Hexagon reports flat Q2 2023, looks ahead to economic recovery

Last week, Hexagon reported Q2 total revenue of €1,353 million, flat year/year, amid global weakness in the construction sector and slowing investments in automotive, affecting sales of sensing and robotic systems. Bright spot? Mining in Latin America. The company sees these challenges continuing into Q3, saying that the selling environment so far (1 month into the quarter) remains difficult, particularly in construction and automotive. So not like Dassault Systèmes, which reported weakness in large deals in aerospace and defense, but not that different.

CEO Paolo Guglielmini said, “We are confident in our continued focus on innovation and see Hexagon’s overall market and competitive positioning as a strong foundation for profitable growth once the macro environment improves.”

The details:

• Revenue by segment: Manufacturing Intelligence (MI) reported revenue of €484 million, with no (0%) organic revenue growth in Q2 (that’s quite a slowdown from the 5% growth reported in Q1). The company said that weakness in the automotive sector offset “positive momentum in aerospace.” Revenue from China was flat year/year. Mr. Guglielmini also noted positive progress with sales of laser trackers and precision robotics, particularly in the commercial aerospace sector.
• Perhaps of most interest to us: He saw “good growth in our software portfolio, with simulation and enterprise quality management solutions pushing up recurring revenue in MI by 4%.”
• Asset Lifecycle Intelligence (ALI) reported revenue of €203 million, up 9%, “driven by the adoption of design tools and enterprise asset management solutions in the context of investments in data centers and new energy.” Mr. Guglielmini added that “SaaS revenues grew by 20% in the quarter, with recurring revenue up 10% as we keep on building a strong foundation for the future … our largest wins coming from asset management applications for data centers and design solutions positioned into the pharmaceutical and medical sectors as we push to diversify the business … [we continue to release] more capabilities to guarantee digital continuity between design and engineering, all the way to operations and maintenance.”
• Geosystems (which now excludes the mining business, so this is restated) reported revenue of €406 million, down 5%. The company cited “lower volumes reflecting a worsening in the construction market environment, partially offset by good progress in software sales, including design software and our reality data platform HxDR, and a 12% increase in recurring revenues.”
• Autonomous Solutions (which now includes the mining business) reported revenue of €141 million, down 2%. The company saw “good growth in mining, while Autonomy & Positioning declined against tough comparatives, reflecting the non-recurrence of some large defense projects and a cyclical slowdown in agriculture markets.”
• Safety, Infrastructure & Geospatial (SIG) revenue was €120 million in Q2, up 6%, “driven by good progress in the public safety and security software portfolio. Our OnCall [emergency service — 911 here in the US] software platform continues to demonstrate strong growth, with a growing backlog of activity globally.”
• By geo, revenue from EMEA was up 4%, as Western Europe saw a continued decline in manufacturing markets offset by solid growth in ALI and Autonomous Solutions. 
• Revenue from the Americas declined 1%.  Revenue from North America was down 2% “due to further weakness in the infrastructure and construction markets” and difficult comparisons within defense for Autonomous Solutions. South America, on the other hand, reported 10% growth, as strength in mining and Security, Infrastructure and Geosystems offset weaker demand in agriculture.
• Finally, revenue from Asia declined 3%. Within Asia, revenue from China fell 4%, while the rest of Asia declined 1%. The company said that performance in China was mixed: flat growth in Manufacturing Intelligence and a significant decline in Geosystems relating to the construction industry. The rest of Asia saw a decline in Mining in Australia and a tough comparison in India for Geosystems, which offset strong growth in Manufacturing Intelligence.

Hexagon’s sensors and robotic solutions (in other words, hardware) reported a 7% year/year revenue decline in Q2 to €820 million “due to lower demand in manufacturing markets for metrology solutions, and sluggish construction markets … particularly [affecting] surveying and reality capture tools.”

Software and services, on the other hand, reported a 4% increase to €534 million — with “robust growth in ALI, good progress in SIG and growth in CAD [which here likely means Computer-Aided Dispatch, not Computer Aided Design], strong growth in Design & Engineering software in MI and HxDR applications in Geosystems, offset by slower service revenue growth.”

Hexagon doesn’t provide quarterly guidance but also didn’t change the targets it had set at its last investor day of 8% to 12% average revenue growth per year from 2022 to 2026. As Mr. Guglielmini pointed out, “after H1 [2024], we are at the midpoint of the 5% to 7% organic growth range we set. We had expected a softening or downturn within this period. So yes, we stay confident in the achievability of that goal.”

TL;DR. Even a diverse portfolio of end industries, geos, and a combo platter of hardware and software items in the price book doesn’t insulate a company from global uncertainties. Mr. Guglielmini cited high interest rates and low end-market confidence as reasons customers are pushing out purchasing decisions. But, he said, Hexagon is focused on controlling what it can and getting ready to meet demand when it does pick up.