Hexagon released its Q3 earnings report today, which was somewhat weaker than we or the consensus expected. In addition, the company announced that it is evaluating the potential separation of its Asset Lifecycle Intelligence business, which is primarily software with a high proportion of recurring revenue. Broad-based softness in revenue growth Hexagon's Q3 revenue landed 4% below our estimates and 2% below consensus. Organic growth was -2% versus our estimate of 0%. Currency movements negatively impacted revenue growth by approximately 1%. The company cited challenging market conditions in several key industries as the reason for the weak growth in Q3. We had expected cyclical weakness in hardware sales in particular, given weak demand in the construction and automotive industries, which impact Geosystems and Manufacturing Intelligence, respectively. However, it appears that actual demand was actually slightly lower than expected across the board. Recurring revenue growth remained solid at 7% year-on-year and represented 43.4% of total revenue in Q3. Organic sales growth per division Source: Inderes estimates and company actuals Improving margins and cost-savings somewhat supported profitability Adjusted EBIT came in at 377 MEUR, some 6% below our estimate and 3% below consensus. Hexagon managed to keep the adjusted EBIT margin stable at 29.0% year-on-year, despite negative growth and a negative FX impact on adjusted EBIT of 8 MEUR. Divestment of non-core hardware business in early 2024 and growth in software sales helped improve gross margin by 1.6pp (we expected 0.5pp improvement). Hexagon has completed its cost rationalization program, which was launched in mid-2023. According to the company, the program achieved run-rate annual savings of 172 MEUR, slightly above the target of 160-170 MEUR. Cash conversion was seasonally low in Q3 at around 70%, although improving year-on-year. The company is confident of reaching the targeted cash conversion level of 80-90% for the full year 2024. Divestment of ALI could trigger revaluation Hexagon also announced that it is evaluating the potential separation of its Asset Lifecycle Intelligence (ALI) business through a spin-off. ALI had revenues of approximately 980 MEUR and an adjusted EBIT margin of 35% for the twelve months ended September 30, 2024. This represents approximately 22% of Hexagon's adjusted EBIT. The unit’s growth profile is stronger than the Group average and the business includes a high proportion of recurring revenues, such as SaaS, which is why it would likely attract higher valuation multiples in the stock market as a separate entity. The separation would likely result in some additional administrative costs in the short term but could support the strategic development of the two separate entities in the long term. Hexagon's complex and diverse structure may have recently been a drag on the company's accepted market valuation, which is why the separation could act as a market valuation trigger, even if the transaction is unlikely to materially support the earnings outlook in the near term.

info@inderes.fi (inderes.fi)

© Inderes Oyj. All rights reserved.