Hexagon Q2’24 preview: Recurring revenue contributes to growth even if the cycle remains weak

Hexagon will release its Q2 financial results on Friday, July 26. We expect revenue to grow moderately, supported by software and recurring revenue. Our revenue and EBIT estimates are slightly lower compared to consensus. Macroeconomic conditions are not favorable at the moment, but any signs of improving demand in the manufacturing or construction industries could act as catalysts for the share.

We estimate organic growth to remain moderate in Q2

Hexagon’s organic growth has been on a slowing trend in the recent quarters. A key reason to that has been the low construction activity that affects to Geosystems division that sells e.g. surveying solutions and AEC (architecture, engineering and construction) software. Another large division, Manufacturing Intelligence, has seen moderating growth driven by industrial cyclicality. We expect continuation to these trends in Q2’24 why the group level organic growth is expected to stay low around 3% or flat q/q. Estimated growth for Autonomous solutions is expected to be unusually low around 3% owing to high comparison figures. Asset Lifetime Intelligence division should grow decently driven by SaaS, thus improving the pace of growth q/q after being hampered by high comparison figures in Q1’24. We however stress that the estimated growth is of good quality, with recurring revenue growing faster than the group average.

Organic growth per division

Source: Inderes estimates

Recurring revenue growth to boost gross margins

We estimate adjusted EBIT to reach 409 MEUR in Q2 or 29,2% of sales (Q2’23: 28,9%). Improving adjusted EBIT-margin is driven by a similar increase in gross margin to 65.9% (Q2’23: 65.6%) that is gradually being boosted by the growth of highly profitable recurring revenue such as SaaS, other software-linked sales and new hardware products with better margins. We estimate fixed costs to stay unchanged in relative to net sales. Cost-savings generated through the efficiency program that was kicked-off in summer 2023 is likely to curb the growth of fixed costs even if the amount of depreciations is growing. Our adjusted EBIT estimate is 2% below the company-collected consensus. FX changes should not have a material y/y-effect on sales or EBIT. 

No numerical guidance issued

Hexagon does not provide numerical guidance for the Group. However, the company does comment on orders and market activity at divisional level. In particular, commentary on growth prospects in the cyclical Geosystems and Manufacturing Intelligence divisions could provide material information to investors that could influence near-term estimates and impact the share price. Any commentary on new product launches, cost savings or cash flow could also be minor price triggers for the stock in the Q2 report.