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

Good morning, and welcome to this Live Q with Modelon following their Q1 report. And with us, we have the CEO, Jan Haglund; and the CFO, Jonas Eborn, with us to present the report. And after that, it will be a Q&A session. [Operator Instructions] So with that, I hand it over to the company.

Thank you very much, Jessica. So I'm Jan Haglund, CEO of Modelon. I'm joined here today by Jonas Eborn, our CFO, and we're happy to present the interim report for January to March 2025.

Good morning, and welcome, everyone.

So today, we will do as usual. We'll give -- I'll start with the highlights of the first quarter, both financial highlights and also some of the product news that we have delivered to customers during the first quarter. Jonas will then continue with more details on the financials for the first quarter, and then we'll summarize at the end and look forward to your questions, of course. So the first quarter of 2025 was a quarter of, I'd say, stable development of all key numbers in the right direction. Our net revenues grew by 12% to SEK 20.4 million. That was primarily driven by software revenues and in particular, recurring software revenues. And as you see, our annual recurring revenues came in at SEK 59.9 million, and that's an increase of 13% relative to the same period last year. Operating expenses were SEK 29.6 million. That's a reduction of 13% compared to the first quarter of 2024. That's something we have planned for and expected, in particular, driven by the restructuring that we executed during the third and fourth quarter last year. And as a result of increasing revenues, in particular, software and reduced operating expenses, we see a significant improvement of our profitability. The EBIT profitability was minus SEK 8.3 million. So we still have an operating loss but it's a significant improvement compared with last year, plus SEK 6.1 million compared with the first quarter of last year. And here, I'd also like to highlight that our operating cash flow was positive. We generated SEK 3 million positive cash flow during the first quarter. That's, in fact, the first quarter since 2021 when we had positive operating cash flow for Modelon. Now it should be noted that first quarters are stronger for us. We're not still in a position to expect positive cash flows in all quarters, but we're really happy that we achieved this milestone. Now it can be noted that we are in an uncertain macroeconomical environment and we have started to see effects of that. We have started to see customers that are hesitating or delaying investment decisions. And that also has had an impact on us. We have seen changes -- negative changes in order intake. And I think the number that it starts to show on is also annual recurring revenue, which albeit 13% up from last year, was flat or actually minus 1% compared to the last quarter of 2024. So -- and we -- I think it's fair to say that we expect this trend to continue also into the second quarter of 2025. So all this means that we are and need to be ready to take action, also action on the efficiency side to be continuing the positive development of operating profit and cash flow that we saw in the first quarter of 2025. Jonas Eborn will come back with more details on the financials. I'm very happy to see that we continue to onboard new customers on our products and in particular, Modelon Impact, which is our flagship product. It's a cloud-based simulation platform where customers can use, simulate and operate with a full range of libraries that we have built up during many years. And during the quarter, we have onboarded new customers particularly in data center climate control, a growth area. And we are now happy to see the second large North American customer that are using our simulation platform to design and plan for next-generation AI-driven data centers. We also won another contract with a large global logistics company that are looking to optimize their energy consumption, in particular of their transport fleet, again, using Modelon Impact to simulate different scenarios and make sure that they use as little energy as possible to deliver their services. Food production is an important area, and we won a contract in Oceania, in fact, new country, a new area for us. And this company, in particular, is using Modelon Impact and will be using Modelon Impact to improve and optimize their energy consumption, introducing heat pumps in their factories. So all in all, good, good new customers coming in and very large-sized customers also that we see have big upside potential. And then during the quarter, we're also happy to see existing customers that are giving testimonials about how they have been using and are using our products to optimize their services, to develop new products, to cut costs, to cut time. In particular, we see a Japanese Muratec, a leader in industrial equipment that are using Modelon Impact to develop new solution. We see Slovenian Gorenje, that's a leader in home appliances that are using Modelon Impact to build new models of their products. And finally, Sattelo from Czech Republic. It's a leader in automotive industry, in particular, components for automotive industry. And one of the areas that they're active in is heat pumps. As you know, heat pumps becomes more and more important as electrical vehicles are introduced. And Sattelo is one of the leading providers there using Modelon Impact again to design and build new solutions. Now these customers often come in with relatively small uses and relatively few users of our product but there is potential, of course, to grow, and they want to grow. And that's one of the reasons that we have now in the quarter, introduced a new feature in the product. We call that Analysis View. And in brief, analysis view is a better and more optimized way to understand and view and share the results of simulation. So typically, you have a few users that build new models that create new products and then want to test different parameter settings that want to evaluate which is the best way to build, for example, a new heat pump. And then once you've done that, you want to share that with a number of colleagues that also then are potential users of our product. That's why Analysis View is really important. And we see that this has a potential then to create both value and revenues with existing and new customers. I mentioned our libraries before. Libraries of simulation models is a huge asset for Modelon. They've been built during many, many years, I'd say, almost since the start of the company 20 years ago. And now combining that with the world-leading cloud-based cloud platform, Modelon Impact gives us a pretty unique and leading offering on the market. We continue to develop, enhance the libraries. And during the quarter, we released 1 of the 2 releases that we will do during this year. We call this Release 2025.1. And there are many changes, many updates. But in particular, I'd like to lift up the focus we've had on battery development. Batteries are used in various applications. They can be used in electrical vehicles but they can also be used on a large scale to stabilize energy systems. And what we've done now is to make sure that simulating and designing batteries can be done in a much better and faster way than before. We see improvements of up to 100x now in simulation time compared to what we had before. Thanks to new algorithms and thanks to new research and know-how that we put into our tool. And finally, talking about research, Modelon is building advanced products. We were founded as a result of academic research in how to simulate control systems. And the spirit and the contact also with research is something that continues to drive the company. I've often got the question of what AI and neural network means for Modelon because we are founded on what's called physics-based models. So we start with equations of physics, the laws of physics, something that is quite difficult to debate and which gives you a solid foundation for building a new product, be it a heat pump, a refrigerator or an electrical vehicle. They're all based on the laws of physics. Now neural networks and artificial intelligence turn out to be a very good complement to this. They can either be used to describe things that are difficult to describe in terms of physical equations. That can be a strange shape, for example, a strange pipe. But what we have shown now in a research project called FIMUS, it's a German research project that is done together with other companies and in particular, also academic institutions is that neural networks generated by Modelon Impact can be used to accelerate simulations. So in cases where our customers want to run through hundreds or maybe thousands of different scenarios, neural networks can be a good complement to the normal physics-based models that we use. That was a little bit of an update, operational update from the first quarter. And with that, I'll hand it over to our CFO, Jonas Eborn, to give us more details about the financials. Welcome, Jonas.

Thanks, Jan. I'll start with comments on the ARR. In Q1, our ARR amounted to roughly SEK 60 million, which is up 12 -- 13% on an annual basis from last year, while about the same as the fourth quarter, actually minus 1% because of currency effects, the ARR is reported at constant currency. So the historical numbers are adjusted to the current exchange rate. Within the ARR, there are 2 pieces. Modelon Impact continues to grow, plus 38% ARR on an annual basis. While we do see a decrease in the multi-platform contribution, that has remained flat over 2024. Now we see a decrease by about 5% from the past quarter. And you can see the details on the FX adjustments in the footnote here on the slide and in the report. On our revenues, in Q1, we report SEK 20.4 million net revenues, which is up 12% compared to the last year. And on a rolling 12-month basis, it's SEK 85.7 million, which is also up by 8%. So we continue to grow our business. This is mainly, of course, software revenues, SEK 15.1 million in the quarter, up 12% this quarter. And in this quarter, it's almost entirely recurring revenue also. We have a very small portion of nonrecurring revenue, software revenue. The service revenues also grew compared to Q1 2024 by 10%. It's SEK 5.3 million in services. This is lower than the past quarter. The last quarter, Q4 was higher. This is not an uncommon pattern that we see at the beginning of the year when we need to sort of start up, get new orders from customers for the new financial year. Also in the current financial macroeconomics, we do see some delays in orders as been reported in the report. On the development costs, we see those reduced, decreasing to SEK 10.6 million in the quarter, down by 29% compared to Q1 2024, which is an effect of the restructuring that we started in the third quarter, and we now see the full effects in 2025. On a rolling 12-month basis, the development costs are SEK 50.4 million, which is down by 4% compared to the previous rolling 12-month period. And all of these development costs are taken as operating expenses, so they are also part of our earnings, the EBIT that we report. If we turn to the operating profits and the expenses and cash flow, the OpEx is also reduced by 13%, and we have SEK 29.6 million in operating expenses in the quarter compared with SEK 33.9 million in the previous period. The lower costs are mainly due to a reduction of external expenses, shifting from consultants that we had early in 2024. And now we're down to nearly no consultant efforts at all within the company. And as a result of the reduction in costs, we do see an EBIT of minus SEK 8.3 million, a major improvement versus last year, plus SEK 6 million compared to the minus SEK 14.4 million that we had in Q1 2024. And also because of this, we do, for the first time in 4 years, see a positive cash flow, like Jan mentioned, plus SEK 3 million in Q1 compared to minus SEK 4 million in the first quarter last year. This is partly a seasonal effect. We do see a lot of yearly renewals, large renewals from our customers in the first quarter and get payments for those. We also had a couple of 2-year deals that were reported in the fourth quarter. Those have been paid now in the first quarter. On the negative side in cash, we also paid the tax authorities as a result of the tax decision that we also reported in the fourth quarter. So both good and bad but in total, it's fantastic step forward with a positive free cash flow in the first quarter. Our target for free cash flow remains to be positive in 2026. So we do not expect this trend to continue immediately in 2025. To conclude, our cash liquidity at the end of the quarter was SEK 64.1 million, which is up from last year, of course, because of the emission that we made and the capital that we took in, in the third quarter last year. With that, I conclude the financials, and we will continue with a summary and Q&A.

Thank you very much. Jonas, would you like or Jan to give a brief summary?

I can do that. Thank you. Thank you, Jessica. So let me quickly summarize then. I mean we've seen a quarter where we have seen many of the financial indicators going in the right direction as we were planning and expecting. We've seen growth of recurring revenues fueling ARR growth of 13%. We've seen a reduction of operating expenses, thanks to efficiency measures, and that has driven both a much better operating profit loss than last year as well as cash flow improvements and in fact, positive cash flow in the quarter. We continue to win customers, large customers that create both revenues, but very much also upside potential. And that's why we continue to invest in our products to add features to make sure that we can be relevant not only for more customers but also for more users within the customers that we have. And we've seen some negative effects during the quarter, especially during the latter part of the quarter. Our order intake, especially in March, was slowed down because of hesitation of some of our customers that have delayed investment decisions that also made our ARR quarter-over-quarter not grow. It was actually a slight decline of 1%. And we do expect these trends to continue into the second quarter, probably driven a lot by uncertain macroeconomic conditions for our customers. That's why we remain vigilant and also ready to introduce further efficiency measures to protect the good improvement we have had on operating profit and cash flow. I think that's -- that will be my summary. But long term, we stand, of course, by the growth target. We believe that the potential of our business is continued growth of recurring revenue. We are quite unique on the market, having a cloud-based tool and a large asset of libraries. We see positive development of profit and cash flow and our target to be cash flow positive in 2026 remains. And the long-term operating profit potential, I'd say, is well above 20% when we have gotten the growth and the increased footprint of customers and licenses for our products. So thanks for that. And now over to you, Jessica, for some Q&A.

So my first question is regarding the impact on the ARR that you mentioned that you've seen a bit of a hesitant development from customers regarding new orders. Are there any specific segments or markets where you see this impact affecting the most?

Yes. Thank you for the question. I think segments might be difficult to see. We don't see so many customers. So -- but what we have seen is primarily from North America. That's where we have seen customers react quickest to the new macroeconomical situations. And some of the discussions we've been having are still good but we see a bit more sort of hesitation and caution on new activities, new investments because often, our products are only a part of a larger investment on the customer side where they perhaps bring in new people, they change processes, they change ways of working. And under uncertain economic conditions, we've seen some customers to push that a little bit forward. And we expect that to continue probably into the second quarter. And then beyond that, it's very difficult to see at this time.

Yes. So mainly North American, as I understand it.

Correct.

Yes. And if we look at churn, I know that you don't release specific churn numbers but have you seen any effect there on the back of this turbulent macro environment?

I think it's fair to say that we have seen also some effect on churn. It can also be that hesitation can be that customers, if they postpone or delay or maybe even adjust some of their spending and projects, that can have an indirect effect. So I think it's a fair guess that we've seen some of that during the quarter also.

And while we're talking about the sort of macro effect, I figure we should put some focus on FX as well. If you please can comment on your FX profile and how a weaker dollar would impact your P&L?

Yes, I can do that. So we do have a majority of our revenue in U.S. dollar over 50% for 2024, and that's current profile also. We are reporting the net exposure. So we are exposed to the dollar roughly on an annual basis, USD 1.5 million. And of course, then we are currently seeing a decrease of 5% to 10% in the U.S. dollar. So that would sort of on an annual basis, give a response to the sort of exposure we have to FX. However, in this period, we do not see a big effect of FX. Actually, the revenue recognition is based on the average exchange rate over the period, so the year-to-date exchange rate. That started -- the U.S. dollar started decreasing in March, which meant that the end average rate landed just above the average rate for 2024. It was 10.68. We do see that continuing into April. And currently, we're at roughly 9.5. If we see this going forward also, then, of course, in Q2, the average exchange rate will be down to 10 roughly and then further down if it continues. So we are exposed slightly, not sort of very dramatically to the U.S. dollar change.

Thank you for that clarification. And Jan, I'm curious to know more about these 3 new customers that you were mentioning during your presentation. And also, if you could elaborate on when the discussions started with these new companies from a sales perspective?

Yes, I can do that, Jessica. Yes. I mean they're all in 3 very different businesses, data centers, logistics and food production. So you may ask what's the common denominator. But the common dominator is actually the fact that they drive innovation through simulation, also that they can describe their engineering problems in terms of simulation models based on physics, which is where we are leading experts. So the first customer then that I mentioned in data center climate control, that's actually a customer that came in relatively quickly, a short sales cycle, shorter than 6 months, where the fast development on data center deployment, in particular, with new servers, GPU servers that are needed to generate AI type of workloads. They not only generate AI, they consume a lot of energy. And since they consume a lot of energy, that heat needs to go somewhere. So new type of climate control and cooling solutions are introduced with combinations of water or fluid cooling and that's -- and of course, traditional air cooling. That's what it's possible to simulate and dimension, of course, in Modelon Impact. And the second one is about energy optimization. That's actually a pattern we see across many industries and many customers. Energy remains obviously a key OpEx for many of our customers. This logistics company runs a large fleet of vehicles and introducing electrical vehicles, where to charge them, how to charge them in the best possible way is a problem that they wanted to try out in simulation. And of course, Modelon Impact was the right choice for that. And the third customer I talked about was in food processing but I think that's an example of customers we have more in production and process engineering where energy, again, is one of the key cost items where there's optimization opportunity, especially based on new renewables and new technology like heat pumps. So yes, that gives a brief summary and a little bit more color to the new wins in the quarter.

Yes. And moving on to the new feature, the Analysis View that you also mentioned during your presentation. Could you elaborate on exactly how this will help upselling to existing customers?

Yes, Analysis View is a way to more clearly and in an easier way, understand the results of your simulations. You could even argue that a simulation or simulation model is little worse without understanding what comes out of it and how to act on it in the real world. So Analysis View is a new sort of cloud-based feature where the user -- either the same user that has built a simulation model or another user who is perhaps just sort of using a model or wants to design, say, a new product, a new heat pump, a new data center, a new electrical vehicle. And he or she wants to try out different kind of parameter settings, maybe different kind of components that have a different sort of cost efficiency and performance profile. By running that over many sweeps of choices that can be tens or even hundreds of choices, you want to compare, optimize and then draw conclusions from that. We believe that this can be an upselling -- sort of upselling feature because it can be relevant not just for the super experts that design that simulation model but for more, let's call them, the domain experts. So not only for the simulation experts but actually more for domain experts that know what to expect and that have the engineering problem of designing a new product. So we're releasing this. We have, in fact, already released it, and we're looking forward to the feedback. We're working and we have been working closely with leading customers to develop and design this new product.

And if we move on to the more financial again, the operating cash flow that it was positive for the first time since 2021 is, of course, a big milestone for you. But could you provide more details on the factors that contributed to this and also add if there is any seasonal patterns to this?

Yes. So I will explain more. I did explain a bit, this is a seasonal pattern, yes. Our business with recurring revenues and licenses, they are often renewed on an annual basis. The contracts typically are signed in the last quarter of the year, Q4, and then get paid within 1 or 2 months. So we see the cash coming in, in the first quarter. This is very typical. And as our software business grows, the effect of this also grows more and more. In this season or this year, in particular, we had a couple of major 2-year deals, which contributed a bit more than usual and were also paid in January, actually. So we saw cash coming in early and also at a good exchange rate. On the other side, we also had payments and the biggest one was the tax payment that we needed to make also in January of SEK 4 million to the Swedish tax authorities based on the decision that we got in early December for employer tax for the past 2.5 years. This is a process that we've started and will be sort of coming back to the tax authorities. We believe that what we do in research and development is cutting edge and definitely something that should be worth the employer tax reductions that are -- can be used in Sweden and should be applicable to our company, of course.

And Jan, if we move on to another slide that you had in your presentation about the library and how you're extending the library. Could you talk about your library if you compare it to your competitors and how it differentiates you?

Thank you. Library is a key asset for Modelon. We built them during many years. And in many cases, we see customers that come in with an engineering problem where they can actually identify that this has been solved before. We have components or models where maybe it's enough to just change a parameter to describe their problem or their design. And that's, of course, a great time saver and also a great asset for us to be able to sell. Compared with competition, I think there are 2 key things. One is the fact that we have libraries. Some of the competitors don't. So the combination of a simulation platform and a very wide and rich range of libraries is something that gives us an advantage compared with other competitors. The other key thing I'd like to highlight is that our libraries are based on open standards. They're based on something called Modelica. It's the description language, and there is also a standard called FMI, which gives a well-defined interface for all the components in our libraries. Together, that means that customers can, if they want, not only see the content of the models. They're not just black boxes that we give and ask for their trust, they can go in themselves and understand how the models are built and they can also modify them. So everyone is free to add their own know-how and combine that with a rich set of libraries. Again, that's a unique feature for us compared with some competitors, actually large competitors, primarily North American that have libraries, but they're closed. You can't see them, you can't adjust them, you have to get them directly from the company. So the combination of the richness, the simulation and the cloud platform and the openness is a key selling feature for us.

And would you say that there is anything or any segment that needs that you're lacking in the library right now?

Let's put it this way that I think we're quite happy with the library areas that we have. We started out 20 years ago as a company and also, in fact, 20 years ago with the library development. And we've been catering towards different industries, everything towards aerospace, automotive, where we've recently seen the most growth and some of the new customers coming in is more in thermal fluids and energy. And that's why you see most of the features coming out right now in those areas like battery, which I gave examples about before. So I think all in all, we're quite happy about the areas that we're in. We're not planning to sort of add an entire area, at least not at this time but rather to improve the usability of our libraries to make them even easier to sort of drag and drop into your own problem as a company or to refine them to add feature functionality and to improve algorithms like we did in the first quarter.

And if we look at the macro environment again, how comfortable are you in achieving your short-term financial targets?

Well, our targets, we're comfortable about them long term, meaning that the growth of recurring revenue is something that we've seen consistently and given that we have unique selling features into an industry which is growing, I think, gives us confidence. We've seen good development also of our operating profit as well as our cash flow. But then we acknowledge that in the first quarter, we did not reach 20% ARR growth. We reached 13%. And quarter-over-quarter, it was minus 1%. And we expect this uncertainty to have an impact on our order intake probably into at least the second quarter this year.

And my last question, what is Modelon's current main focus is? And what can we expect from Modelon during the rest of the year?

Well, our vision is to be the clear and best and leading provider of cloud-based simulation solutions towards many industries to build on our heritage of physics-based simulation models and to develop that and put it into the hands of many customers and many users of our customers. So everything you'll see coming out from us will be in that direction. It will be about efforts to win new customers where we continuously seek and obviously also get interest from more customers. It will be to grow our relevance with existing customers to make sure that our tools can be used by many more engineers, not only simulation experts, but also domain experts. And we'll achieve that by continuing innovation. We were founded on innovation. We were founded on being on the cutting edge of technology, and we'll continue to do that. And we have a quite existing and/or a quite exciting pipe of new features that we're planning to release during the remainder part of this year.

Thank you very much, Jan and Jonas. And that's it for this Q&A session and this live queue with Modelon following their Q1 report.