Modelon AB (publ) (MODEL) Earnings Call Transcript & Summary

A warm welcome to the Modelon investor presentation for the second quarter and first half year 2022. And without further ado, I would like to hand over to the CEO, Magnus Gafvert; and the CFO, Jonas Eborn. Please go ahead. Next slide, please.

Thank you, Jenny, and welcome, everyone, to this presentation of the interim report for the second quarter for Modelon. My name is Magnus Gafvert. I'm the CEO and one of the co-founder. And as Jenny said, with me today, I have my colleague, Jonas Eborn, CFO; and also one of the cofounders. We will present the report today. I'll start with walking through some business highlights of the quarter including a very brief overview of the company, and then I'll hand over to Jonas, who will elaborate on the financial development in the period. And in the end, we'll have a Q&A, and I believe you're all welcome to share your questions by e-mail during the presentation. So I'll start with bullet highlights, and I'm pleased to report that we continue our growth of our annual recurring revenue and in Q2 at a level of 24% compared to Q2 2021. And this is driven by continued account wins for our flagship product Modelon Impact with a good global spread across regions and with notable wins in Japan during this quarter, which I'll tell more about. And we continue to see continued good activity across regions, Europe, North America and Asia. In the quarter, we also released a new version of Modelon Impact with important new functionality to drive the further growth of our ARR business. And all in all, this means that we do remain confident in the targets we have set out for 2024 to arrive at a level of SEK 100 million of annual recurring revenues at points. And with that, I'm moving into a quick brief overview of the company. Modelon is a business-to-business software company in the systems, modeling and simulation sector. And that means we're helping our clients to digitize engineering workflows related to the innovation, development and operation of high-technology products and systems. And that can be anything from a car, to an aircraft or a power plant. And in digitizing such workflows, you need to have a digital representation of your product that can reproduce or predict the behavior and performance of your product or system in the digital domain before it exists in the real world. And this is precisely what we provide tools to create such models and to use them for those purposes. And this brings tremendous benefits to our clients. It means that they can bring their products to the market faster at a lower cost since they can reduce or even eliminate the use of expensive physical prototypes and testing and in the end also arrived at a higher-quality product with better performance because of the methods that are available in the digital domain for engineering design. And we also enable our customers to operate these products and systems in a more economic and optimal fashion after deployment when they are realized. And we serve technology companies across the world and in several industries with these solutions, and I'll give some examples later in this presentation. We have been doing this for 15 years. We were founded in 2005. We are currently around 100 people working from 10 offices in 6 countries in Europe, North America and Asia, headquartered in Lund, Sweden. We have among our employees, a high portion of PhDs in the -- among the engineers. And that speaks to the fact that we're working in a very high entry threshold technology domain and the software that we develop is of a very sophisticated nature, deep tech, if you like. And our technology is proven, both industrial and commercial since many years. We are currently, based on that technology, investing in a new and pioneering cloud SaaS platform Modelon Impact that was first released in the third quarter of 2020 with the purpose to drive and grow a recurring revenue business based on that. And the simulation and analysis market is really big. It was estimated to $8 billion in 2020 and growing at an annual rate of close to 8% every year. These are numbers provided by U.S. analysts' SIM data who are very good at our industries. Modelon Impact is a unique product in its space. It's the first cloud-based systems modeling and simulation platform. And that is a very exciting position to have. That, in combination with the market size and growth means that we have set out targets for 2024 to grow our annual recurring revenues to SEK 100 million. At that point, also turned cash flow positive again after the ongoing current investment period and start approaching profitability levels of EBIT margins of 20% or more. And we are executing on that strategy. As you can see from the chart at the bottom here since the release of Modelon Impact in 2020, we have consistently grown our annual recurring revenues quarter-by-quarter, which takes us to the second quarter this year. Where we are, again, pleased to report that we are growing our annual recurring revenues with 24% compared to Q2 2021. So now at SEK 41.1 million compared to SEK 33.2 million at that point. Also, we're pleased to see how Modelon Impact drives this growth. And in the second quarter, we're at a pace of 20% growth of the recurring revenues from Modelon Impact quarter-by-quarter, that translates to roughly a doubling of the revenues from Modelon Impact on an annual basis. Also, we can report that the lead generation for Modelon Impact has also approximately doubled compared to the same quarter last year, which illustrates how we are scaling our business appropriately. We also then see pipeline development in the quarter that gives us continued confidence in meeting the goals that we have set out for 2024. And the next slide here provides some more color to the activity in the quarter, and I'll start with introducing the main target -- the four main target industries that we are addressing: Automotive, energy process, industrial equipment and aerospace and also illustrating with the sample of existing customers that we have in these industries, you see the logos here. And I'm sure you recognize that these are very well renowned companies, often leading and very high demanding customers in these respective sectors. And we are, of course, extremely proud that we earn the trust from such fine companies to use our solutions for their product innovation and development. And in the quarter, we have won a number -- a good number of new accounts in -- across these industries and around the world as listed on the chart here. And you see it's a good spread across the industries with some weight on the industrial equipment. In past quarters, we have seen that weight a bit more on the energy process side. We also notably can observe that we have several wins in Asia, in Japan specifically. And some of you may remember that a couple of quarters ago, we reported about investing in increased sales capacity in that region, and we're happy to see that this is now paying off with results. We are employing a land and expand sales strategy. And with -- in the phase we are with Modelon Impact, we are currently dominated by winning and landing new accounts. Many of the customers that we bring in are really large companies, really huge, often international with thousands of employees, and that means that they constitute great opportunities for further growth of business with expand business. And in -- this is something we also see quarter-by-quarter, customers that we brought in will start increasingly to add more users to their Modelon Impact accounts. In the second quarter specifically, we're happy to see a European global aerospace company continue to expand the use of our solutions. In the quarter, we also published this very nice customer story. And this is from a Dutch company, Lightyear, they -- that started using Modelon Impact a couple of quarters ago. They are an innovator in the electric vehicle domain, and they are developing a solar-powered electric vehicle with integrated solar panels, which means it can -- they can charge on the go and thereby expanding the range by up to 70 kilometers per day from solar power alone and thereby saving grid consumption. This is very exciting technology, and in developing this kind of novel technology. There is a very large number of critical engineering decisions to make related to the configuration, selection of components, trade-off, weight, cost performance for each components and so on. And we're very happy to see how Lightyear are using Modelon Impact to evaluate all those different options in the digital domain and reporting that they are, by that, able to make good decisions that saves time to market and cost for them. So Modelon Impact is now an integral part in their engineering design process. And they are specifically also highlighting the importance and the value of the built-in models that we provide with Modelon Impact that helps them to quickly get the results that they need and results that they can trust. So Lightyear and all -- basically, all the companies we bring in are driven by a number of big trends that we see out there. Trends that is driving companies to adopting more simulation of the kind that we provide. So the first one I mentioned is that of digitalization, it's simply necessary to work more in the digital domain to have more engineers, try out ideas, options, make decisions based on digital models rather than physical prototypes and this is precisely what we provide with Modelon Impact, the capability to work with important engineering workflows in the digital domain. Virtually all these companies are also subject to very strong pressure to improve it's a challenge, and it's an opportunity, of course, but to meet the demands and requirements on sustainability, there's an enormous pressure on innovation to come up with new ideas, to test them and realize the best ideas into new products that are of a more cleaner or more sustainable nature. It's simply impossible to do this in a competitive way without working extensively in the digital domain with the kind of tools that we provide. And we also have very strong support in the built-in models for precisely these kind of applications related to clean technology. And we're very happy to see large portion of our customers working with that kind of product. And then of course, the general trend of moving to cloud -- to using cloud software, that's related also to developments that have been accelerated during the pandemic, to work collaboratively, remotely over distances across teams and so on, greatly facilitated by cloud software. So again, Modelon Impact is a unique solution for systems modeling and simulation on the cloud, and that's, of course, a very exciting position to be. So all in all, Modelon Impact very well meets the needs of these companies and in this -- related to these three important trends. And these trends, we have all reasons to believe that they will remain important and strong drivers for a decade or more. And. Modelon Impact is a modern cloud-based software platform, you operate it from the -- your regular web browser, no installation required, using the built-in model components engineers can very easily using simple drag and drop operations. Take components. We provide thousands of building components representing the different parts that you have in the vehicle car, an aircraft or power plants, mechanical parts, electrical parts and so on. You take drag and drop components, you connect them into your unique individual engineering design and then basically just press a play button and you can experience the behavior and performance of that design. So it's tremendously a powerful way of working. And the provided model components cover a broad range of applications across the target industries that we work with. And with a focus on clean tech sustainability kind of technologies. And these models then support engineering workflows across all the product life cycle for the customers. That means from the early innovation and research activities when you want to try out ideas into the detailed requirements and design phases throughout the integration testing and all the way to deployment and operation. So it's a very strong value proposition. And we are -- with Modelon Impact also able to monetize, of course, each individual user that we onboard to the platform but also the volume of work that is done in the platform, that's what we name the productivity licensing. And then in addition, we have support to build, based on the platform lightweight web apps to use for specific purposes that can be deployed to a large number of users, and that's another way for us to monetize. And in the period in the quarter, we released a new version of Modelon Impact with, again, important new functionality to drive the further growth of our business. And one part of that is related to scaling our cloud business, and that includes both customer-facing new features such as a new app mode for sharing and collaboration, but also significant improvements under the hood to be able to scale our deployment to the next level on our hosted services. In addition to that, we have many improvements related to the library and model content and workflows on the platform. And that -- those new features expand the addressable market for Modelon Impact, in that, it means we support an even broader range of applications across the industries we're working with. For example, we have a focus here on improvements related to electrification and that could be electrification in cars or it can be electrification also in other industries, aerospace, for example, model components to support that. Likewise, improvements to models to work with hydrogen-based energy technologies, such as fuel cells to work with hybrid aircrafts and also improvements in the segment that's related to industrial refrigeration, which is a large energy consumption across the world to important for companies to improve those products. So it's very exciting, very important update is very pleased to see the response. And I'll also take the opportunity here to highlight our global team, which I'm immensely proud of. We are highly, as you may recognize, internationalized for our size with 100 people distributed over 10 offices, 6 countries, 3 continents and working together on a daily basis across time zones, language barriers, cultural barriers and so on. And in order to make that work, while we usually bring all the team together, all the global team together once a year to get to know each other and create the bonds and connections that make us work effectively on a remote basis. Now for obvious reasons during the pandemic, we have not been able to do this. So we're extremely happy to be able to resume this annual get together in June this year, where we brought all the global teams together at Becker School Castle in Sweden, for 3 intensive days with social activities, workshops, meeting new colleagues that have onboarded since 2019 for the first time. And we had, for example, a very successful Modelon Impact Hackaton activity where a lot of new ideas were brainstormed, great ideas and presented and realized in a short period of time. And I hope to see several of those coming into the product sometime soon. I also want here to highlight our team in India. So it has been growing since we started during 2015. And in the quarter, we moved into new office premises, larger premises to -- for this growing team. And it's a very strong team of simulation engineers, software developers and software testers that are working integrated with our global teams. And the benefit of having a globally distributed team like this, is also that we have access to talent pools across the world. So many of the positions -- profiles that we look for are very specialized and it's a great benefit then to be able to find talent all over the world, basically. And part of our recruitment and the employee branding activities is that we feature employees on social media. So on LinkedIn, you find these snippets with employees telling their stories about working with Modelon, which I can recommend. And finally, I should also mention that, of course, having a globally distributed team, a major benefit with that is also that we're able to serve our customers with feet on the ground in all the important markets. Meet and get to know and support our customers with training, consulting services to drive the adoption of our software solutions and so on. So it's very exciting to see the level of internationalization and how we make that work at a global level. And I'll conclude with this. In the quarter, we continue to prepare for our upcoming user conference in October in Stockholm. So it's actually our first user conference. We've had Modelon Impact on the market for pretty much exactly 2 years now. And in that period of time, we're very pleased to see how we have onboarded a number of high-profile customers as mentioned here, representing some of the most demanding and innovative technology companies in the world to use our software and also be willing to share their stories and experiences at the conference here. So we very much look forward to meet customers from all over the world, telling stories about fuels, how they use Modelon Impact for fuel cell system development, solar power, power plants, digital twins, offshore solutions, large-scale energy storage, nuclear power, electric vehicle, thermal management and autonomous driving. It's an extremely exciting range of applications that we will learn more about. We're also extremely pleased to have a keynote presentation by the Chief of Future Methods Tony Phipps from Rolls-Royce. That will be extremely interesting to listen into. And I look forward to report back after the conference about more details on what we learned better. And with that, I'm handing over to you, Jonas, to talk about the financial developments in the quarter.

Yes. Thank you, Magnus. You can go to the first slide here with the ARR, where we start. So we already heard that the software ARR is growing 24% is the annual growth since Q2 2021. I would like to note that this is reported at constant currency. So this is showing the real volume growth. We are seeing increased foreign exchange rates. So the number from 2021 has been adjusted with SEK 1.6 million. So that's the change in -- since Q2 2021. Over the last quarter, 4% quarter-to-quarter growth has very small FX effect. So the changes in currency is basically since February when we sadly had the war in Ukraine, and these effects will -- are expected to continue throughout the year. That's what we see. Modelon Impact is, of course, the largest engine driving the growth with the 20% quarter-to-quarter growth here for -- since the last quarter. And now we can shift to look at the net revenues. And we do see a decrease here in Q2. Of course, compared to last year, this is the final quarter where we have the comparison numbers with the co-development service with this U.S. enterprise customers. So this is now past our history. If we look at the difference between Q2 and last quarter, Q1, the decrease in net revenue is two part. So there's a drop in software revenue with SEK 1.1 million. This is entirely due to a paid-up license sales in Q1. This is a pattern that we've seen historically in Asia is where we do sell paid-up licenses, permanent licenses that have a larger initial fee. And those usually come in Q1, which is the final fiscal quarter in that region. The other part is the service revenues. Of course, there, the numbers are affected by the co-development service, but also affected by some delays and reduced projects that we do see with European customers. And this is again related to the war in Ukraine, some of our German automotive customers, they have supply chain issues and therefore, are more cautious in their ordering. These effects are expected to be temporary. Development costs, I will talk more about that later, are taken as operating expenses. And of course, then that is included in the EBIT, which is negative minus SEK 17.5 million. If we look at the difference again with Q1, we have a drop of SEK 4.8 million, which is mainly due to the drop in net revenue. The cost increase part is SEK 2 million. That is split between cost actually for the employee event that Magnus mentioned. So this is something that we haven't been able to do in 2020, 2021. It does carry a cost, of course, that we as an important investment in our staff and employees and the efficiency, how we're working together. Also, there are parts, of course, we're recruiting. So there's recruitment costs, and we have the global salary revision in Q2. This is also now with increased inflation, for example, having an impact. But we're past that. This is for the entire staff than the global salary revision. Now we can go to the next slide, Magnus. So here are some of the details, of course, with the numbers of net revenue. Operating expenses, If we look at those, there is a growth 18% compared with 2021. This is primarily the new recruitments, increased sales and marketing costs. We have just launched the new website, which, of course, included some development. And if we compare with also Q1 here, the change is SEK 2 million from Q1 to Q2. So there's a growth of 6%. And those are the factors that I mentioned, the salary revision and the employee event onetime costs in relation with that, international travel, for example. We can note with the development cost here, they are growing as planned, SEK 14.2 million in this quarter. And all those development costs are taken as operating expenses. And we can compare them -- of course, with the cash flow minus 9 in the period. And note that the development costs are significantly higher than the negative cash flow. So if we are taking them as operating expenses, if the development costs were activated, we would actually be at a positive cash flow. But we have chosen this path. This is seen as an integral part of our business. So we do take the ongoing development, of course, as operating expenses. And these investments, they are at a pace according to our strategic plan. Our cash liquidity is SEK 148 million at the end of the period. Target is to be cash positive in 2024 and we believe that this is the right pace for us to take us to that goal in the next 2 years. So I think that was what I intended to say here, Magnus, so we can conclude, I believe.

Thank you, Jonas. And before turning into the Q&A and Jenny, I'll repeat the highlights, the bullet highlights of the quarter. We have a continued ARR growth at 24%. We have several good new account wins for Modelon Impact with the global spread and with notable wins in Japan and continued good activity in sales pipelines across all the regions, Europe, North America and Asia. Strong new release of Modelon Impact in June, and all in all, remain confident in the targets we have set out for 2024. And with that, I hand over to you, Jenny, for the Q&A.

Thank you, Magnus. And I would like to start off with questions from Stefan Wård at Pareto Securities. And the first one is for you, Magnus. Customer intake during Q2 was strong within total 13 new contracts versus 9 in Q1. The level of qualified leads is described as doubled versus previous year. Can you describe the demand in general and comment on your focus segments?

Yes. Good question. So the demand of the type of solutions that we provide is basically huge in all industries over the world. So what's important for us is to make those companies aware of our solution. We are a small company. So it's very important marketing activities, in particular, what we're doing in the digital domain to expose us to these opportunities. So I'd say the doubling in lead generation is an effect of our increasing market activities and also increasing exposure leading to higher awareness. If we talk about the focus segments, again, we have the 4 target industries. And in those industries, again, we have particularly strong solutions related to the development of clean technology type of technologies. So it's electric vehicles, hybrid aircrafts and various type of clean energy and so on, more energy-efficient industrial equipment. So this is what we're exposing. This is what we're strengthening in the products, and this is what the market and the companies learn -- increasingly learn more about and reach to us.

Okay. Thank you, Magnus. And next question coming from Stefan Wård, Pareto Securities as well, and it's for you, Magnus. It looks like you have invested additional capacity into [indiscernible]. Can you share how you allocate the resources geographically and if targeted to our specific segments?

Yes, another good question. So the way we sell our solutions requires a team effort with sales reps that -- well, starting at lead generation and marketing with sales reps and supported by application engineers that helps our prospects to evaluate our solutions, answer questions, help them to understand how to resolve their specific problems using our software and on. So when we are increasing sales capacity. It's both on sales rep side but also on the application support engineering side. So we're scaling that together. And again, we're seeing good opportunity and activity across all regions. So what we're doing is to try to sort of continuously balance the growth of sales capacity in those regions. As mentioned, we realized some quarters ago that we had a need in Japan specifically, and we see that, that has paid off now with that investment. So this is something we continuously evaluating and acting on. I should also mention that in addition to the application engineers and sales reps, we have our, what we call, industry solutions teams with simulation engineers that deliver consulting services to customers, to help customers bring the most out of our software solutions and thereby also supporting the -- more adoption and expanded use of our solutions. And in those teams, which are somewhat reorganized in a more globally efficient way in the second quarter. We have deep expertise related to the different industry segments we operate in. And these experts are also supporting our sales teams to present our solutions in the best possible way for our prospects.

Okay. Next one for you as well Magnus from Pareto Securities and Stefan Wård. Can you describe your current fastest-growing customer engagement?

So I would say here that there is really no engagement that sort of stands out as being particularly important. And the flip side of that is that we -- I believe we have good spreads on our engagement on a number of customers and a number of parallel engagement that we are growing in parallel. So we're not really depending on any specific single customers at this point. And this is -- I mean, this is also a balance and the spread that we're also striving for. And we expect, of course, as I mentioned, the previous answer here that we -- if we talk about the growth pace with different customers, we expect that the increased exposure that we have as the awareness growth about our offerings. That will also lead to faster growth of sort of the average customer engagement that if we're well-renowned and well known at a broad scale, that will drive larger initial transactions and also faster growth on all accounts.