Hexagon announced its Q2 results this morning. Revenue growth was below expectations due to cyclical factors such as weak construction and automotive markets. However, profitability beat expectations, driven by strong gross margin and good recurring revenue growth. We believe the consensus could slightly lower its estimates for Hexagon's earnings in 2024. However, the improved revenue quality and strong relative profitability bode well for future earnings growth once cyclical industries pick up. As a result, we don't expect any major cuts to consensus long-term earnings growth estimates. The company may provide more details on the business outlook in its earnings call later today (10am CET). Hardware sales weak, recurring revenue grew well Q2 growth ended up being weaker than we expected, which was reflected in the bottom line, even though relative profitability was quite strong. Revenues were 3% below our estimate and 4% below consensus. Adjusted EBIT was 2% below our estimate and 4.5% below consensus. Large segments with material hardware sales, such as Manufacturing Intelligence and Geosystems, suffered from cyclical headwinds in some of their key end markets (automotive for MI and construction for Geosystems). However, recurring revenues, including software and services, grew 8% year-on-year, indicating an expected improvement in revenue quality. This development signals good potential for earnings growth once the cyclical industries recover. Autonomous Solutions' growth suffered from high comparison figures from last year due to some large one-off defense projects. Organic sales growth per division (source: Inderes) Profitability relatively resilient Gross margin reached an all-time high, improving 1.7 percentage points year-on-year. A high gross margin is naturally supported by a higher proportion of recurring revenues, especially software. High gross margins, together with operational efficiency measures, also helped to maintain the EBIT margin at a good level of 29.5%, up 0.6pp year-on-year. Cash conversion was healthy at 85% as the company continued to focus on working capital management and cash flow. No clear improvement visible in the short term According to Hexagon, early indications are that the automotive and construction markets will remain challenging in the third quarter. However, the focus on innovation (improving sales mix) and operational efficiency (cost savings) will support the adjusted EBIT margin and provide a strong foundation for growth once the macroeconomic environment improves.

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