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

Good morning, and welcome to this slide with Modelon following their Q2 report. We have the CEO, Jan Haglund; and the CFO, Jonas Eborn, with us to present the report before we move on to the Q&A session. [Operator Instructions] And with that, I would like to welcome Jan and Jonas. Please go ahead and start your presentation.

Thank you, Jessica. So my name is Jan Haglund, and it's my pleasure to present the interim report for January to June 2025 for Modelon. In this call today, I will be joined by Jonas Eborn, our Chief Financial Officer. We will be covering the highlights from the second quarter. Jonas will give a more financial -- detailed financial update. And then at the end, we'll end with a summary and outlook for the rest of the year. And there is, as Jessica said, an opportunity to ask questions during and after our presentation. So the second quarter of 2025 brought net revenues of SEK 18.5 million. That's a decline from last year of 16%, to a large extent, explained by currency effect as well as lower professional services on our legacy offering. You could say that it's, to some extent, a result of our streamlining the company into a product-led platform company with a cloud-based offering for system simulation. ARR for our software was flattish or minus 2% quarter-over-quarter, but an increase of 9% year-over-year. Again, it's our legacy software that pulls us down a bit, while the new Modelon Impact offering grew by 28% year-over-year, a strong and solid growth. Now we do see hesitation and delays on the market, and we have anticipated that already in the first quarter, which is why we've also taken actions on our operating expenses. Operating expenses in the second quarter were down 16% versus last year, to a large extent, the effect of restructuring and efficiency measures that we took last year. And that has led then to a strong improvement in profitability 2 million up versus last year or a year-over-year SEK 7.8 million in improvement of adjusted EBIT. Now as we anticipate continued hesitation on the market and uncertainty, we've taken additional measures during the second quarter, additional efficiencies, which has come with some restructuring costs, but that will also lead to a lower cost base of around SEK 15 million on an annual basis starting from Q3 this year. Q3 was -- Q2 was also a quarter where we welcomed new customers and in particular, new customers on Modelon Impact, our cloud-based simulation offering. In particular, we had wins in the energy space. Dandelion is a U.S.-based specialist in geothermal energy. Takenaka is not a new win in the quarter, but a new reference company in the important area of buildings simulation and buildings energy optimization. We won a new license contract with a Japanese heat pump manufacturer, a European leader in waste-to-energy and a very exciting contract with a European high-profile motor sports company. All of these contracts are, let's say, entry-level contracts that don't have a major financial impact in the quarter, but they're all a base for continued growth. All of them come with growth opportunities as the customers learn and expand their usage of our offering. So as I mentioned, Takenaka of Japan -- a Japanese construction and engineering company is a great example of using Modelon Impact in combination with buildings library where you can optimize the energy and climate systems of a building, both in the design phase and in fact, in the operational phase. This is one out of several contracts that we've taken. We've also taken contracts, for example, in North America. And that's why we decided to also integrate the buildings library from Lawrence Berkeley National Laboratory into Modelon Impact. That means that this is now a combined product offering, the open source library together with our software and customers then of what we call Modelon Impact Pro get access to the full suite of integrated libraries. For us, this means that we have a larger addressable market because we can serve customers in the growing space of building optimization. Our particular kind of building is data centers. And data centers up to now have been mainly ventilated and cooled by air, but things are changing and things are changing rapidly with the development of artificial intelligence services and special processor types. They consume so much energy that, in fact, you need to cool them with liquid cooling. And our tools, Modelon Impact and our libraries, happen to be well suited for liquid cooling, simulation, design and optimization, which is probably why 2 Tier 1 U.S. cloud providers have already chosen us for their simulations. We're working with several other opportunities. And during the quarter, we took a chance to explain to customers and to the market how simulations can be used for data center liquid cooling. So if you're curious about that very exciting technology area, I recommend you to follow the link in this material to learn more. On July 9, right after the second quarter, we released an exciting news about a new minority shareholder that will invest in Modelon. This is Briarwood Capital Partners, who following a decision on an extra shareholder meeting on August 20, will come in as a new shareholder, investing SEK 20 million at a share price of SEK 20 per share. Now this is exciting for us for several reasons. Briarwood Capital Partners are a strong U.S.-based owner that have experience and competence in the simulation area. So I believe that this will contribute both with knowledge about the industry as well as our most important market, which is North America. Then, of course, the proceeds, the investment help us with continued investment, both in go-to-market capability as well as in the portfolio. And in particular, we are eyeing to see how we can combine generative AI with our current platform. I think the combination there will bring many exciting opportunities for customers going forward. And also this week, we had -- earlier this week, we had a piece of news coming out. This was a new partnership with TLK Energy. TLK Energy is a German specialist in simulation. They do mainly consulting and services, and they have their own libraries for these areas. TLK Energy becomes a reseller of Modelon Impact. They will be able to offer that to their customers, and they will use it as part of their customer training also. We're very happy about this. We believe that this is a win-win for both companies and of course, for customers, both our customers who get access to integration of TLK's libraries as well as TLK's customers. Now this is a partnership that will evolve step by step, but I'm sure that this will drive potential for sales for the future. With that said, I'll hand it over to Jonas Eborn, our CFO, to give us more details about the financial results. Welcome, Jonas.

Thank you very much, Jan, and I will move into the ARR. So in the period, we have a software ARR amounting to SEK 55.5 million. This is a 9% growth annual, while you do see a decrease from the previous quarter, minus 2%. It's important to recognize that this is reported at constant currency. We do have major foreign exchange effects in the quarter and the adjustment made on the historical number is minus SEK 3.2 million. So the difference to what was reported in Q1, SEK 60 million is primarily from foreign exchange effects. The growth -- annual growth is driven by Modelon Impact ARR increasing by 28% annually. We do see a continued decrease in our legacy offering, multi-platform offering by 6% annually. So that's the major reason for the quarter-over-quarter decrease that we see in the ARR. Net revenues in the second quarter amounted to SEK 18.5 million, which is a decrease by 16% year-over-year. This is not an FX-adjusted number. So there is quite a lot of foreign exchange effects in this number. The rolling 12-month net revenue is SEK 82.3 million, which is a 3% growth -- annual growth. The software revenues were SEK 14.4 million, which is flat versus the second quarter in 2024. And we do see some recurring revenue growth because of also some paid-up licenses, but of a small amount in the quarter and in the previous quarter. Service revenues amounted to SEK 4 million, which is a decrease by 46%. This is very much a result of our customers requiring less support with Modelon Impact. So it's an easier product, a cloud product, and we do not deliver as much services for Modelon Impact as we've done historically. This is also a strategic shift. We're moving away from supporting our competitors' platforms. So this is partly and primarily the reason for the decrease in service revenues. Development costs continue to decrease. They were SEK 10.5 million in the quarter, decreasing by 22% quarter versus the historical quarter. Rolling 12 months, the decrease is 12%. So we have an annual development cost of SEK 47.4 million. These have decreased as a result of the restructuring announced last year. We expect that they will continue down a little bit for the remainder of the year and then stabilize around the level that we're seeing or slightly below the level that we're seeing in the quarter. If we look at the expenses, operating expenses in the second quarter, they were SEK 33.2 million, lower costs compared to the previous year. A lot of it is reduced external expenses. We had a lot of consultants before. And now we actually operate completely without any consultants. This is actually including the nonrecurring effects. So in the SEK 33.2 million, there's SEK 5.2 million nonrecurring expenses. If you take those into account, the personnel cost was down quite a lot compared to last year, SEK 16.3 million versus SEK 22 million. As a result of this, the adjusted EBIT improved by SEK 2 million over the 2024 results, and we are at minus SEK 9.4 million in adjusted EBIT. Cash flow was flat versus last year, minus SEK 14.6 million in the quarter. Very much this is the net result that is showing in the cash. There are no working capital changes in the period. Cash liquidity is at SEK 49.3 million. Notably, this is before the announced capital investment, which will be decided in August Extra General Meeting and then executed shortly following that meeting. And this concludes the financial summary. So we'll go to the outlook.

Thank you, Jonas. So just wrapping up. As said, we do see some hesitation on the market and also delays in customer investments, which has affected our annual growth, but we see that as a short-term effect. Longer term, we see it fully realistic to have an annual recurring revenue growth ambition of above 20%. We also maintain our free cash flow positive target from 2026, especially since we have been seeing gradual improvements in profitability and now also have taken further measures on cost reductions and efficiency. And with very high gross margins as a software company, cloud-based and a better and more effective cost base, we see that a long-term operating profit margin above 20% is a fully realistic target for Modelon. So with that, I'll hand it back to Jessica to moderate the Q&A.

Thank you very much, Jan and Jonas. So let's move on to the Q&A session. The first question is about ARR development and outlook. Can you provide an update on the ARR development during Q2 and your view on the trajectory going into the second half of the year?

You want to comment?

Yes. So we've seen some headwind in the market and, of course, a lot of FX effects. Taking those out of the picture, we see that we will be recovering the ARR growth towards the end of the year. The third quarter historically is the sort of lowest new sales period and a lot of people are on vacations, of course. But the strong feeling is that we will be coming back with -- to a growth quarter-over-quarter by the end of the year and then also return to our ambitions with 20% growth annually.

And let's move on to the cost measures and impact on -- or potential impact on delivery. What specific cost adaptation measures have been implemented in response to the uncertain market? And are you anticipating any effects on delivery capacity or timelines?

Yes. Thank you for the question. Well, the efficiency and cost measures that we've taken are in line with what we did last year. We try to focus as much as possible on external costs, also management overhead we've taken out even more at this time. We have consolidated R&D sites, so to have fewer R&D sites than before. We are now where we want to be with 2 main R&D sites and because every R&D site brings a bit of overhead into the organization. There are -- there will be some effects, but we regard all effects on customer deliveries as manageable. So no major effect.

And should we expect any more nonrecurring costs connected to this cost adaptation?

No. We have accrued everything and reported everything in the second quarter.

So let's move on to the proposed directed share issue. Could you talk about the background and the rationale behind the directed share issue?

I can start and you can fill in, Jonas. I mean, first of all, we're very happy about this and Briarwood Capital Partners, they actually came to us through research. They have experience from the area of simulation technology and found Modelon and found that we are a leading company, especially when it comes to cloud-based offerings. And based on also positive feedback from the market, including, I suppose, some of our customers, they contacted us and then that was an agreement then on July 9. And the agreement contains both an initial part that we talked about here, SEK 20 million at a share price of SEK 20. And then there are warrants to increase the ownership further during the next couple of years. And the share price for that is also fixed and set to SEK 20 and SEK 30, respectively.

From the financial point of view, this is a welcome addition, a major -- or a minority new shareholder, but with sort of a major positive impact on the company and a lot of good references. What I've heard from the majority shareholders, this is also seen as a cost-effective way of bringing in new capital and at a premium over the market valuation. So the sort of dilution effects are seen as not a problem really that they are minor in comparison with the capital investment that Briarwood are making.

And how do you intend to use the funds? Are there any near-term priorities or strategic investments?

I mean we have a business plan that this gives us the opportunity to execute on and to some extent, accelerate also. And there are several areas that we're evaluating here. But in particular, generative AI is a topic, I think, for all companies, but also for us. And I think the combination with the cloud-based offering for system simulation and the capabilities that generative AI offers on various levels for our customers, that's an exciting area that we now have the opportunity to accelerate and put more focus on.

And moving on to FX outlook. Given your international exposure, how are you managing the current FX trends? And what is your outlook for the second half of the year in terms of FX effect?

Of course, we don't know what the future will bring, but the -- we see that most of the changes in FX have happened in Q2. What I expect is that we will be -- continue to operate at roughly the currency level that we are right now. That means that we will have, of course, major currency effects in the reported numbers as we're sort of going into -- going forward and still have the higher effects from the second half of last year in the history. From a hedging point of view, we have natural hedging because we also have costs in the U.S. The exposure that we report in our report is roughly USD 1.5 million in that currency because we have a sort of a larger share of sales in U.S. dollars than we actually have costs. There is also some exposure to euros, which is a lower effect on euros. But overall, we're using natural hedging. We're not doing any active hedging or sort of FX contracts. And we see that we've taken most of the effects in the current quarter.

I could add also that, I mean, the obvious reason why we have an FX effect is that a major part, actually more than half of our business comes from North America and is done in U.S. dollars. So with a stronger Swedish krona versus U.S. dollar, we have an FX effect. We also see that quite a bit of the hesitation and delays on the market are in North America for reasons that we are all aware of. But I mean, we have a strong outlook in the long term also for North America. We have a broad customer base, and there are a lot of exciting things happening there. And as you saw in this report also, we have new contracts in North America that come with growth opportunities. So I believe we're well-positioned for growth also in that area.

And moving on to the new reseller, the TLK Energy. How do you view the strategic significance of onboarding TLK Energy, particularly given their past use of competitor tools?

Yes. I think there are several positive things in this news and several opportunities over time. It will take time to build up this, of course. So we should not expect any sort of short-term effect. But if I point that 2 primarily, one is the most obvious that TLK comes in as a reseller of Modelon Impact, which broadens our addressable market. It gives opportunity then for TLK to use Modelon Impact in training of their customer base and in presentations about both current and new opportunities that they may bring to the table. The other part, which makes TLK Energy a bit special is that they have their own software and library suite. And this is a proof point alongside with the building library of our strategy as a platform provider because not only do we have a suite of our own libraries, we're also now adding other companies and other organizations' libraries in order to give a broader offering to our customers. We believe that, that's good, of course, for our customers, but it's good for us because our platform gets a better exposure to the market.

And do we have a list over how many libraries you want to include on the platform? Or where is your target?

The sky is the limit, but we believe that thanks to open standards that we base our platform on, there is an opportunity to onboard quite a bit of libraries. There are -- the most immediate and obvious targets are what's called Modelica-based libraries. That is the sort of modeling language and standard that we primarily base ourselves on. But thanks to open standard, it is, in fact, also possible to onboard other type of libraries on top of Modelon Impact, and that is our intention going forward.

And my last question is regarding strategic focus for the rest of the year. What are your key strategic priorities for the second half of 2025 and particularly in the light of the current quite uncertain market environment?

Well, our key strategic priority in one word is growth, to grow on our key markets. I believe that we are well-positioned geography-wise. We have a strong team both in North America, in Europe, in Japan and in India. And I think those are the right places. We are where we want to be from a market point of view. We also have a strong customer base where many customers are at sort of an entry level of using our tools, which gives an opportunity then to expand with our current customer base. Then, of course, we have priorities in our offering. We continue to broaden the offering. I already mentioned broadening our library base where we extend both our own libraries as well as libraries from other sources and cloud-based platforms. We have added quite a lot of features to that platform during the first and second quarter of this year. And you should expect us to continue to add feature functionality in order to increase the ease of use for our customer base.

So that's it for the Q&A session. Thank you very much, Jan and Jonas.

Thank you very much.

Thank you.