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

Hi, and welcome to Modelon's Q2 2024 Earnings Report or Call. Here to present the Q2 report is the CEO, Jan Haglund; and the CFO, Jonas Eborn. So we will start with a presentation of the Q2 report, and that will be followed by a Q&A session. [Operator Instructions] So without further ado, I leave the stage to you.

Thank you very much, Jessica. So it's a pleasure to be here to present the interim report for the second quarter and the period January to June 2024. My name is Jan Haglund, and I am CEO actually since not so long, since the 1st of July this year. So this quarter, I was actually not in the company, but still, I'll take the opportunity now to introduce the highlights of the second quarter and also give my personal reflections. I will be joined here by a long timer in the company, Jonas Eborn, who is CFO of the company, and he will give financial details later on. So second quarter of 2024, some financial highlights. We had net revenues of SEK 21.9 million, which is up 4%. For the period, it was up 3% to SEK 40.2 million. Our annual recurring revenue was SEK 53.9 million, up 2% over the previous quarter. If you look year-over-year, it was up 18%. Operating expenses were a bit up 2% to SEK 34.8 million. But here, it should be noted that this contains a SEK 1.5 million of nonrecurring income. So in fact, without that, we were down 3%, which is the same change as for the period where we amounted to SEK 68.7 million operating expenses. And our operating profit or rather loss, EBIT was negative SEK 12.9 million, in line with last year. For the period, negative SEK 27.4 million. And this is a reflection that the company is still in an investment stage where investments in R&D as well as go-to-market and customer acquisitions are higher than revenues. I think my personal view on this is that we have higher ambitions when it comes to growth, and we have higher ambitions when it comes to profitability. However, it's very positive and pleasing to see the growth of annual recurring revenue. And going forward then, by focusing on that and controlling operating expenses, using also some efficiencies that I think we already see in the company, we have a positive outlook for the long-term of the company. We'll be coming back to that. But first, who are we as a company? Some of you might not know Modelon. So in short, Modelon enables companies to design, analyze and optimize systems through cloud-based simulations. So we are a software company. We have a software product for simulating processes in different industries. This example here is a power plant, and energy systems is actually one of our focus areas. What we do is to put that power plant into a simulation model. We don't actually draw the whole power plant with buildings and everything that other people can do. What we focus on together with our customers is the control system, the control loop. How do you actually regulate energy in order to provide, for example, a stable voltage out of a fluctuating input from, for example, a solar system. That's called control theory and the company has been very much built up on control theory, putting that into equations, putting it into simulations and generating results. That's in brief what we do. And we do it across the world. We have a global footprint all the way from North America with about 40% of our turnover to Europe, another 40% of the turnover. And then we have business also in Northeast Asia, 15%, give or take. We match this customer base with local presence. Our headquarters are in Sweden, in Lund, South of Sweden, and about 50% or 50 people in the company are based in Sweden. So in Lund, Sweden, we have headquarter functions and also a significant part of R&D. In the U.S., we have a sales and services body to match large customers. One of our main centers is in Germany for European customers, and we also have a team in Japan. India is important for us because there, we have the opportunity to use the great competence and efficiency, both for R&D and services, out of a site in the southern parts of India. And we are a listed company since 2021. We are listed on the NASDAQ Stockholm Exchange. As I showed, we have a broad customer base and here are some examples of these global and pretty impressive large customers. And we have customers in different industries doing different things. And I think this proves the strength of our offering. We can actually be relevant for different kind of challenges and different kinds of industries. We serve customers in HVAC, that's heating, ventilation and air conditioning, energy and industrial, so one large group of companies. For example, Siemens, Carrier, Honeywell are among those. We have large customers in aerospace, including the 2 big giants, Boeing and Airbus, Rolls-Royce engines also, Saab of Sweden, and last but not least, NASA in the U.S. And then automotive is also an important area for us with pretty large logos as you see here. Now with all these companies, what's common is that we typically enter through the simulation engineers of the front end, the most advanced part of research and development of these companies. Typically, a few people then are looking for new ways of developing complicated systems, new ways to save money, to have shorter design cycles through virtual simulation. That's how we come into the company. That also means that we are still in an early stage with, I'd say, almost all of these companies. Early stage in the sense that we only provide a few licenses to each customer, but that's growth potential. That means that over time, we have ambitions to be relevant also for the design departments and production departments of these large companies. So why do customers choose us? What makes us special? I think one thing is that we decided early on to have our product web-based. That means that you're not stuck to your personal PC, but you can actually access the tool and the simulation and the results from any web page you have on any device. I think that is the strength that all or actually most competitors cannot match. Another thing is that we can enable better decision-making in different parts of the development chain, both from very advanced simulations all the way to sort of less advanced simulations, where you actually try perhaps a new parameter set, you want to test a new algorithm, for example, I mean, just to see the result is something that can be done quicker by more people also. So we are relevant for different parts of the development chain. We are cloud-based, and cloud-based means that it's easier to collaborate. It means that a team can work on the same model of, say, a car or a power plant or an airplane engine. That's more difficult if everything is locked down into a PC. And then last but not least, flexibility. For us, we decided very early on as a company, and that's something I want to take forward also, the openness of what we do. We have open interfaces. We built on an open language called Modelica. That means that customers can actually put content on top of what we do in an open way. It means that other companies, third-party providers can provide their libraries together with our tool. And it means that we can connect also with other tools. As we will see later on, we actually recently launched the connection to Excel, a widely obviously used tool where, thanks to the openness, we can collaborate freely with that environment that many customers prefer. How do we sell? Well, it's pretty simple. We are a SaaS company primarily. We sell software as a service through a cloud-based service. Our ambition is to have subscriptions, license subscriptions, and our ambition is to close multiyear license subscriptions. At early stages, they might be 1 year, but our ambition is definitely to go beyond that. The other business model we have, which is today about 30%, is professional services. What we do is relatively complex. That means that some customers might need help to onboard, for example, on the product or to train on the product or to get help in building models. So we have the ability to do that. In fact, we have a very competent set of services people who are able to be out there with customers locally where they sit. Today, it's about 70-30, 70% on the SaaS side, 30% of the business on the professional services side, but the SaaS side grows quicker. It scales better. So over time, our ambition is to continue to grow the company, of course, and especially the software business. And our deployment models follow on. So they are also cloud-based. Our primary deployment model is through a cloud that we host. That means that the customer don't have to manage their own servers. They don't have to do their own upgrades. We do all of that, and customers immediately have access to the latest features or the latest releases of our offering. But then we do have customers who, for example, for regulatory reasons, demand that the software runs on their premises, on-premise customers. So there, we also have an offering that we call self-managed cloud service. So we can do that also. You can see it as an instance of our software that we can run or that the customer can run on their own premises and do the upgrades decoupled from the rest of the world, if so be. Some news from the second quarter, just some brief highlights. What did we do and announce? We announced a new solution for Energy System Optimization, where we have, you can say, prepackaged models of different kind of energy systems so that it will be easier for customers to go in and maybe do their smaller adaptations to get value out of what we do. And we've also bundled this with a set of services so that we can also send help if need be. And the reason why we have invested into Energy Systems Optimization is that we see that there is a lot of growth potential in energy systems with all the demand for more electrification across the world and also more and more regulatory and other pressure and willingness to introduce more sustainable energy sources. There's a lot of change in the energy systems side. That's the reason why we continue to invest in energy systems. That's also the reason why we engage into industry bodies. This is an example from the second quarter where the American Power Research Institute held conferences where we were one of the speakers interacting with experts from other companies as well as experts from this industry body. And well, I'm pleased to see that we are up there. We're up on that level. It's kind of a watermark of quality for us that we're able to contribute and that we're invited for our expertise. That's really good to see and, I think, gives optimism for the future. I already mentioned that we are open to interacting with other tools or third-party libraries. This is a very concrete example that I think most of us can relate to. Excel is a favorite tool, whatever industry you're in. And many customers have actually asked them that they can run simulations from Excel and see the result in Excel and where our tool becomes sort of the engine to all of that simulation. So we have enabled that connection between Excel and Modelon Impact, which is our flagship product. And Modelon Impact then can play with Excel as well as other tools going forward. And I think this openness, which is something I've experienced in the past also in other companies and other industries, is the way forward. I think this, in the long run, is the way to build customer value. And I see that many of our competitors have chosen a different path. And I think we're on the right track, quite frankly. The final point here is about competition. I'm not going to give a list of competing companies here, but actually highlight that our main competition might still be in-house tools, companies that have chosen so far not to use a third-party tool for their simulations, but rather have a team that throughout years have developed and tried to build something bespoke for their problem. What we've done here in this e-book that we released during the second quarter is to give those customers a bit of a sort of nudge, if you want, or a highlight that there could be alternatives to those in-house tools. We believe that Modelon Impact, which is our flagship tool, is definitely mature enough to challenge most in-house tools, both from a cost point of view, definitely from a cost point of view, but also from a feature-richness point of view, from a relevance point of view. We believe that simulations in most industry can be more accurate by running the models that we have developed, both ourselves and together with other companies during more than a decade. So that's why we came out with this e-book to try to attack this untapped part of the market, I'd say. My last point is actually about the future because it's an event. Customers is very important for us, of course. It's important for me. I've already started to meet customers only though I've been with the company a few weeks, and I have more lined up. I do that because I believe that to be close to customers is important. Customers orientation is one of our key values. And we're actually going to gather many customers together in Copenhagen on October 10 to 11 for a user conference or an innovation forum. We call it Modelon Innovate, where customers get to share with each other what they have been doing in simulations. We ran the first event of this type 2 years ago. It was a big success. Many customers came back to us and asked us to organize that again. So we're doing that. And personally, I'm really looking forward to this. It's an opportunity for us to meet customers, to listen to their challenges and to serve them better. The theme for this year is Where Simulation Meets Sustainability, I think an obvious opportunity and also a very gratifying theme to contribute to as a company. So with that, I'll leave the word over to our CFO, Jonas Eborn, for some details on the financials in the second quarter. Welcome, Jonas.

Yes. Thank you, Jan. And I'll give everyone some look at the details of the second quarter, the financials and starting with ARR as usual. So our ARR grew to SEK 53.9 million in the second quarter, which is an increase of 18% compared to last year and year-over-year. The sequential growth compared to last year was 2%. So we have continued growth since the middle of last year, although not at the same pace. But the main important thing is that Modelon Impact is continuing to grow. It's new sales of Modelon Impact. We have an annual growth of Modelon Impact ARR of 37%, while our multi-platform offering is -- has a flat development, which is expected. These are legacy customers that we've had for a long time with a stable demand. And we're moving to revenues. We have, in the quarter, SEK 21.9 million, a growth of 4%. And on the rolling 12-months basis, we have grown to SEK 80 million, which is 9% growth compared to last year. The software revenue is flat, SEK 14.4 million, but within that is the recurring revenue, which is growing in line with the ARR, 17% growth to SEK 13.5 million. So the reason for the flat software growth is mainly the nonrecurring sales in the previous quarter or the second quarter of 2023 of SEK 2.9 million. So there are, from time to time, larger sales to customers of a nonrecurring-type paid-up sales. The service revenue in the quarter grew to SEK 7.5 million, up by 11%. You can say that it's returning to normal after a slower first quarter. Our industry expert engineers, as Jan mentioned, they have very much appreciated knowledge and expertise. They are working both in our service projects and also engaging in sales, presales efforts with new customers as well as, in some instances, working on R&D for our different focus verticals. And in the first quarter, that was the case. There were -- was a push for the '24 H1 release in the first quarter. The development costs are up by 8% in the quarter, while on a rolling 12-months basis, they are decreasing by minus 7%. The growth is primarily just regular cost increases. The longer trend is on the rolling 12-months basis as we see. And the EBIT compared to last year was flat, minus SEK 12.9 million, as already mentioned. If we're looking at the operating expenses and our cash, the OpEx is up 2%, including personnel costs that are growing both due to salary increases in the second quarter, but also a nonrecurring item of SEK 1.5 million. So if you exclude this nonrecurring item, the OpEx is actually decreasing in line with the year-to-date OpEx of minus 3%. We should also mention that the development that we're doing, the development costs, they are taken as OpEx. So we are not making any capitalized development at all. So it's all in the result. The cash liquidity at the end of June was around SEK 40 million, which is actually just before we closed the financing round in July. So that was announced and mostly done in June. The final outcome was published July 4 and adds SEK 56.5 million of financing to our cash before transaction costs. The cash flow in the quarter was minus SEK 14.6 million, which is better than the quarter in 2023 by around SEK 5 million. This is roughly in line with the EBIT development. There are some variations with working capital, relatively minor in this quarter. The difference is a little bit higher accounts receivable compared to the previous quarter, which has a negative impact on the cash flow. And with that, I will leave over to Jan to take the summary.

Thank you very much. Thank you, Jonas. So just a summary before we go into Q&A. As new CEO, I believe that Modelon has a pretty unique position. We have unique knowledge in what could be called physics-based system simulations. That means concretely that we have experts in everything from physics, control theory, cloud systems, numerical methods, thermal fluids, areas that are quite difficult per se. What we do is to combine them into an offering of system simulation software. Therefore, I believe that we are well positioned to win market share and to grow revenues going forward. And we have chosen a business model to be based on cloud software as a service, which obviously has high scalability both from a customer point of view to increase in, for example, performance when you need to run large simulations, where you need more computing power or if you need more users, it's very easy to add capacity. But it's also from a financial point of view because we have high gross margin means that we have high leverage, so every new revenue comes with a good bottom line contribution. We are established across key geographies from North America through Europe to Northeast Asia. So we are where we want to be in terms of growing in advanced markets. We're still in an investment phase. So it's clear that product development and customer acquisition costs at this time and also in the short term are higher than revenues. That was clear, I think, also in the details that Jonas showed. But with a scalable business model and with the right focus on go-to-market, we do see opportunities in the mid to long term to generate significant operating profit and cash flows. So with that, I'll thank you for listening to our introduction of the company and hand it back for a question-and-answer.

Thank you so much, Jan and Jonas. So let's move over to the Q&A session. My first question is regarding the ARR. You mentioned in the report that Modelon Impact was the main growth driver to the 18% year-over-year growth of the ARR. Could you elaborate on how much of the ARR is contributed by Modelon Impact?

So well, I can give it a try, and you can tell me if I'm wrong.

Yes.

But -- so we don't give that exact numbers. We don't break down numbers in that sense. But what we do show, and I think Jonas mentioned it, is that the ARR of Modelon Impact, our flagship and newly developed product, that's what we invest the main part in. That was actually 37% year-over-year. And then the total ARR was 18%. I think it's relatively easy to do the math and to see the relation because the other part of ARR comes from what we call multi-platform business. And multi-platform is actually where our libraries, which are also, by the way, in Modelon Impact, but where those libraries run on legacy platforms with legacy customers. So that's third-party platforms. And that is growing at a slower pace because it's more in legacy sort of industries with less of a growth trajectory. I mean what's pleasing to see is that we have positioned Modelon Impact and we'll continue to position Modelon Impact towards growth industries, for example, in energy systems.

And do you see a potential for moving over those customers there on the legacy platform to Modelon Impact?

Maybe, but that's not our sort of -- I don't think that's the primary focus, quite frankly, for the reason I just mentioned. So we have no reason to put a lot of energy on that because there's so much potential to grow with other customers and applications.

And regarding the sales mix that you touched upon a little bit earlier, service revenues are growing slower than the software revenues. How should we view these estimates going forward? And how dependent is the software sales from the service segment or department?

Maybe not dependent enough would be the short answer. So it's right as you say, that services have been -- if you look at the last 12 months plus, especially been a flattish development of our services. A big reason for that is actually what I just mentioned that they are, to a large extent, tied to that legacy business, which has been growing at a lower pace. Modelon Impact and that part of service development actually grows, and that's the reason why we saw growth now in the quarter. I see an opportunity to use services and competence to also boost the Modelon Impact business because customers will need help, and we can provide that help. So that's part of the strategic work we're doing right now.

And if we look at the pipeline going forward, are there any specific segments or geographies that are -- where you see the highest interest from?

I think from a geography point of view, we're pretty happy where we are. I mean North America is important. Europe has actually been picking up quite well, especially this year. There's a strong development in Europe. Maybe proportionally, we could do even more in Northeast Asia. I think relatively speaking, our revenues are lower than what most people judge on the market potential. So yes, so Japan and Northeast Asia could be an area, but it's also quite costly to do business there. But I think in general, we're happy of where we are. Then I did mention energy systems where we have invested from a solutions point of view and an R&D point of view. I think that's an obvious area where we expect to see growth. But other areas also, including aerodynamics, for example, and vehicles or automotive, we will continue to be there, too. But focus is part of what we will drive. We cannot be everywhere. And with this tool, you can, in theory, solve any problem. We get a lot of those questions from investors. Are you doing this? Are you doing that? And so we have to deselect rather than select.

And in the last report, if we stick around to sales a little bit, you mentioned that you had a new cross-functional sales or growth team. Could you elaborate on how they have been executing so far?

I would say they've been executing really well. It's in a niche area within energy to large heat pumps, industrial heat pumps. And we've seen good customer potential there. The typical sales cycles that we see is 6 to 12 months. And this new team, they've been active basically since the beginning of the year. So we have several very good potential within this area that they're focused on. That basically has been picked up from conferences, from cold calls, from identifying target customers. And this is a way of working that we will continue also.

Do you see any potential to expand this team?

Yes. To other areas?

Yes.

For sure. Yes.

To the other segments?

That's also part of the reasoning that we did the rights issue, that we want to have that possibility to grow our sales team. For example, the growth team, and also in certain applications, for example, IT security work on the product development.

And in the update that you do during Q1 for Modelon Impact, you added a sharing functionality. Have you observed any more usage from your customers from this new functionality?

I know this is a very appreciated function. So it's been used and we get good feedback. I can't say that we have data that the sort of usage is increasing right now. It's also been summer period. So a lot of people are on vacation. So we hope to see proof of this now during the fall.

Not you and I now.

We'll get the reports.

I was talking about vacation.

Yes. Okay.

And I know that you don't disclose specific churn figures, but could you talk about it generally? What kind of trends are you seeing?

I can mention that, how I see that, because I think it's correct that we are not yet exposing churn figures. And I think the reason for that is that we're quite early still on the journey of SaaS. And in that early stages, you still have -- you have more volatility. And as I mentioned already in the report here, that we typically come in to the research department and come in -- and have one or 2 or 3, a few experts, that really understand the potential of this because it's relatively complex, and you need to get there. But once you're in there, then the potential is larger. But it also means that once you have that, when you're still in that early stage, you have to be prepared for a little bit higher volatility. So we have judged that maybe that day will come. But so far, the churn is something we need to sort of average out over time. So in bottom line, I think, is that we have more volatility in the beginning. But once we come deeper into our customers, we see already the trend that churn is stabilizing.

And let's see if we have any questions from the audience as well. We have one here. Just comparing to financial targets, should we expect growth of Modelon Impact to accelerate?

So I mean, we don't give an exact outlook beyond what I just said. I mean what we're happy to see is that Modelon Impact, which is our main investment, is fueling the growth. That's pretty clear from the numbers, 37% year-over-year, contributing to an 18% ARR growth. So I mean, our ambition is to keep a steady and strong growth on our software business, to control the operating expenses and in that way then, over not too long time. So I say mid- to long term, make sure that we start to generate also positive cash flows.

And there is one more. What is the explanation that despite large customers and a unique product, you do not take on larger orders? When do you expect a change to large order?

I think I was into that a few times. So the nature of our business is that we typically enter through a few experts on the customer side, experts that are sitting typically in a research or -- research and development area or actually research area, but who are tasked to grow that as a new way of working into the company. I met one of those customers, by the way, last Tuesday. And it will take some time because they also have their challenge, to champion -- to change ways of working, to change processes, to prepare IT systems. I think that will typically be the growth journey we will see with customers. I doubt that customers will go in and take a decision that 100 designers, for example, will immediately jump over to Modelon Impact. That would be fantastic, but I don't see that happening. I see it's more about step by step, coming in through one, 3, 5, 10, et cetera. We have customers who have started to take that journey, which is very pleasing to see. And for us and for me, it's important now to learn from that and see how we can duplicate it.

And you called out the land and expand.

That's our perspective, land and expand. I think from a customer point of view, it's more about how to grow in efficiency and how to cut lead times and cost.

Thank you very much, both Jan and Jonas. That's it for the Q&A session, but I will leave it over to you for some final comments.

Well, thank you very much. Well, I can just say I'm proud to have been tasked to lead this company. I think we have a unique and very interesting position. I hope I was able to, in a few words, give you a view of what we do through system simulations to help customers and industries to become more efficient, both from a cost point of view but also from a resource point of view. And I think that's an area with some obvious potential going forward. So we have high plans for Modelon to take forward into growth and profitability, but it will be a step-by-step process, starting from where we are now and hopefully, a gradual improvement over the next quarters. Thank you very much.