic, on demand for surveying, infrastructure, and construction solutions. South Korea and Japan also saw “strong organic growth” even as revenue from India declined. North America was flat organic growth, with strong demand in defense offset by weakness in surveying
  • By divisions within GES, Geosystems reported 8% organic growth, with solid demand for surveying solutions in Europe and South America and the abovementioned recovery in China. The mining segment reported solid growth. The Safety & Infrastructure division, which had been struggling, reported 5% organic growth, on traction for the new OnCall platform. The Autonomy & Positioning division reported 11% organic growth, with demand from defense and agriculture buyers adversely affected by weaker demand in automotive and marine

For the year, Hexagon reported total revenue of €3.76 billion, down 4% ccc and down 4% as reported.

All right. Lots of ups, downs, parts of the business, and different geos. What does it mean?

Q4 was good. Strong cost control led the company to report its highest quarterly earnings and cash flow ever; it was able to return to positive organic growth overall — even if that was spotty across the businesses. And even there, there are signs of positive progress: the Manufacturing Intelligence division improved sequentially, with its reported 2% organic decline actually improved over Q3.

Software continues to be an increasingly important part of the picture for Hexagon. Mr. Rollén didn’t quantity but said that “MSC, Bricsys, and our mining software portfolio [are doing very well]. Safety & Infrastructure’s OnCall [the emergency dispatch solution] was very good, as well.”

Acquisitions continue to be a key part of Hexagon’s strategy. The company did 12 in 2020, including 4 in Q4 alone. Mr. Rollén said that Hexagon has plenty of headroom in its debt covenant for more deals, and has a good pipeline of potential acquisitions. BUT: “Prices are at record levels. So you have to be very careful making acquisitions at this moment in time. And, it might be the peak in the pricing cycle.”

Like we’ve seen across our spectrum, 2020 got better as the year went on. Mr. Rollén, who never gives forecasts, no matter how hard analysts try to get him to commit, was optimistic. During the investor call, he said, “we believe we’re going to see a sequential recovery in auto and aero [in Q1] which hampered industrial enterprise solutions in [Q4].” And, “We expect MI to turn around before PPM. And PPM could probably see a recovery throughout the year but maybe with better numbers in the second half than the first half.” When asked if he saw any unusual seasonal patterns developing in 2021, he said “It hasn’t happened yet. But I don’t think so.” Entertaining as you can imagine, but no forecasts.

Financial analysts are modeling revenue of €4 billion for 2021, which would be an increase of 6% to 7% or so. We’ll see. Hexagon reports its Q1 results on April 29.