Modelon AB (publ) (3VM.F) Earnings Call Transcript & Summary

Good morning, and welcome to this Live Q following Modelon's Q3 report. With us, we have their CEO, Jan Haglund; and the CFO, Jonas Eborn, to present the report. But before I hand it over to the company, I would like to remind you that you can ask questions throughout the session via the chat function just below the video window. And without further ado, I leave it over to you, Jan. Welcome, and the stage is yours.

Thank you very much, Jessica, and welcome, everyone, to this presentation. As said, my name is Jan Haglund, and I am the CEO of Modelon. I will be joined in this conference by Jonas Eborn, our CFO. And together, we will cover the highlights of the third quarter of 2025. Jonas will give a financial update with more details, and I'll wrap up with a summary and outlook for how we see the business going forward. And as Jessica mentioned, there is an opportunity for Q&A at the end. So first, the highlights from the third quarter of 2025. Revenues came in at SEK 16.3 million, which is a decrease of 21% relative to the same period last year. For the full period this year, we were at SEK 55.2 million, which is minus 9%. This is a continuation of the trend that we saw in the second quarter, where both decline in legacy services as well as negative FX effects contribute to the vast majority of this decline. Recurring revenues were flat or stable. So ARR currency adjusted was minus 2% quarter-over-quarter and plus 1% year-over-year. We had a negative effect in the quarter of a customer, NASA JPL, Jet Propulsion Laboratory, who unfortunately were not able to renew at the same volume as before due to reductions in funding from the U.S. government. Despite that, we were flat in ARR. But really, what we've seen changes in the quarter is in our cost base. Our operating expenses, excluding non-recurring items, and we did not have any non-recurring items in the quarter, came in at SEK 20.4 million, which is a reduction of 38% relative to the same quarter last year. For the full period, it's minus 22%. And this is the effect of efficiency programs and cost reductions that we've carried out both at the end of last year as well as in the second quarter of this year. And this is now bearing full effect in profitability. So our operating profit or adjusted EBIT came in at the best level we have had in many years, minus SEK 4 million in the quarter, which is an improvement of SEK 8 million compared to the same quarter last year. Year-to-date, we are at minus SEK 21.7 million, which is an improvement of north of SEK 16 million relative to last year. We're quite happy with this planned improvement of profitability, and we expect to see continued improvement of profitability, thanks to a new and more efficient cost structure, which I judge now is sustainable for the future. We're happy to see both upselling with existing customers and new customers in the quarter. Upselling came from 2 North American companies, one major customer of ours in aerospace who decided to bring on new users and buy new software licenses from us. We also saw new users at a major automotive company, also North American. A Swiss company in energy solutions decided to use Modelon Impact, our key tool for a completely new use case. Super happy about that, and I believe that there is upselling potential in that account going forward also. In the quarter, we also welcomed 2 new, albeit small customers, one exciting Italian customer building sailing boats for the next America's Cup, where they're using Modelon Impact to design these super advanced sailing boats. And one Korean customer, a specialist in simulation solutions that will be using Modelon Impact for delivering their services. One of our customers is Danfoss, a global Danish provider of energy efficiency solutions in various areas. Danfoss is really a pioneer in using simulation technology, and they've been using system simulation products, in fact, from competitors during several years. But now they've decided to use our product, Modelon Impact for expanding the use of simulations. Specifically, what they want to do is to spread simulations into their sales force. They see the opportunity now to change the way of working in sales to shorten sales cycles and to be more efficient in the sales process by directly using simulation results in front of customers to dimension solutions and provide and show the value of new solutions. And the reason they chose Modelon Impact for this expansion is our unique properties, unique properties based on cloud deployment and the ability to very, very quickly share models with a large group of people. We're really happy about that and look forward to Danfoss' success and also we will try to replicate this with other customers. We see that the use of simulation technology for sales is really a future area of expansion. Since the beginning of the year, we have worked hard on expanding the ecosystem of libraries on top of our platform, Modelon Impact. We have onboarded and integrated several third-party libraries on top of Modelon Impact. And now in the quarter, we're happy to announce new -- 2 new partners, both are German companies. One is TLK Energy and the other one is EA Systems Dresden. They both have their own simulation libraries, which now are available on top of Modelon Impact. These 2 partners will use our tool as well as their libraries in selling to customers and delivering their services. And with TLK Energy, we also have a formal reseller agreement. So we have high hopes here that TLK Energy will be bringing us new customers and new leads going forward. I think this model is really very promising, and we have the intention and ambition to continue to grow ecosystem and library providers to broaden our go-to-market channels and to increase license sales. AI is, of course, revolutionizing many industries and simulation industry is no exception. The combination of AI technology and system simulation technology is really a match made in heaven, if you want, because AI can, in a large way, facilitate the way that you both initiate simulation, analyze simulation technology and understand how simulation technology affects your business. And so we put a lot of energy into this during the year and partly thanks to the fact that we have a cloud-based platform, we have quite quickly been able to add value based on generative AI technology, combined with the unique know-how that we have in Modelon. We have both unique know-how in our experts as well as in the large assets of simulation libraries that we have built up during many years. So we've put all of that into a prototype for an AI assistant into our tool. And we showed that at a conference a couple of weeks ago. In fact, we were the only company at that conference showing a live and working prototype. And we are right now in the process of working with a couple of our lead customers to get feedback on this before we release it commercially. AI can be used on different levels, both to initiate system simulations to understand the result, but as shown in this example here, it can also be shown used at a lower level, for example, for troubleshooting. And as such, it also simplifies and lowers the threshold of expertise needed to use system simulation. So I see this as a possible driver for new revenues, thanks to making our tool available for a wider group of engineers. So with that said, I'll hand it over to our CFO, Jonas Eborn, for more details on the financials. Welcome, Jonas.

Thank you, Jan. So we will start with the ARR numbers. It came in, in the third quarter at SEK 53.6 million. This is an increase versus last year of 1% and is shown at constant currency. So the FX effects affecting the historical number was minus SEK 3.3 million. So there are quite large FX effects, of course. But this is constant currency numbers. The sequential ARR is 2% lower than the second quarter, so minus 2%. Modelon Impact, we're still showing growth, plus 7% annually, while the multi-platform business is continuing to decline. There is a 4% drop in the multi-platform ARR within these numbers. Continuing with the revenues and costs. We have SEK 16.3 million in revenue in the third quarter. This is a drop by 16%, roughly about the same decrease that we had also in the second quarter. Rolling 12 months, the number is SEK 78 million, which is a drop by 4% versus last year. Note that these numbers are not FX adjusted. These are actual currency. On the software revenue side, we have SEK 13.5 million in the quarter, which is a drop by 7%, primarily explained by the currency effects. While services revenues dropped by more than half, minus 54% to SEK 2.8 million in the third quarter. This is the primary reason for the decrease in revenues in the third quarter. On the cost side, development costs were SEK 7.6 million in the third quarter, which is also declining -- sorry, 45% versus last year. Rolling 12 months, the development costs are SEK 41 million now, which is a decrease of 27%. The effects we're seeing here is a result of the restructuring that were announced in the second quarter of 2025. They're also, of course, comparing with last year effect from the restructuring that we did in 2024. We are not expecting any further decrease from this level rather that we're starting to build now on this cost base that we have established. And I should also note that all the development costs are taken as operating expenses. So there is no capitalization at all of the costs. If we look at the OpEx, this decreased to SEK 20.4 million compared to SEK 39.8 million in the same quarter last year. This is now lower personnel costs as well as reduced external expenses as part of the restructuring done. And this includes the full effect of those restructuring and efficiency programs. The adjusted EBIT as a result improved by SEK 8 million in the quarter, and we are now at minus SEK 4 million, which is, as Jan mentioned, the best result that we've made in several years. The cash flow is now minus SEK 16.9 million. This is about the same as in the same quarter last year. The difference between this -- the cash flow and the adjusted EBIT is mainly explained by changes in working capital. These are payouts, costs that were taken in the previous quarter as part of the restructuring, and these are now sort of affecting the cash. Cash liquidity in the quarter was SEK 51.8 million. This is following the rights issue that was made -- announced in the beginning of the third quarter and includes the equity capital of SEK 20 million received from Briarwood Capital Partners as a result of this rights issue of 1 million new shares. And this was all of the financials. So we're moving on to the summary.

Thank you very much, Jonas. And I will just summarize by saying again that we're happy to see a significant improvement of EBIT of the company. That's been our plan all along, and we're happy to see now the full effect of that. And we've had that despite a challenging market, especially in North America, where some customers for obvious reasons, have been seeing new conditions or hesitating on new investments. In the quarter, we have seen upselling. We've seen new customers, and we have onboarded reselling partners. All this makes us confident for future growth and upside in our business. We continue to innovate in our product, Modelon Impact. And one of the key innovations during the quarter was the integration of an AI assistant into Modelon Impact, which not only is a great sort of technological achievement, but I believe that it will drive new business, thanks to simplifying for new users. They will quicker get to value and results in our product. So financially, as I said, we're happy to see the improvement of profitability, and we expect that to go on. We have a new and more efficient cost structure, which we will benefit now in the quarters to come. So with that said, thank you very much for listening, and I'll hand it back to Jessica for Q&A.

Thank you very much, Jan and Jonas. So my first question is regarding the ARR and specifically Modelon Impact ARR. It continued to grow, but at a more modest pace than we're used to seeing in previous quarters. And I'm curious to know how much churn impacted growth this quarter? And also if you still feel confident in a return to quarter-on-quarter or sequential growth in the total ARR in Q4?

Well, I can start and then you can fill in. I mean, as I mentioned during the year, we have seen some headwinds on some of the markets, especially North America, which was the driver a lot for our growth in ARR and revenues during 2024. 2025 has been more challenging, and we've seen a shift also in the investment landscape. Some customers are moving on fine, and we see that in some of the upselling we have, whereas some other customers, specifically federally funded customers are having sort of significant changes in their own funding and priorities. And that's why I wanted to highlight then that the loss of business with NASA Jet Propulsion Laboratory has affected our ARR. We don't quantify the individual effects, but it was a noticeable effect in the quarter. I mean now going forward, we expect that the business situation will continue to be a challenging for a while, and it's quite uncertain where markets are going, especially in North America. But of course, we are shifting also our focus to follow the money, to follow customers that have budget that are successful. And I think the effects from more challenging customers will taper off over time. So we are quite confident and planning for a continued increase in ARR going forward.

Yes. And I can just add on to that, that we do expect that this is sort of the effects of the market are tapering out, and we will start returning to growth on Modelon Impact for sure, but also on total ARR. So we're not reporting churn numbers, but the effects we're seeing improvement also in churn.

And the next question is regarding service revenues. We've seen them declining over the last couple of quarters. If you could elaborate on why we see this declining or decline and also what we should expect in terms of service revenues going forward?

I came in as CEO last summer in July 2024. And one of the sort of shifts that we did or I did with support from the company and the Board was to focus even more on the product. We had invested in Modelon Impact as a cloud platform during several years, and we decided that now was the time to double down entirely on becoming a product company. So services are still important for us, but mainly as an enabler for Modelon Impact sales. We had before services which were related to competitors' platforms. And we have not focused so much on those. And that has brought down a planned decline, and we have also adjusted our cost structures accordingly. Then, of course, we see services as an opportunity to sell more Modelon Impact. And with some customers, we are helping them with their onboarding and modeling. Many other customers are actually handling Modelon Impact fine on their own, which is also good news because we want our tool to be an easy to use with good usability platform, and we see that trend, too. So I think it's both of those 2, but it's primarily -- the decline is primarily related to less legacy services on competitors' platforms.

So then I take it that these levels or around these levels is what we should expect going forward and not looking [indiscernible] '24 numbers.

I think it's a fair assumption.

Yes. And moving on, we have a question from the audience regarding AI. If you could explain more in general terms what the AI assistant actually does and what it can help customers with and what type of upsell opportunities you see?

Well, the AI assistant that we demonstrated at the recent conference is fully integrated into Modelon Impact. So it's available for the user to sort of ask any question, and they can be high-level questions or low-level question. A high-level question could be, please help me to model or simulate my system. It can be an energy system or a heat pump or something similar. Then what the AI assistant will do is to find information both available sort of publicly, but very much also available through our knowledge that we have trained the AI system with. You can also think of use cases where the AI assistant helps you on a lower level. For example, that you are a simulation expert already, but you have some error or problem that you can't figure out yourself, then the AI assistant will actually, through the entire knowledge about troubleshooting and previous faults, be able to help you in clear text and quicker get you to results. Why did I say that this will bring up selling? Well, it's going to simplify for users. You don't have to have 10 years of experience to be able to come to advanced result. You can actually by using or collaborating with the AI assistant with much less knowledge, which means a much wider group of engineers come to the results that you want. So we believe that this can be a strong driver for upselling of licenses.

Interesting. And you're currently engaging with pilot customers to get feedback, as I understood it, when do you think this will be live and commercially available?

Yes, we'll announce that when the time is right. So -- but we have come quite far in the development. And right now, we just want to get customer feedback to make sure that we solve their problems in the right way.

And you also talked about the market uncertainty, specifically in the North America. Are you seeing any changes if you compare Q4, the start of Q4 to Q3?

Not really. I think there is still uncertainty in some segments, especially North America, whereas some segments are quite, well, unaffected. So we have to be sort of more selective and be focusing on our customers where we see potential, of course, supporting all other customers, but we're shifting our focus also in our sales force to where opportunity is going to be. So we expect to have a continued period of uncertainty, but step-by-step, see that there will be successful industries that continue to use system simulation and our tools specifically to solve their problems.

And you mentioned 2 key customers in the U.S. that actually expanded the license bills during the quarter. Could you talk a little bit more about the drivers behind them expanding?

I think the drivers are the same, both customers. One is an aerospace customer, actually one of our largest customers who are doing a significant onboarding of new users. They see the value that they can get from system simulations. They're able to solve their design problems in a faster way by simulating them in a virtual environment. They also collaborate with their customers through simulation models. And they've seen also the usability of Modelon Impact. So what they're doing is now essentially to bring on new users, to train new users so that they can go faster in their development. And I think on a smaller scale, that's what we see with the other automotive customer, too. More users coming in, more licenses and more use cases.

And in terms of the new Danish customer, Danfoss, I see this as a quite interesting customer and reference case as it expands the usage of Modelon Impact outside the engineer desk, so to speak, and now also in customer-facing situations. Could you elaborate on this and how you can take this case and adapted on potentially more customers going forward?

It's a great observation that while simulation technology primarily has been used on the engineering side for advanced engineering or dimensioning of new solutions, simulation technology has potential beyond that, way beyond that. And I think the Danfoss example shows that putting simulation technology or rather the results of simulation models in the hands of a sales force can help them do their job much faster and quicker rather than looking into datasheets or books or webpages, they can directly get answers, for example, for dimensioning or costing in front of their customers and get a much faster response and get more precise results and hopefully shorten sales cycles. So the vision of Danfoss to grow their revenues is very exciting and something that I believe has potential at many other customers. And we are in a few exciting dialogues also with other providers that hopefully will bear fruit going forward.

And have you received any feedback so far from Danfoss and how it's developing?

It's still early stages in the program. But so far, we have a very good collaboration and good feedback on the usability of our tool, which is really key because if you want to share results and simulation with a large group of users who are -- perhaps don't have the experience of using simulation technology, it needs to be easy to use, needs to be right out of the box, and it needs to be available on your device and on a web page. And that's exactly how we deploy Modelon Impact.

And a question regarding financial targets. Are there any updates or changes to your financial targets at this moment?

We're not changing our financial targets. We maintain the ambition to grow ARR to continue to grow profitability and improve profitability like you saw in the quarter, which over time will lead then also to positive -- consistent positive cash flows. The exact timing of that is difficult to judge, so we don't have an updated view on financial targets. When and if that happens, we will come back to that.

And last question. What should investors expect from Modelon in the near term?

You should expect continued focus on software growth, continued focus on recurring revenues, building for long-term, both revenue growth and long-term improvement of profitability. You should expect that we should have a continued improvement of profit relative to last year, thanks to a more efficient cost structure. And you should continue to see innovation, hopefully bringing on new customers and new users at existing customers. That's what we're working hard on every day.

Thank you very much, Jan and Jonas.