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

So hi, and welcome to this Live Q with Modelon following their Q4 report. With us today, we have the CEO, Jan Haglund; and the CFO, Jonas Eborn. And they will present their report and after that, it will be followed by a Q&A session. [Operator Instructions] So without further ado, the stage is yours, welcome.

Thank you very much, Jessica. So it's a pleasure to be here. My name is Jan Haglund. I'm CEO of Modelon, and I'm joined here in a while by our CFO, Jonas Eborn, also one of the founders of the company. We will today present the Q4 of 2024 as well as, of course, the full year. I'll start with some highlights, customer news; Jonas will go into details of financials; and then I'll do a wrap-up and outlook for the future. There is a chance, and we welcome, of course, questions both here from the audience and from the web afterwards. So I'm happy to say that financially, I think all the key financial indicators for Modelon pointed in the right direction in the fourth quarter. We showed a net revenue of SEK 22.8 million, which was up 10%. That's a faster growth rate than the average for the year, which was 6%, landing at SEK 83.6 million. And in particular, then the underlying and annual recurring revenue growth rate was 6% up quarter-over-quarter and 19% year-over-year. And underlying that, which I think is also very pleasing is our key product, Modelon Impact, which from an ARR point of view, grew by 57% year-over-year in the quarter. Operating expenses were flat at SEK 35.6 million. But here, you should note that there is actually a onetime effect, which is in the OpEx. So in reality, OpEx went down. That downward trend is something that we had planned for, thanks to the restructuring program we did in Q3 of the year, and we expect the full effect of that to come also into Q1 of 2025. So we're happy to see that this is now coming into effect. And it also affects the adjusted EBIT in a positive way. So both the revenue growth as well as the cost control drove a positive SEK 3 million in the quarter for adjusted EBIT and on the year, a positive SEK 5.9 million. The growth of annual recurring revenues was very much driven both by renewals, upselling of customers we had and some important new customers coming in. The most important one is this: A win we did during the fourth quarter in the market of data center cooling. A big contract, a big contract for us of USD 630,000. It's a 2-year contract. A substantial part of that is licenses, software licenses. And this customer, which is a major North American player in social media is building data centers, huge data centers for the future with more capacity and also tuned for new type of processors. This demands new kind of technologies and solutions for cooling, which is a very interesting technology area. And as it happens then, our product and expertise is well tuned towards these kind of problems. It's thermofluid cooling problems that Modelon Impact is a perfect tool to use. And this American customer then has chosen us for this technology. We're really very happy about that. And we also see new potential in the market of data center cooling. To show the versatility of our key product Modelon Impact, another customer, Volvo Autonomous Solutions are testifying in the quarter to how they use Modelon Impact. In this case, it's actually to support the building of autonomous large vehicles. Volvo Autonomous Solutions is part of the Volvo Group that do trucks and buses and things like that. And if you go to places like mines, for example, it's advantageous to have them self-driving, but it's also very costly and time-consuming to build a prototype of a new truck. So it's so much quicker and smarter to do it virtually. And that's exactly what Mohamed Takkoush and his team at Volvo Autonomous Solutions are doing, building virtual prototypes of large vehicles that you can then test, change, put new parameters on, test under varying environmental conditions and build software on top, for example, for autonomous driving. Again, we're really proud to be supplying the underlying cloud-based simulation platform for this work. Now yet another big application area, where we also see growth and potential, is HVAC and energy. Heating, ventilation and air condition is an area which drives a lot of change driven by energy efficiency, but also some regulations, for example, the introduction of climate-friendly refrigerants. The energy market, I think it goes without saying that there is a continuous need to bring in more energy but also the introduction of renewables is something seen across the whole world. Attuned logos during the fourth quarter that we're proud to be working with and that have then been testifying to their projects on our webpage, modelon.com, that I recommend you to go into and read more about. One is BrainBox AI that use our tools to develop AI-based HVAC solutions to simulate that. The other one is U.S. Babcock Power, big company providing utility scale boilers and heating and energy solutions. What they do with us is to simulate and try out new generations of boilers both for traditional fuels like natural gas, but also for renewables; again, saving lots of time and money in virtual prototyping rather than building the full thing at scale. Now North America is an important market for us that goes without saying. It's actually the biggest market for Modelon, but we do have significant activity also in Europe and East Asia. During the fourth quarter, we had two significant marketing events. One was an East Asian conference in Korea. We have an office in Tokyo, where we both have direct sales activities, but we also have a number of resellers, both for Japan, Korea and China that we drive from our East Asia office. And this was a great event to drive customer contacts and to further understand the market opportunities, which are there, no doubt about it. The second key event that I can mention here was an event in Europe, in Prague actually, around heat pumps. Again, heat pumps is an area that a lot is happening, and our tool offering and expertise is well adopted to that, both from a residential point of view, but this particular conference was about industrial scale heat pumps. So again, an opportunity for us to show our capabilities and build new customer contacts. So in general, I'd say, a positive development of opportunities that I see in this area. With that said, I'll invite Jonas Eborn to give some more financial details for the fourth quarter. Welcome, Jonas.

Thank you, Jan, and I'm happy to give the numbers for Q4. So we are reporting an ARR of SEK 60 million. So this has been growing solid growth over the year and since mid-2023. We see 19% growth in the ARR versus last year and 6% quarter-over-quarter. We are reporting the annual recurring revenues currency adjusted. So this is the real volume growth. There are -- is a little bit of currency adjustments, SEK 0.7 million, as you see at the bottom of the page here. The growth is primarily driven by new sales of our flagship product, Modelon Impact, which has an annual increase of 57%. And these are sort of very promising numbers showing the future potential of Modelon Impact. If we look at the revenues and margins. Net revenues increased to SEK 22.8 million, an increase of 10% versus the 2023. Over the full year, we had SEK 83.6 million revenue, and that's a 6% growth. So we're growing faster in the fourth quarter. Our software revenues increased to SEK 15.7 million, an increase of 9%, primarily from recurring software growth, which increased to SEK 15 million by 18%. And the difference between these two numbers lies in a few nonrecurring deals, typically in East Asia, as Jan mentioned; and there's one in the historical quarter, Q4 2023 of SEK 1.7 million, and that's the reason for the difference. You can see from the differences of the two numbers here, there's actually one also in the fourth quarter here of SEK 0.7 million with the nonrecurring revenue. Our service revenues grew by 12%, and there's good pace in our project deliveries with new and long-standing customers. And we expect to keep our service business growing. It's a very important driver also for new Modelon Impact sales. They go hand-in-hand. The development costs decreased by 10% in the fourth quarter. That's a trend that we expect to continue a little bit further into Q1 as a result of the restructuring that we did in the third quarter of 2024. Over the full year, rolling 12 months, the development costs were up slightly, but that's mainly because of sort of end of last year and the beginning of 2024. Those development costs, we are taking them as operating expenses. So they are included in the EBIT that we're reporting. And then I will talk a little bit about the operating expenses, cash flow. One very big effect that we talked about in the press release in December is the decision that we got from the Swedish tax authorities to deny previous employer tax reductions. And so we see in Q4, our operating expenses increased to SEK 38.8 million but that's entirely due to this nonrecurring effect from those denied employer tax reductions. There are two terms in this. So there's partly the reductions for prior years 2021 through 2023 of SEK 3.2 million, that we can take as nonrecurring item. There's also the full effect of denied employer tax reductions for the 4 quarters in 2024 which all land on the fourth quarter in this case, SEK 2.9 million extra in 1 quarter. And those two together are then sort of included in the personnel costs for the fourth quarter. So we basically have the same numbers repeated here, but it's because this is a very big effect that sort of explains the pattern of both operating expenses and personnel costs. If we adjust -- not adjust, but if we just take out those onetime costs from the employer tax from the personnel cost, we can get a comparable figure for the personnel cost in Q4, SEK 21.2 million in the fourth quarter of 2024 and SEK 22 million in the fourth quarter of 2023, so just to make sure that we can compare apples-to-apples here. This also, of course, goes into the adjusted EBIT. There's only then the nonrecurring item that's adjusting. We are improving our EBIT to minus SEK 11.6 million. The cash flow from our operating activities was minus SEK 11.4 million compared with minus SEK 18.7 million. So we are improving our cash flow. Part of the operating cash flow is, of course, the non -- the changes in working capital, both from sales. We had good sales in Q4, but one effect that we see also from this denied employer tax reduction is that the reservations and the taxes that we need to pay to the tax authorities are booked as other liability, that's actually a positive on the working capital and then that will come out in the first quarter when we actually pay those taxes. And I think that's -- hopefully, the last thing I will ever need to say about the tax effect here. We are, of course, as we said in the press release, preparing an appeal of this decision. But with the tax authorities, that will take some time to settle. We are working with our legal tax advisers for that. So I'm happy to take any questions after the presentation, but Jan, back to you.

Thank you, Jonas. So just to wrap up first by saying that we actually have something to celebrate as a company this year. The company was founded almost exactly 20 years ago in early 2005, and the 3 photos here show when the company was founded, gathering with some of the founders and some of the early employees. There's a younger version of Jonas Eborn also on the photo. There is a photo of the 10-year celebration when the company was very much a service company building a large base of competence and of course, customers to where we are today. This last photo was taken in October when we had the Modelon Innovate event in Copenhagen where we gathered a lot of customers and prominent speakers to talk about how they use simulation technology and our product. And the journey to a product company is something that, in particular, the last 5 years, has been the guiding star and will continue to be the guiding star for the company into the future. Because what we do is really to, as a company, enable companies across different industries to design, analyze and optimize their system, and we do that through cloud-based simulation. Our key product is called Modelon Impact, where through lots of natural science, knowledge, actual equations and lots of mathematics to translate that into simulations, we're able to simulate and sort of virtually prototype problems or solutions from different kind of industries, everything from aerospace, automotive, energy, HVAC and many more. It's a really good and fun position to be in. And what makes us unique is very much the openness, the modern tool, the cloud-based platform, what we have in combination with years of knowledge about these domains. Our business model is and will remain a Software-as-a-Service model, where we, thanks to this cloud-based tool, are able to alleviate some of the IT hassle that customers may have with desktop-based tools, and we can then also have a flexible model where we sell our software as a licensed subscription. We have built and have a pretty broad and impressive customer base across the world. As I mentioned before, North America is our most important market from a revenue point of view, followed by Europe and East Asia. And as you see here, these are the public logos. We have other customers on top of this, but it's a good set of large and prominent customers, and we actually have a position, very often in the core of the development of new products and new technology for these companies, working with the experts in many cases at the forefront of these large engineering companies. A lot of our opportunity lies in broadening that relation. So I see both opportunity to win new customers and to expand licenses with these customers to make sure that we become relevant not just for the few experts at the research department, but broadening into design and operations departments, all the way into what's sometime referred to as digital twins of equipment out there into operation. So I think in summary, based on this sort of good position, we have the good development of recurring revenue, the effects of the restructuring program that set us on a, I think, healthier cost base, we decided that it's time to be more precise on our financial targets. So yesterday evening, we decided then to set new financial targets that we also published to the market. These three are the ambition to generate annual recurring revenues, the growth above 20%, pretty much starting now going forward. Of course, there can be variations. But as we saw 19% is pretty close, and we're -- so we're already at that range as of today. We also see now with the cost development and the -- what Jonas talked about the good cost control we have in combination with revenue growth, that the ambition of having free cash flow positive from 2026 is realistic. And with a combination of these breaking through the ice during 2026, continuing growth of recurring revenues and a very high gross margin because we are a software business with good and healthy gross margins that gives high leverage and the possibility to longer term have operating profits and operating profit margins well above 20%, which is our ambition. So again, these 3 updated targets reflect what I think we could say is a higher confidence and a more precise view of where our business is going. I think with that said, we are through the presentation, and we're really happy to take questions. Thank you very much.

Thank you very much, Jonas, and Jan. Let's move on to the Q&A session. And we will start with a couple of questions that I have, and then some questions from the online audience as well. And then at the end, we will open up for questions here from the live audience as well. So my first question is regarding the ARR, which show a 19% year-over-year growth. How much is driven by price increases versus volume?

Should I take that?

Yes, you can take that.

So we do price increases at the beginning of the year, every year. So partly, this is an effect of that. Those price increases, they take effect as our customers, they are renewing their contracts over the year. So there's no particular effect of price increase in Q4. The primary driver, as I said before, is the new sales that we're doing, a new Modelon Impact sales. That's the biggest driver for the 19% ARR growth.

And the price increases, you do that accordingly to the contract every year or...

Yes. So all contracts they go through a price revision. In some cases, there's an index cost. We typically adjust roughly with the index, although it's not sort of on all contracts.

And Jan, you mentioned two key segments: Climate Control and Renewable Energy, where you see opportunities both to expand on current contracts up-selling and to win new contracts. Can you talk about the strategy on how to approach these two segments?

I think our strategy to win more business, both with existing customers and new customers is based on two things. One is to enhance the product. We continue to invest into Modelon Impact, both to the platform to make that more increased capacities, increased characteristics, but also increase the user friendliness so that we can broaden that to a wider audience within our customers. We also invest into libraries because being able to adapt to technology changes, I mentioned, for example, refrigerants, which is a particular technology that changes both HVAC and energy industry. The other thing is that we invest into customers and customer relations and sales. So we have a strong organization, both in North America, here in Europe and over in East Asia. In North America and Europe, it's primarily direct sales. In East Asia, it's primarily indirect sales. But we continue to invest into those relations. So the combination is really where we see growth coming, product and sales.

And regarding the product development, is that based on customer feedback or how is the iteration?

Partly. So obviously, we listen to our customers. We work with lead customers also. We're blessed with having very advanced customers. And by working closely with them, we will understand where the market is going. But Modelon is an innovation company. Also we have very high level of competence. We both follow and drive research-oriented activities. So in many cases, we actually generate and see sort of product trends before customers demand them. And then when customers come to that point, it's there.

And given the quite long sales cycles, how long should we expect it takes before the current sales efforts translate into visible top line effects in the P&L?

I think sales cycles for us vary between maybe 3 to 18 months, 3 in the case where we have perhaps an existing customer. We've had examples of very fast new customers also. But if you have an existing customer, it's so much easier to have that dialogue about new functionality or new capacity. Whereas if you enter a totally new customer that might not even be using simulation technology themselves, which we see examples of, especially in energy industry, that might take longer time also for them to mature their thinking process. So I'd say 3 to 18 months frankly.

And we have a question from our online audience. How does Modelon's pricing model looks like for Modelon Impact?

Do you want to?

Yes. So I think we've explained this quite a bit in previous quarters. But the main idea is that we have a Modelon Impact on different tiers, base and a pro level. A pro level for sort of full availability of all the libraries. And then on top of that, we sell add-ons. So deploy add-on to distribute simulation results and simulation FMUs to many users. Productivity to expand the usage of simulation for a single user to run more simulations and get access to more capacity in the cloud. And then also, you can sell -- distribute FMUs and have app mode. So you basically get customers also using your simulation results.

And we should explain that FMU, it's a cryptical...

Yes. It's part of this Modelica standard that we use. So it's a functional markup unit. It's basically a calculated model of a system or a component that you can easily send and someone else can run it in -- also in third-party simulation platforms.

I think a good nontechnical explanation that I love is to talk about digital twins because it's actually -- when you create something that runs, it could be a heat pump or a truck or whatever, and that you could have run in parallel with your physical equipment. That's what we can generate from the tool. From a technical point of view, it's called an FMU.

Yes. Got it. And another question from the online audience. How many clients are currently using Modelon Impact? And what is the average contract value? And what is your ARR target for 2025 and/or 2026? That was actually three questions. Let's start with the first one. How many clients are using Modelon Impact?

So we don't publish the exact customer count, but I think I had a slide there on the logos and I didn't count the logos, but I think they were, well, in the 10s, so well above double-digit that are public logos, and then we have at least an equal amount of nonpublic logo. So it's a pretty healthy list. Modelon is not dependent on one or a few single customers. We have a broad customer base. That also means that if you do the sort of backwards calculation that the average revenue per customer is still quite low. We have relations with and we have business with many of those large customers that are spending a lot on development, prototype development, and there are still perhaps using a simulation for a limited part. And we see, of course, the opportunity to grow that. So a lot of the revenue potential for Modelon lies in finding deployment methods and becoming more relevant for larger groups of engineers in those.

So upselling?

Upselling, growing the share of pocket with existing customer, yes. And the third one the growth of what to be expected. Well, the updated revenue targets for ARR, above 20% is our ambition. And in the quarter that we just published, we had 19% of growth. So I think that gives an indication where we are at least right now.

And in terms of upsell, you mentioned a little bit about it in your CEO letter. Are you seeing a positive momentum there or could you give us some guidance to what you're seeing right now in terms of upselling to existing customers?

I think that -- I've been out meeting a lot of customers since I started. I'm counting 30-plus right now, I think, out there seeing customers. And I think in general, there is very strong trend towards working more and more virtually. Customers want to do things faster, quicker because there's a lot of competition. I mean European companies get competition from China, for example, and you need to be faster and smarter in order to meet that kind of competition. In many cases, our customers see simulation technology as one of the key answers to get that. So I see a positive view on that. Then, of course, that's a change for them. It's a competence shift that needs to happen also on the customer side, the process shift. So -- but all said, the growth we saw in Q4 was a combination of upselling to existing customers and a few key new contracts also. And that's our ambition also going forward, both working with existing customers. That's probably where you have the lowest hanging fruit always when you already have a customer relation. So we're putting a lot of focus on that.

And in terms of the reorganization that you did late last year, what kind of effect have you seen on the organization so far?

I mean we launched a reorganization and restructuring at the same time on the 1st of October last year. We did that in order both to accelerate revenue growth by being more clear and precise on our focus, in particular, as a product company. And the other reason was to put out on a more sort of sustainable cost structure. So we took that chance to do at the same time. I think we've -- as a small company, you can do these changes faster than what you can do as a big company. So I think we're through the whole change. The new organization is in place. It's operational. Targets are there. People know what to do. And at least my perception and view that I hear is that it's been a positive change, well received, both by our customers that see even increased attention on things like innovation, product development, customer orientation and from our employees who get more clarity on where we're going as a company.

And another question from the audience. Your financial target calls for at least 20% yearly growth when it comes to ARR, while the previous midterm target was 35%. Is the 35% target still achievable or should we see this as a downward revision?

Short answer is no. I think the key thing is that it's much more precise now. So the previous target was towards an undefined time, whereas the other targets that we launched yesterday night were here and now. We talk about both ARR, which is an ambition right now. We talk about 2026 in terms of positive free cash flow, and then we retain the ambition of long-term operating profit. If you look at the underlying growth we have, for example, Modelon Impact that in the quarter grew by 57%, I think that gives sort of reason for optimism when it comes to underlying growth factors. And as we continue our journey as a cloud-oriented company, software company, with cloud also as a deployment method it's highly scalable, I think there are good reasons to be positive going forward.

So I would like to ask the audience here, the live audience, if you have any questions and if you have, please raise your hand and there will be a mic circling around.

Yes. Can you elaborate a little bit about the competitive landscape and what's your upper edge against the competition?

Right. Yes, I mean, as any attractive market that will be competitors, otherwise, you should be worried. So there are competitors, there are large competitors, both competitors that are quite similar to us, meaning that they work with the type of technology we have and then competitors, for example, North American competitors that have a different kind of technology approach. What makes us special, I'd say, is perhaps two things. One is that we focus on openness. So we have, at the base of our technology, a very open approach to things. Customers can actually themselves, on top of what we provide, build their own models. They can look at the equations and see that. They can connect their own tools, either that they've built themselves or other favorite tools could be even Excel. So openness in all aspects is something that we have bet on. Some of our North American competitors have more of a closed ecosystem. I think the other thing that makes us special is that we come in a little bit later than some of the big incumbents in this market, so they are still stuck in a computer. They still have desktop type of applications. We have built our software for cloud and that gives so many advantages in terms of scalability, access to performance, also collaboration if you're a team that want to work towards a common model. So that's also a thing that we differentiate -- that sets us aside. And both of these things I've heard actually face-to-face from many of the customer meetings I've been having. So that, again, gives me optimism for the future.

We should also mention the libraries that we have in Modelon Impact. The content, which is the widest choice of libraries in different industries, different technologies. There's actually -- in our segment, at least, there is no other supplier that has as a big choice of different libraries. So we can serve many industries and all our customers.

And while we're talking about advantages, I think, I mean, we are a company that we're a good size. So I mean we're about 100 employees, that means that we are stable enough to be providing a service to many of the large customers you saw, but we're small and nimble also. And the feedback -- the positive feedback I get is that we're much faster than some of the bigger companies in terms of responsiveness, being able to adapt to requirement and being there when there is a question. So the level of expertise and the speed and customer orientation is also something we differentiate in.

Any more questions from the audience? No. So I have a last question and that is what should we expect from Modelon in 2025?

Yes. A lot of things. I think, first of all, a continued strategy towards winning as a software company, continued focus on recurring revenues, so building step by step for the future, a long-term view. Should also expect that we continue to invest, which will generate innovation. So you will see innovations coming out and continued customer focus. So I think hopefully, you'll see evidence both in terms of deals, but hopefully, testimonials from more customers like the ones we showed here in Q4. Those are at least my focus areas for the year.

Thank you very much.

Thank you, Jessica.

Thanks, Jessica.