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

So a warm welcome to Modelon's investor presentation for the first quarter 2024. My name is Jenny, and I will moderate the Q&A session at the end of the presentation. And this presentation will be available on demand on Modelon's IR website. [Operator Instructions] So without further ado, I would like to hand over to Magnus Gafvert, CEO as well as Jonas Eborn, CFO. Over to you.

Thank you, Jenny, for that introduction, and welcome, everyone. Good morning to this presentation of Modelon's report for the first quarter 2024. Let's see if I can flip the slides here. So yes, my name is Magnus Gafvert, I'm the CEO of the company and one of the co-founders and with me today, I have my colleague, Jonas Eborn, CFO and also one of the co-founders sitting in the next room.

Good morning, everyone.

And today, after presenting the bullet highlights of the quarter, I'll do a quick overview of the company and then walk through the business highlights of Q1 before I hand thing over to Jonas, who will present the financial update for the period. And then at the end, we'll have a Q&A, as Jenny said, and you are very welcome to hand in your questions. So the first quarter highlights. We are pleased to report the continued double-digit growth of our ARR, amounting to 14% in the quarter and taking us to SEK 52.6 million. And we are very pleased to report a faster growth of Modelon impact, our flagship product in Q1 amounting to 29% versus the same quarter last year. And we see high activity in our pipelines on Modelon impact also throughout this quarter. And we'll talk more about that in the presentation. Also in the quarter, we released a new major version of Modelon impact, 2024.1, including significant improvements and also eliminating certain sales bottlenecks that we had in 2023 and that we have reported about them. Also in the period, we launched a new -- and established a new growth initiative, a growth team with the purpose to accelerate sales in select focused market segments, and we'll also talk a bit more about that later on. So a quick overview. Modelon, we are a business-to-business software company in the systems simulation sector, and that means we're helping technology enterprises around the world and across the industries to digitize engineering workflows related to the innovation, development and operation of high-technology products and systems, which could be anything from a car to an aircraft or a power plant. And in digitizing such workflows, you need to have at hand digital representation or a model of your product that can predict and reproduce the behavior and performance of that product in the digital domain before it exists in the real world. And that's precisely what we provide software tools to prepare such models and to use them for these purposes. And that brings tremendous benefits to our clients. It means that they can take their products to the market faster, cheaper and also arriving at higher quality and better performance in the end. Our flagship product, Modelon Impact, is pioneering the systems simulation industry being the first cloud-native SaaS platform in that space. It is based on technology that we have developed over close to 20 years, and it was first released in late 2020. We are investing in these products to grow our annual recurring revenue business. And we are also pleased to see, as you can see from the chart at the bottom here that since we put Modelon Impact on the markets, our annual recurring revenues have grown consistently year-by-year. We are highly internationalized for our size. We were around 100 people with offices in North America, Europe and Asia, which means that we have presence in the key markets and also that we are close to our customers, which are typically global and international technology companies. So that's a strong advantage we have. The underlying -- the total simulation analysis market is really big. It's estimated at over $9 billion in 2022 and projected to grow with an average pace of 10% for the foreseeable future. So this in combination with the strong positioning with Modelon Impact and our international presence has made us set ambitious targets for our business to arrive at a ARR growth of 35% in the medium term to turn cash flow positive after the current investment period in the short term and to approach and exceed EBIT margins of [ 20% ] in the long term. And with that, let's go into some of the details of the first quarter. Again, we are pleased to report that we are growing our annual recurring revenues by 14% in Q1 compared to Q1 2023. Notably, the growth -- ARR growth was suppressed in the first quarters of 2023 because of the strategic unplanned cloud transition that we then performed, which means that most of this growth is happening at the end of the period. And we see that sequentially ARR growth Q4 to Q1 is 5%. Also notably, Modelon Impact our flagship product. We had a fairly flat growth during 2023. In Q4, we reported higher activity and also seeing an increase in the growth. So from flat in Q4 to a sequential growth of around 6% and in Q1, that sequential growth takes off to 19% versus Q4. So we're really seeing an uptick in the activity with Modelon Impact, which we are very pleased to report. Also in this, we see a clear trend on increasing upsell on our existing accounts. Again, this is in line with the land and expand strategy that we have. And yes, we'll see a bit more on that on the next slide, which we'll provide some additional detail on the activity in the first quarter. So I'll start by introducing the target segments that we work with the energy process industry, industrial equipment, automotive and aerospace sectors and also showing a sample of customers we have, the type of customers we have in these sectors. And I'm sure that you recognize many of the logos here, the companies here represent leading in global innovation-driven technology companies, highly renowned and we are very proud to have these type of companies as our customers. And in the first quarter, we have landed again, a number of new customers of similar character. As usual, we're not able to disclose the names of our customers unless we have -- we're producing a testimonial or a case study or similar. So hopefully, some of these will be closed in the future. But we can start and see what we have here. It's -- the first one is a British multinational oil and gas company, that's an upsell, actually, more than 1/3 of the wins listed here are upsells. And this is a customer that's using Modelon Impact in the context of hydrogen energy systems. They have been a customer of ours for about 1 year. And this is actually the second upsell that we have with them during that first year, which is a very good indication. We have a next U.S. global leader in energy storage systems, and that is utility-sized battery systems, they use Modelon Impact to work on the cooling solutions for their equipment. Then we have a U.S. innovator in carbon-free energy systems for sustainable maritime transportation. And this is a very -- again, this is an upsell company that's been working with us for maybe 2 years. And they are working on very exciting new technology with new novel energy carriers. That basically means new types of fuels to be used in ship propulsion and energy systems. And this is a sector where there are really large opportunities to do improvements on sustainability, I'm sure you're aware of that ships are not traditionally the cleanest type of transportation. But this is a company that addresses that, and it's really, really great to be part of that kind of initiatives. We have then a U.S. multinational manufacturer of home appliances, and that means the type of equipments and products you have in your homes that it could be domestic dryers, washing machines, cooking equipment, refrigerators and things like that. So they are using Modelon Impact and to -- for the development of these kind of products. And this is also a nice win. It's a first deal that is a little bit larger than we typically see with our Modelon Impact customers. I think they're starting with 6 seats. So that's also a good trend and indication that we're growing the size of our initial transactions. And this is also a company where we see a strong opportunity for growth. Then we have 2 quite similar companies in a way. So first, the British multinational professional services firm. They are using Modelon Impact in the context of smart homes, energy and control systems in -- or smart buildings, I should say, energy and control systems in buildings. Next is a German consultancy that is in the same space really, smart buildings, energy systems. So good, nice to see that. In the automotive, we have a Korean automotive parts manufacturer for thermal management systems, which means air conditioning systems, engine cooling, battery cooling and the integration of such systems in your cars. [indiscernible], obviously, we can call it an upsell. It's actually a customer that we have been working with for a long time, I believe, almost 2 decades now. It's one of our original and first customers. And they are using our sort of previous products since many years successfully, and they are now taking steps and start using Modelon Impact as well. So this is a sort of good milestone with this customer. And then on the aerospace, we have a Chinese commercial aircraft manufacturer, and that is a company that's using Modelon Impact in the context of looking at novel aircraft technologies, more electric aircraft and similar for commercial aircraft. So very nice activity, great customers. We see also that the pipeline activity throughout the quarter remains high, both for new accounts and upsells, which also means that we have a good momentum going into the coming quarters. And even if we see high activity in the first quarter, we want that activity to increase even more. So we launched in Q1 new initiative on growth, a growth team with the purpose to accelerate the Modelon Impact sales in identified slices of the total market in specific market segments. And the background for that is what's illustrated on the picture here. The total addressable market for Modelon Impact is really broad. It's really big. So you have the other industries, automotive, aerospace, energy and so on. And in all of these, you have different types of products, different kinds of subsystems that where we can apply system simulation. And also for all of these products, we have a life cycle, starting with the innovation and the requirements, definitions, the design of the different parts of the system in integration, testing, validation, verification and then putting this product in operation or on the market. So Modelon Impact supports engineering workflows in all these phases, although I should note that we are stronger in the earlier phases, probably. That's also where we see most of our customers. But this basically means that there is tons of opportunities for us. And with the company of our size, 100 people, we cannot work effectively across all these markets. So the purpose with the growth team is to have a way of working more focused, identify high potential slices, segments here and have the growth team working in an agile way, cross-functional way with aggressive outreach and also working with fast product iterations to really sort of spearhead and drive sales in these segments. And we have had very good initial experiences with this team. So contributing to the pipeline in Q1, and we will certainly continue this and also evolve it and sharpen this tool as we move forward. And from that, let's turn into a great customer testimonial that we received in the first quarter. So one of the industry segments we work with is the industrial heat pumps. Turboden, it's an Italian global leader in the design and production of large heat pumps, and that's megawatt-sized heat pumps, which is key in reliable and clean energy systems. It's a Mitsubishi Heavy Industries group company. They have been operating since 1980. They have 455 plants in operation or delivered in 52 countries and they have another 62 under construction. And I'm sure you have read about or heard about heat pumps recently. It's a very important technology to have efficient energy systems and make good use of heat that would otherwise be wasted into the atmosphere or similar and turn that into useful heat or even into other energy forms like electricity. You can find heat pumps in, again, your home appliances equipment like domestic dryers, you also find heat pumps in cars. You can heat your homes with domestic heat pumps. This is a different type of heat pumps. They are very large compared to the other I mentioned here. They are used typically in industrial processes to recover waste heat from those or from incinerator plants, engines, et cetera, and you can use them to drive gas turbines and produce electricity. So it's a very important technology in the transformations towards sustainable and clean energy systems. And it's very nice statements that we received from Turboden, they say Modelon Impact is an invaluable tool for them and contributes to them delivering cutting-edge solutions in the field of sustainable energy, invaluable is a strong and great word to see. Also they talk about how Modelon Impact the advanced simulation capabilities and power them to validate their new heat pump technology. So also very good statements. So very pleased to see this also from a customer in a sector that we think is really important. And they like Modelon Impact, obviously, and Modelon Impact is getting even better. In the first quarter, we released version -- a new major version, 2024.1. The improvements that we have in our road map is driven by customer feedback and also our own market analysis to sharpen the product, to position it to growth and solve customer satisfaction in the best way. Having -- being a SaaS company, we are, of course, also delivering improvements to our customers continuously on the cloud seamlessly, although there are some significant and major new capabilities that we put into these sort of twice a year major updates. I will not go through all the details here, but the highlights here includes a single one-click app mode sharing, that's a functional capability, which enables customers to share simulation models broadly within their organization. It's requested by several of our customers. Also, significantly improved Excel integration. That might sound mundane, maybe, but that's very important for many of our customers. They're using Excel to manage various types of data, which they want to feed into and receive up from simulations with more Modelon Impact. So we're making that -- those workflows really convenient. And I should also mention, of course, again, the streamlined on-premise installation or customer managed installations that we suffered from as a bottleneck during last year are resolved, and they are now in general availability with this release. And we're also seeing several improvements -- updates in our industry applications that basically means in the library content built into Modelon Impact that are used in different industry applications. So notably here, improvements on the thermal management models, hydrogen tank design, hydrogen technologies. We see a lot of activity out there. Thermal power plants, heat pumps as we just mentioned, refrigeration. So continuously evolving in the segments where we find activity and opportunity. Also in -- with this release, we're highlighting a specific solution package that we have targeted, and we call that energy systems optimization. And this is based on several customer engagements. For example, the case study we published -- recent case study we published with Honda Motor Company last year to turn the manufacturing plant into zero emission. And this basically means to look at for an industrial facility, you look at the energy consumers, the energy producers that store energy storage systems. So different types of renewable energy or other energy that is available on that particular site. And then what can you do -- how do you upgrade that system in a cost-efficient way. So optimize this to arrive at the sustainability or emission targets while also optimizing or minimizing the capital and operational costs of that upgrade. So we have very good capabilities built into Modelon Impact to do that kind of work, and we're leveraging that with 2024.1. We're also in the quarter, continuing the preparations for our upcoming international user conference, the second ever that will take place in Copenhagen in October. And in the quarter, we published the list of customer speakers that will come and talk about how they are using Modelon Impact, our products in their respective businesses. And among those, you see synergies, German thermal management company. So they're using Modelon Impact in that context, automotive, that is. [indiscernible], they are a leading Italian institute in using Modelon Impact in hydrogen-based energy systems. Volvo, they are using Modelon Impact in the context of autonomous driving. Allegion is a U.S. company in door automation, I believe, is their main segment. So they are using Modelon Impact in that niche. Saab are using Modelon Impact in the development of the [indiscernible] fighter aircraft. Aircela is a U.S. innovator really exciting technology in the sustainability clean tech niche. They are developing a technology that produces synthetic fuel to use in combustion engines by picking carbon dioxide from the atmosphere and turning that into synthetic fuel using renewable energy sources. So it's a really revolutionary and quite early-stage technology, but really, really exciting to be part of that. EPRI, Electric Power Research Institute, that's a really big U.S. institute that's working with electricity companies, electricity energy companies across the world really in the -- to develop and deliver sustainable electricity, affordable and reliable. So also there, I believe that the particular applications they are using Modelon Impact is in hydrogen-based systems. So last time we had this event in Stockholm 2 years ago, it was a vibrant, very successful event. Customers provided very good feedback about interacting with our experts and other users. So we expect to see the same again this year in Copenhagen and greatly look forward to this event. And after 12 years as CEO of Modelon, the time has come for me to pass the baton. Hand over the road to my successor, Jan Haglund, who will assume this position on July 1. And it has been a fantastic 12 years. I am deeply grateful to have had the opportunity to work with such an extraordinary and unique global team. I'm immensely proud of the achievements that we have made together. We have transformed the company. We have launched Modelon Impact to the market and positioned Modelon as a global leader in system simulation on the cloud, pioneering that sector with a unique and new offering. So I am very thrilled about the opportunities ahead, and I'm certain that Modelon is very well positioned for continued success. Jan brings in experiences and skills that are -- will be -- and are instrumental for the coming phases for Modelon. I will work side-by-side with Jan in June and do whatever -- everything I can to get him up in the [indiscernible] as quickly as possible. And then after July 1, I'll also be available to support as needed. And my commitment and dedication to the success of Modelon, it will remain also throughout and after this change, I can assure you. And with that, I hand over to you, Jonas.

Thanks, Magnus. And I also want to thank you for the great experience of working with you over the past 20 years in forming Modelon and also in recent years, taking Modelon to the share stock market. and presenting these quarterly financials, of course, since the IPO in 2021. So I'm looking forward to continuing our collaboration also in the future and welcoming our new CEO, Jan Haglund. It will be very exciting to see this new phase in Modelon's journey. With that, we can start with the -- go through the financial updates. So you can show the first slide with the ARR. Thank you. So this is showing a very solid growth trend. We're at SEK 52.6 million ARR, a 14% growth annually versus the historic period here, showing ARR at constant currency. So this is the real volume growth in the period, there's actually a negative FX adjustment since the currencies in Sweden has been a little bit weaker than the previous period in Q1. Also, the sequential growth is at 5%, so continued solid growth in ARR for the past 3 quarters after that temporary decrease or sort of flat growth in the early phase of 2023. And it's also very good to see that Modelon Impact is returning as the primary growth driver. We have 29% annual growth and even better 19% sequential growth since Q4, which is a clear shift -- clear sign that we're past this -- the transition period that we have reported previously. We can continue to revenues and development costs. So the net revenues increased to SEK 18.3 million. This is a small increase 2% compared to the historic period here. RTM, it grows 17%. So we're continuing our revenue growth. The reasons for the Q1 revenue here is mixed. We see very good software revenue increasing sort of in line with the total RTM revenues, 17% in the quarter. Recurring software revenue, we also see growing by 11%. That number compared to the 14% growth in ARR is explained by the FX. So this is actual currencies. So that's showing a softer growth than the volume growth of 14% in ARR. The exceptionary is the service revenue, which decreased in Q1. Reasons for this is that this is a temporary decrease we see. It's very much related to the increased efforts that the -- our industry engineers are doing on library development for the 2024.1 release. Our industry experts, they balance their time between services, library development and expert sales support for the new sales of Modelon Impact. And this is sort of a temporary shift towards more development with the, for example, efforts on the energy systems optimization release that Magnus also talked about. We do expect the service revenue to recover during 2024. We see a very good pipeline, new projects, large projects that are coming in and being delivered. On the development costs, these are continuing to decrease. We have a 5% decrease in the quarter and a 12% decrease of development costs over the rolling 12-month period. We expect this to continue at this level or below this level for the rest of 2024. So maintaining sort of a balanced investment in our R&D for products. This is important for our customers. We will continue to deliver new features in Modelon Impact. A very good highlight, milestone, you could call it, is that the quarter is the first time since the IPO that the EBIT adjusted for development costs is positive. So EBIT is minus SEK 14.4 million, and the development cost in the quarter is SEK 14.8 million. So basically, we're at this turning point where we start seeing better results than the development that we need to invest. Also, if we're comparing over the rolling 12-month period. I actually think that's an error, the 53-point no, sorry, this is correct. SEK 53.3 million EBIT over rolling 12 months, which is very close to the SEK 52.7 million rolling 12-month development cost. So roughly at the same level, and we expect this to shift now going forward. We can look at the final slides with the expenses, and we see that we're still keeping sort of our operating expenses in check, decreasing slightly. The operating expenses are decreasing by 8%, personnel costs decreasing by 11%. So we're managing a shift into a more efficient operation and keeping cost control even in a high cost and relatively high inflation period, although we are seeing those cost increases coming down also on a global level. I did talk about the product development costs. Very important, of course, to understand that the development costs are taken as operating expenses. So all those operating expenses include the product development. Cash liquidity is at SEK 55 million at the end of the first quarter, including some short-term funds that we've invested in, you can see that in the financial tables in the report. Q1 is a seasonally strong quarter in cash flow. So we have minus SEK 4 million in cash flow comparing that with the quarter Q1 2023, you see a slightly worse cash flow. There is an effect from an upfront payment in Q1. We actually received a 2-year license renewal where the 2024 part corresponds to SEK 2.7 million. So that cash was received already in Q1 2023, although the revenue is taken now in the current period. So you can correct for that cash flow. And then we see that the trend of improving cash flow is continuing also in the current quarter. We expect to continue improving our cash flow towards our short-term goal of being cash flow positive. I should also mention in the report, we have a statement, the Board's assessment is that we have sufficient cash liquidity today for 12 months operating -- operating costs going forward. So we feel that we have a good position, and we can continue working towards our financial goals of reaching cash flow positive. Then also improving our ARR growth and in the long term, also being a high EBIT margin company. And that was all from my side, Magnus.

Thank you, Jonas. And I hand the word back to you, Jenny, for the Q&A.

And we have the analyst with us, and I will put Stefan Ward from Pareto forward to speak.

And thank you for an interesting presentation and also my -- what do you say, thanks to Magnus for a great job as CEO, during your tenure, we'll be exciting to follow the company also in -- with the new CEO, of course. My first question relates to the cash flow development. It was better than expected in the first quarter but you comment that Jonas were putting forward here in the presentation, it looks like you're managing the balance sheet situation quite well here. Can we expect that you will be able to reach profitability without having to take on new capital?

So I can't respond to that without giving a prognosis which we don't. But I believe that, that comparing the current cash, SEK 55 million, with the negative cash flow that we had over the historic period over the past 12 months, that does not give a correct picture. So as I mentioned, we are continuously improving our ARR. We are lowering our development costs and thus improving EBIT. So with the goal that we have of reaching cash flow positive and also with the additional statement that I made, the Board's assessment for the 12-month operation from today, I believe you can also see that there is a very narrow window there for also turning cash flow positive. That's the sort of best estimate or the best information that I can provide for this question.

Yes, I understand. Thank you. Yes, I think that -- how should I put it. I think that you would benefit from trying to help the market get comfortable on this issue. It's a clear cloud over the entire case and sort of over shadows some of the good developments that you have been able to produce, but that just my thought...

We acknowledge that. And we are also acknowledging that in the current plans, there are risks. We are actively managing those risks and of course, communicating as much as we can around this.

Yes. Okay. So moving on to this. The growth team looks a little bit -- it looks a lot interesting, I would say. Can you describe a little bit about how that team is constituted, the number of people and what the profiles of these people are. And from where they are working, so to speak, how to -- are they in the sales function, if I understand it correctly?

Yes. Maybe I should have elaborated a bit more on that. Thank you for asking. So the growth team is a cross-functional team. So they are sort of operating independently. They are led from the U.S. And while our sort of sales function -- existing sales function is based -- regionally based. So we have people working in different territories. The growth team is taking a global approach. So even though led from the U.S., the team, it includes sales expertise, and that's also the leadership coming from that. It includes industry expertise that is related to the market segment they are currently focusing on, and also expertise for doing rapid product iterations, small improvements that are -- can facilitate the lead progression with the companies they're working with. So it's not a big team. This is also one of the purposes here. We want it to be small and agile, work independently, cross-functional, work with the existing sales business developers, work with the product development teams and so on. So what they have been doing is that they have identified a market niche as narrow as possible. Then produced a list of prospect companies in that and then rapidly systematically with outreach covered all of that list and generated leads, which are then progressed with evaluations and so on. So we find it's a very appropriate way for us to work. And from the experience, how -- we will continue this, but there are different ways we can learn and continue from the current experiences.

Is it David Higbee that is responsible from the U.S., sorry, just my curiosity.

He remains -- he's as the Chief Commercial Officer, He is responsible for the sales, marketing and customer success functions. So the leadership in the Growth team, Peter, he comes from Dave's team and he's working so more independently and more cross-functional with this team.

Okay. Looking at the past, how you addressed sort of the sales strategies. Is this -- can you just give it some context? Or is this a result of -- that you felt like you didn't get enough leverage on the products in the past. It's a bit vague question, but what I'm after here is that if the -- if you have any sort of -- can you help us understand how you addressed this function before this initiative was launched, so to speak?

Yes. So we are doing several things. So our overall challenge and opportunity at the same time is that the addressable market for Modelon Impact is so broad. So we see that in order to be efficient, we need to be smart and focus on the niches where we see the most opportunities. So we are doing work across the company in sort of sharpening, improving the way we work focused on the best niches and the growth team is an initiative related to this also. We felt that our usual way of working is not fast enough. So we think we're not sufficiently efficient in really grabbing the opportunity that we find in individual segments. So we launch this to accelerate the sales in the market segments where we have good reason to think that we have a good match and a strong opportunity.

And we also have Mark Siostedt from Redeye with us.

So can you talk a little bit about the strong pipeline activity that you see? And is there like any specific industry, region or type of customer that is extra strong?