Hexagon's Top-Line Growth Masks Margin Squeeze: A Closer Look at Q1 Results
2min read Hexagon AB (HEXA.B), a global leader in sensor, software, and positioning technologies, reported mixed results for Q1 2025, highlighting a stark divergence between its top-line performance and profitability. While revenue edged higher, the company’s operating profit fell sharply, underscoring the challenges it faces in a slowing macroeconomic environment. Here’s what investors need to know.
Ask Aime: "Is Hexagon AB's Q1 2025 financial performance warning investors?"
The Sales vs. Profit Paradox
Hexagon’s Q1 revenue rose 2% year-over-year to €1.32 billion, driven by steady demand for its recurring revenue streams like subscriptions and service contracts. However, this modest growth was overshadowed by an 8% decline in operating profit (EBIT1) to €345 million, compressing its adjusted operating margin to 26.1%—a 2.9 percentage-point drop from a year earlier.
The margin squeeze stems from three key factors:
1. Sensor Sales Weakness: A sharp drop in sensor volumes during March—the quarter’s most critical month—due to delayed deliveries in key markets like North America and China.
2. Currency Headwinds: A €6 million adverse impact from currency fluctuations, primarily the weakening of emerging market currencies against the euro.
3. Structural Pressures: Lower delivery volumes in March, which management attributed to “economic uncertainty” in major markets.
Ask Aime: What's driving Hexagon's revenue growth?
Digging into the Numbers
The data tells a story of resilience in recurring revenue but vulnerability in one-off sales:
- Recurring Revenue: Grew 10% to €571 million, now representing ~43% of total revenue. This segment, which includes software licenses and maintenance agreements, has become Hexagon’s financial anchor.
- Cash Flow: Operating cash flow plunged to €154 million (from €219 million in Q1 2024), with a cash conversion ratio of 71%—well below the 88% achieved last year. Weak working capital management and lower profit margins likely contributed to this decline.
Recurring Revenue: A Silver Lining
The recurring revenue growth is a critical bright spot. Unlike one-time hardware sales, which are volatile, Hexagon’s subscription-based services provide steady cash flows. Management emphasized this segment’s “strategic strength,” suggesting it could buffer against cyclical downturns. For context, recurring revenue has grown at a 10%+ clip for three consecutive years, now accounting for nearly half the business.
However, the company’s ability to sustain margins hinges on stabilizing its hardware division. Sensor sales, which include products for automotive, construction, and manufacturing, face headwinds from slowing global industrial activity.
What’s Next for Hexagon?
Management has signaled a focus on cost discipline. In its April 30 interim report, Hexagon stated it would “monitor end-market uncertainty” and implement cost-reduction measures if demand remains weak. The company also highlighted its recurring revenue as a lever to offset margin pressures.
Investors should watch two key metrics:
1. Sensor Sales Recovery: Any rebound in March 2026 deliveries could alleviate margin concerns.
2. Margin Trend: Whether Hexagon can stabilize its operating margin near 26% or regain lost ground.
Conclusion
Hexagon’s Q1 results reveal a company caught between its subscription-based future and the cyclical challenges of its hardware business. While recurring revenue continues to grow impressively—up 10%—the 8% drop in operating profit underscores vulnerabilities in its traditional divisions.
The path forward hinges on two factors:
- Demand Stability: A pickup in industrial activity, particularly in North America and China, could reignite sensor sales.
- Cost Management: If Hexagon can reduce structural expenses or mitigate currency impacts, margins might stabilize.
For now, the stock (HEXA.B) trades at a trailing P/E of ~18x, near its five-year average. While the recurring revenue tailwind is real, investors must weigh that against near-term margin pressures. A sustained recovery in March 2026 sales—combined with cost cuts—could shift the narrative from caution to confidence. Until then, Hexagon remains a story of resilience in recurring streams, but one still navigating choppy waters.
Data as of April 30, 2025.
