Hexagon AB's Profit Dilemma: Rising Sales, Falling Margins Amid Global Uncertainties

Hexagon AB (HEXA B), a global leader in sensor technologies and digital solutions, has released its Q1 2025 financial results, revealing a stark contradiction between modest sales growth and a significant erosion of profitability. While net sales edged up 1.8% year-on-year to €1,322.8 million, operating profit plummeted 23.4% to €267.2 million, marking a critical turning point for the company. This article dissects the factors behind the margin squeeze, evaluates management’s response, and assesses the implications for long-term investors.

Sales Growth Stalls Amid Structural Challenges

Hexagon’s Q1 revenue increase masks deeper operational struggles. Organic sales growth stagnated at 0%, reflecting weakening demand in key markets like North America and China. The company attributed this to delayed customer orders and delivery disruptions in March—a month that typically accounts for a significant share of quarterly revenue. While recurring revenue (subscription-based and service contracts) rose 10% to €570.7 million, this was offset by a 28% drop in sensor sales volumes during the quarter’s final weeks. Currency fluctuations further exacerbated the pain, contributing a €6 million drag on profitability.

The data paints a clear picture: Hexagon’s reliance on cyclical markets and high-margin sensor sales has left it vulnerable to macroeconomic headwinds. shows a decline of 15% since April 2024, reflecting investor skepticism about its ability to navigate these challenges.

Margin Collapse Signals Structural Risks

The true gravity of Hexagon’s Q1 results lies in its profitability metrics. Adjusted operating margins fell to 26.1% from 29.0% in Q1 2024, while the reported operating margin collapsed to 20.2%—the lowest since 2020. This margin contraction stems from two interlinked issues:
1. Sensor Sales Volatility: The 28% drop in sensor volumes in March directly reduced revenue from high-margin products.
2. Currency Headwinds: Weaker currencies in key markets amplified costs, squeezing profit margins even as sales grew nominally.

The decline in cash flow is equally concerning. Operating cash flow before non-recurring items fell to €154.0 million, a 30% drop from Q1 2024, with cash conversion weakening to 71% from 88%. This signals potential liquidity pressures if profitability does not rebound soon.

Management’s Playbook: Cost Cuts or Wait-and-See?

Interim CEO Norbert Hanke has framed the downturn as a temporary issue tied to geopolitical and economic uncertainties, noting stabilization in early Q2 2025. However, the company’s investor update explicitly states that cost-reduction measures are under consideration if demand remains subdued. This hints at a potential shift in strategy—away from relying solely on organic growth and toward operational efficiency.

The recurring revenue stream, now accounting for 43% of total sales, offers a silver lining. Its consistent growth underscores the success of Hexagon’s long-term pivot to subscription models, which provide stable cash flows. However, this progress must be weighed against the risks posed by sensor sales volatility and margin pressures.

Investment Implications: Navigating the Crossroads

Hexagon’s Q1 results present a paradox for investors: a company with strong recurring revenue momentum but deteriorating margins in its core hardware business. The stock’s valuation—currently trading at 14.2x forward P/E—suggests markets are pricing in near-term uncertainty but not yet discounting long-term growth potential.

Key risks remain:
- Geopolitical Uncertainties: Tensions in China and North America could prolong demand weakness.
- Currency Exposure: Over 60% of Hexagon’s sales come from regions outside its home market, leaving it vulnerable to exchange rate fluctuations.

Yet, the recurring revenue engine (now €2.28 billion annualized) provides a foundation for resilience. If management can stabilize margins through cost discipline without stifling innovation, Hexagon could emerge stronger from this downturn.

Conclusion: A Test of Resilience

Hexagon AB’s Q1 2025 results underscore the fragility of its business model in the face of macroeconomic turbulence. While the company’s shift to recurring revenue offers a critical buffer, the 3.9-percentage-point margin contraction and 20% drop in net profit demand urgent action. Investors should monitor two key metrics:
1. Sensor Sales Recovery: A rebound in Q2/Q3 2025 would signal that demand is stabilizing.
2. Cost Management: Any announced cost-reduction initiatives could stabilize margins and restore investor confidence.

For now, Hexagon operates in a knife’s edge scenario—its technology leadership and recurring revenue moat are undeniable, but its ability to navigate margin pressures will determine its next chapter. The stock’s current valuation leaves room for upside if management executes decisively, but the risks remain elevated until profitability stabilizes.

In an era of global uncertainty, Hexagon’s story is a microcosm of the challenges facing industrial tech firms: balancing innovation with profitability in a volatile world. The next few quarters will test whether it can turn this corner—or become a cautionary tale of margin erosion in the face of macroeconomic headwinds.