Hexagon: Navigating Margin Compression with a Strategic Software Pivot and Spin-off Opportunity

In an industrial technology sector marked by volatile demand and margin pressures, Hexagon AB has emerged as a case study in disciplined capital allocation and strategic reinvention. Over the past two years, the Swedish engineering giant has systematically divested low-margin, hardware-centric businesses like Tesa PMI while accelerating its pivot to high-growth software and SaaS solutions. These moves, coupled with the impending spin-off of its Asset Lifecycle Intelligence (ALI) division, position Hexagon to not only recover lost margins but also secure long-term resilience in a world increasingly driven by digital transformation.

The Tesa PMI Divestiture: A Catalyst for Margin Recovery

Hexagon's decision to sell its Tesa PMI business—a €50.9 million revenue generator in 2022—to Hangzhou Great Star in early 2024 was a pivotal step in its margin-expansion strategy. While Tesa PMI's precision measurement tools were foundational to Hexagon's legacy in manufacturing, its profitability lagged behind the group average. By offloading this asset, Hexagon freed up capital to reinvest in higher-margin segments such as digital reality solutions and robotics. The transaction also eliminated a drag on operating margins, which had been compressed by the cyclical nature of hardware sales.

The results are already visible. Hexagon's adjusted operating margin has climbed from 15% in 2020 to 17-18% in 2024, with a clear trajectory toward its 18-20% target by 2025. This progress underscores the company's ability to prioritize capital efficiency, a critical trait in an industry where overleveraged peers often struggle to balance growth and profitability.

The ALI Spin-off: Unlocking Software-Driven Value

The most transformative element of Hexagon's strategy is the planned separation of its ALI division into a standalone entity, NewCo. Announced in October 2024 and expected to close by mid-2026, this spin-off will create a pure-play software and SaaS company with a projected 31% adjusted operating margin in 2024. NewCo will consolidate Hexagon's Safety, Infrastructure & Geospatial (SIG) division, along with ETQ and Bricsys, into a unified platform offering asset lifecycle intelligence, public safety, and geospatial analytics.

This move is more than a structural reorganization—it's a strategic repositioning. By isolating its high-margin software businesses, Hexagon can focus on its core measurement and automation technologies while NewCo scales its recurring revenue model. The separation also addresses a key challenge in industrial tech: the undervaluation of software-centric assets in traditional hardware-dominated valuations. Investors are likely to reward NewCo's predictable cash flows and 31% margin with a premium multiple, unlocking latent value for Hexagon shareholders.

Capital Allocation Discipline in a Volatile Sector

Hexagon's approach to capital allocation has been methodical. Beyond the Tesa PMI and SIG divestitures, the company has acquired complementary software firms like Voyansi Geosystems and Itus Digital to bolster its ALI portfolio. These acquisitions align with its goal of capturing growth in data-driven industrial solutions, where margins are inherently higher than in physical product sales.

The recent $90 million divestiture of non-core SIG assets to Bart & Associates further illustrates Hexagon's focus. By shedding lower-margin IT services and hardware businesses, the company is sharpening its public safety and geospatial software offerings—segments with strong tailwinds from government digitalization and infrastructure spending.

Investment Case: A 12–18 Month Horizon

For investors with a medium-term horizon, Hexagon presents a compelling opportunity. The company's margin expansion trajectory, combined with the potential for a premium valuation on the ALI spin-off, creates a dual catalyst for share price appreciation. Key metrics to monitor include:

Hexagon's stock currently trades at a discount to its software peers, reflecting skepticism about its transition. However, the execution of its divestitures and the clarity of its margin targets suggest this discount is unwarranted. With the ALI spin-off expected to generate significant shareholder value and the software pivot gaining momentum, the company is well-positioned to outperform in a sector where margin resilience is paramount.

Conclusion

Hexagon's strategic pivot from hardware to software, underpinned by disciplined capital allocation and a bold spin-off, exemplifies how industrial tech firms can navigate margin compression. By shedding non-core assets and focusing on recurring revenue, the company is building a moat around its future growth. For investors seeking a high-conviction play on the industrial software revolution, Hexagon offers a rare combination of near-term margin visibility and long-term value creation.