Modelon AB (publ) (MODEL) Q4 FY2025 Earnings Call Transcript & Summary

Hi, and welcome to this Live Q with Modelon following their Q4 report. And with me today, I have the CEO, Jan Haglund; and the CFO, Jonas Eborn, that will present the quarter. And after the presentation, I will come back for a Q&A session. Welcome. Stage is yours, Jan.

Thank you very much, Jessica. So the fourth quarter of Modelon 2025. My name is Jan Haglund. I'm the CEO, and I will be joined a bit later in this presentation by Jonas Eborn, our CFO. Today, we will give highlights of the fourth quarter of 2025 and of course, the full year 2025. Jonas will go into a bit more of details on the financials, and then I will be summarizing and giving a short outlook on how we see continued business. And there will be opportunities for questions and answers at the end. Financial numbers in brief for the fourth quarter as well as for the full year 2025. Well, you see on the revenue numbers that there are a lot of negative growth numbers here, SEK 16.3 million, down 29% in the quarter, SEK 71.5 million total in the year, negative 15%. Note though that this is a continuation of what we've seen during the year. There is a lot of currency effects in this because we have a very strong position in North America. And when the Swedish krona versus the dollar has the variations that it's had during 2025, we have an immediate effect on our financial numbers. We've also had headwind on our services delivery, which is really not our sweet spot. We are focusing on recurring revenues, but we have had a trend where customers have been acquiring less of external services. If you look behind these numbers and look specifically at recurring revenues, in constant currency, we actually have growth. We have growth of 3.5% for the full year in constant currency for recurring revenue of Modelon's offering. Having said that, there is no doubt that we have had some headwind during the year, especially in North America and in particular, of course, in the United States. And we saw that in the first quarter -- in the fourth quarter. Specifically, we had our 3 federal accounts that now have paused or have had to pause the use of our tools because of reduced funding that we all can read about. And that had an effect also on our ARR in the quarter, which was down 4% quarter-over-quarter due to these -- primarily due to these 3 U.S. federal accounts. Now we obviously have the ambition to win this back during 2026, and we maintain good relations and contacts with these customers. Now we have anticipated this, and as I said, this has been part of trends that we've seen during the year. And we have transformed Modelon into a significantly more efficient company and also with a much lower cost structure. And you see that in our operating expenses that were SEK 24.3 million, and that, in fact, included some negative currency effects, but down 32% year-over-year in operating expenses, thanks to the turnaround of efficiency and structure of the company. And that has given a very strong positive effect on our adjusted EBIT, which was up SEK 9.6 million compared to the same period last year. And I'm happy to say that I think we now have a sustainable cost structure and a good structure and good efficiency in the organization to carry us forward into next year or into 2026. So as I said, there's been, for sure, an uncertain market that has affected us during 2025. We have a good position now in terms of efficiency and cost structure. So all our focus is really on growth. We look forward to more stable market conditions, but we've also taken action internally on how to strengthen our own sales activity. We've had some changes during the year with a new Chief Revenue Officer from the third quarter, midyear 2025. And he has in turn then modified and adjusted and revamped his team with a new marketing director in the fourth quarter. And now from the first quarter this year, also a new setup with a clear customer success team towards our existing customer base where we have a good and strong customer base with a lot of upselling potential, especially in North America, Europe and Northeast Asia. And we have gathered a very strong team of account manager directly under our Chief Revenue Officer to focus on new customer acquisition and new sales. I'm confident that this new setup will be part of bringing us back to growth in 2026. Talking about new customers. We had a couple of important wins. Before I say that, I could mention that Q4 is actually always our strongest year -- strongest quarter for renewals. And barring the 3 federal accounts that I mentioned, we came in strong on renewals during the fourth quarter, corresponding to a bit half or a bit more than half of our annual revenue that was renewed as planned during the fourth quarter. So that's a good base to stand on since we have a very high ratio of recurring revenue. On top of that, we had upselling. We had upselling with existing account. One very exciting upsell was new software licenses for digital twins at AI data centers at our customer in North America for social media. We also had new software licenses in Asia, Northeast Asia at a construction company, also active in large enterprise buildings. We had new customers in Europe. We had a new customer in our part of the world in Northern Europe for industrial equipment. And a little bit further south in Europe, we had a heat pump diagnostics customer that selected Modelon Impact for integration into their customer offering. We're, of course, extremely happy about that. Now perhaps on this list, the most exciting win here is in AI data center and digital twins. I think that ticks a lot of the boxes for the future with a lot of market development and quite frankly, a lot of growth potential for Modelon. So let me say a few words about what our offering is in that space. As you probably are aware of, the growth of AI data center means that a lot of deployment is being done, especially in North America, but also in other parts of the world. It's a rapid and fast development right now where new types of data center also requires new technology, specifically for cooling and energy solution. In order to verify and optimize those solutions, there is a lot to gain. And in order to do that in a fast and quick way, system simulation that we represent is really the best and most efficient way of doing it. That's why we have customers now and also why we're building a product offering for digital twins, where as part of building components, creating system models and generating digital twins, those digital twins can be used either for optimizing the system, for verifying the system. It can be used for commissioning part of the system, and it can be run -- can be done online as verifying the behavior as a system operates under various, for example, weather conditions. Now this is something we are productifying. We already have this in deployment with large customers, and we have a lot of very good discussions going on with several other, both operator customers as well as supplier customers in the data center space. So I still have a very positive view on the market potential for Modelon in this space. Product innovation is important for us. And AI is something that creates a lot of opportunity for Modelon, not just on the customer side, but also, in fact, on the development side. Our system simulation platform is built on an open code layer. Now what does that mean? Well, it means that it gives us unique opportunities, or it gives customers unique opportunities to modify or to build on top of the thousands of components and hundreds of different library components that we can offer also. This is not something that all our competitors have. We are quite unique in this space. So that's why we have chosen to enhance this customization possibility with AI. We've done it in a way that we are leveraging the golden standard for code development called Visual Studio, and Visual Studio integrated into Modelon Impact with our own, call it, secret sauce, or in fact, it's a coupling to our own solver and compiler creates a combination where customers can use their favorite AI tool, Claude Code or Gemini or GitLab Duo, whatever they prefer to enhance their productivity, to enhance their development of physics-based models. I believe that this is something unique to Modelon and something that will be very attractive. And we, in fact, see a very fast uptake by our customers since we launched this now, or released it in December last year. More to come. So summarizing, I'm very confident that we have, during 2025, strengthened our competitive position from a solution point of view. We have a quite unique offering in system simulation with world-class modeling libraries where we have opened up also to third-party libraries to give the broadest library offering in the industry, where we hold on to the open standard-based paradigm, which also creates this accessible code layer that enables customers to add their own IP. We scale from few users to many, many users, thanks to being cloud-based, thanks to things like sharing version control over the cloud, and we can offer a broad range of different simulation technologies from what's called steady state to very fast and dynamic behaviors. So more to come. We are an innovation company. We continue to innovate. We continue to invest into R&D to capture growth and new markets. With that said, I'll hand it over to Jonas for more financial details on the fourth quarter. Welcome, Jonas.

Thank you, Jan. So looking at the financials for the fourth quarter. First, our annual recurring revenue, ARR, decreased by 7% over the past year to SEK 50.8 million. This ARR is reported at constant currency, and we see that the currency effects constitute minus SEK 5.3 million. So it's almost 10%. But the 7% decrease that we see, of course, is excluding those currency effects. The reason for this is both on the Modelon Impact losses, the federal accounts that were mentioned previously, also some lowering ARR also on our multiplatform offering. So combined, these result in minus 4% decrease in ARR quarter-over-quarter since the third quarter. And the 2 pieces Modelon Impact decreased by 8% year-over-year, and the multi-platform offering decreased by 6% in the same period. On the positive note, we see that we have many renewals in the fourth quarter. This is the main renewal period for all the large contracts that we have. And this is the sort of stable recurring revenue base that we carry with us into 2026. On the revenue side, we see a better profit margin, while the net revenue is decreasing also. So net revenue in the quarter is SEK 16.3 million, a decrease by 29%. And the year-to-date revenue or 2025 revenue is SEK 71.5 million, which is 15%. Note that these numbers are not FX adjusted. These are floating currency. We now have the ability to calculate the currency effects, and the FX effect on the year-to-date revenue is minus SEK 4.1 million, which is almost 6% negative. While on the software revenue, we see a decrease to SEK 12.7 million in the fourth quarter, which is minus 19%. This is all recurring revenue now. We do not have any sort of permanent licenses in the current quarter. When we look at the FX effects here, the decrease on software revenue is entirely on the currency effects. Year-to-date, we have, in constant currencies, a flat development in software revenue. We even see a positive 3.5% on the recurring revenue for the full year. The main source of decreasing revenue is our service offering. It's SEK 3.5 million in the quarter, which is a 50% decrease over the past year. And the reason is the same as we've communicated earlier. There are customers that are decreasing their external spending during the year. We do see, however, that we have many recurring customers also for services, many long contracts that are ongoing. The development costs, we are at SEK 7.1 million in the quarter, which is lower also, minus 44%. And rolling 12 months, year-to-date development costs are SEK 35.8 million, a decrease by 35%. This is what I would say is the stable R&D level that we will continue at. So we do not -- we see that we expect to stay at the current yearly level of R&D costs for this year, the 2026. We move over to operating expenses. We have lower costs, which contributes to the improved EBIT, of course. Our operating expenses in Q4 were SEK 24.3 million, which includes some operating -- other operating costs. These are currency effects on the accounting, specifically due to unrealized exchange rate differences. And you can see that outside of the net revenue, there's also on other operating income, which is the other side of those exchange rate differences. So net, these 2 basically canceled. So on the EBIT, we have no net currency effect, minus SEK 0.1 million. So that sort of shows that we are naturally hedged in our operations. It also shows that the sort of underlying expense rate, our run rate in Q4 was SEK 21.4 million. And this is sort of a sustainable cost rate that we're taking forward into 2026, which is also a result, of course, from the restructuring programs that we did earlier in the year. This results in an adjusted EBIT for the quarter of minus SEK 5 million. And it also gives us an improved cash flow to minus SEK 9 million in the quarter, compared with minus SEK 11.4 million in the same period last year. And at the end of the year, we're at a cash liquidity position of SEK 42 million, which is sufficient for our operations for the coming year. And that's the numbers that I wanted to present. So we're moving into a summary from Jan.

Thank you very much, Jonas. So quickly summarizing at the end. Looking back at 2025, we have turned around the profitability development of Modelon. It's something we are proud and happy about and something that was necessary to do, which brings us to a path going forward of a sustainable cost structure, which means that we can focus all our efforts on growth going forward. Now obviously, the growth during 2025 was insufficient. Many reasons for that. There may be things we can do better, but there were certainly market conditions that were in our disadvantage. But I look forward to a more stable market situation during '26. And with the changes we've done internally, I have -- I'm optimistic about the opportunity to turn around into growth in next year. What I'm very happy about is our ability -- continued ability to innovate. We have done unique things in AI and data center. We have entered the data center market with system simulation knowledge and combining our assets with a strong evolution of AI trends. There are many things that we both have done and will be able to do going forward, making Modelon come out even stronger as a company in the era of generative AI. So looking into our financial targets. We maintain the ambition of generating ARR above 20%. I believe now that shifting into these growth markets, including AI and data center gives us a very good opportunity to reach those. We maintain the ambition to generate free cash flows, positive free cash flows. With the turnaround we've done on profitability and the much improved EBIT, with some tailwind now on revenues, more market -- more stable market conditions, we have a good opportunity of reaching positive cash flows within or right around the turn of 2026, 2027. And we maintain the long-term ambition of reaching an operating profit margin above 20%. With the sustainable cost structure we have right now and with the growth opportunity in the industries that we are addressing, this is certainly within reach, perhaps not during this year, but during the years to come, we certainly see that we have this ambition to reach beyond 20% EBIT. With that, we are through what we intended to present, and I hand it back to Jessica for moderating a question-and-answer. Thank you.

Thank you so much, Jan, and Jonas. So let's move on to the Q&A session. And we have a lot of questions today from the audience and specifically regarding AI, which suits very well with your presentation as well. So I figure we'll start with some questions regarding AI. So the first one is the Modelon -- modeling industry appears to be at a turning point with the emerge of AI, which could disrupt historical market shares. How is Modelon positioning itself to thrive in this environment?

Okay. Yes. Thank you, Jessica. It's -- thank you, first of all, for, everyone, asking questions also. I think it's -- we're very grateful for that. I think I'm very optimistic in the combination of our technology and AI, not only from a customer side that I've talked already about that we can be relevant for customers thriving on AI and especially customers building up AI infrastructure. So that's something we're already doing. But also in our offering, we have already started to take the steps where we leverage generative AI technology into our products. I already mentioned the integration of generative AI for code development into Modelon Impact. That is something we have already launched. We have already demonstrated how generative AI can be used to speed up or help developers in their way of using. That's something I talked about in the third quarter, and we're working with customers right now to also launch that as a product during 2026. And the third thing that I briefly mentioned in this report is how AI technology or specifically neural networks can be used in a combination with physics-based modeling. Both have their strengths. Physics-based models can be used to basically create something out of nothing. The only thing you need to know is the laws of physics. You don't need lots of measurement data. You don't have to build a prototype before. You can basically model something from scratch. Neural networks have their strength in being very fast. So if you want to deploy fast and run fast, that's something. And the combination here, I think, is our sweet spot that we've already launched, and we're working with customers on. So all in all, I'm optimistic about the combination.

And you mentioned a little bit about the competitive situation during your presentation as well. But could you elaborate on how you see yourself positioning against your competitors right now within the whole AI segment?

Yes. I think everyone is running and talking about AI, but we have a few things, which are unique to Modelon. I mean, first of all, we are a cloud-based software tool. That means that we can leverage the whole sort of cloud offering around generative AI, large language models and integrate that into our tool rather than having to invent all of it ourselves. That's why we were able to so quickly come out with something very unique in the fourth quarter. I think another asset is the fact that we have libraries that we have developed during many, many, many years. And combining those libraries with generative AI and sort of teaching, training and prompting generative AI, we have something for our customers that no one else can replicate. So those are just 2 examples of how we will continue to be unique in an AI environment.

And how has the customer feedback been so far?

Well, as I said, it's been very, very strong uptake on what we launched, both what we prototyped in the third quarter and what we now launched commercially in the fourth quarter. Basically, customers are pulling this from our hands. So I think all customers are exploring. I think no one has figured it out right now. AI technology is not perfect in our space. It still requires a lot of human know-how, a lot of competence. But as a help and as support, it's certainly there to stay.

Is your strategy expected to evolve with the integration of AI in the sector? Are you considering a shift in pricing models, value-based versus seat-based, opening up APIs to AI agents or seeking new strategic partnerships?

We already have pricing models that scale with value and not only with seats. I mean, for example, our digital twins. They scale with a number of digital twins, the number of copies, the number of executables that customers use or want to use. So we have parts of that in our model also. But this is something we are monitoring very closely, and we are ready to take next steps as we see the market evolves. And certainly, the trend is towards sort of usage-based pricing models and value-based business models.

And another question from the audience. What is the revenue potential for the liquid-cooled AI data center segment?

Yes, in brief, it's huge. Just looking -- you can do the calculation on the back of an envelope, look at all these data centers, how much they consume in terms of energy. And if you know that about, say, 30% of that consumption has to do with the cooling system, then you can understand that, but shaving off, say, 5%, 10%, even 15% of efficiency in that cooling, if we can help in that, there is certainly a lot of value in that. And I believe that we have a unique position, thanks to what we have built up with our libraries, with our modeling and with the fast turnaround cycles and innovation cycles. So there is a lot of value to capture out there in the industry.

And would you say within data center operators, are you a well-known name? Or do you have to sell sort of what you do and the name Modelon when contacting, or are you being contacted by the operators?

It depends on whom you talk to. We certainly have been contacted by operators. So I think in the narrow community of simulation experts, we're known. But I think we're still a well-kept secret to the broader sort of engineering departments, operation departments and the ones who would be in earnest, be benefiting from, for example, digital twins. So we have more to do on making ourselves known. That's for sure.

And the Modelon's proprietary model libraries seems to hold a significant value in the current AI development landscape. How do you plan to leverage this unique content?

It's correct that our library is something we have built up during many, many years, and that's not something an average large language model knows. The large language models of today does not still have that capability. So by combining that with the sort of general AI technology, we have something which is unique. We actually prototyped and demonstrated that already during the fall, and we are planning to productify it now during 2026. So that's, in essence, what we want to do. We want to combine our unique know-how, which is our libraries and not to forget also our solvers and compilers, which are the sort of mathematical secret sauces of addressing physical -- physics-based modeling. I think those 2 assets combined with AI technology will create something very interesting for the market.

And let's switch now from AI to ARR. How will you bridge the gap to reach your 20% ARR growth target in 2026?

I mean Modelon is well positioned in, I think, the most important markets in the world. We have decided to focus on North America, Europe and Northeast Asia, and we intend to stay there. That's where we believe that the future lies. And our strongest business has been during the last couple of years in North America, and still is. Now North America has been particular and special during 2025, but I'm convinced that North America will come back for us. I'm convinced that we will see more stable market conditions. And part of the uniqueness of Modelon is that we can move with the money also. So we can be relevant, and we have been relevant for so many different industries. I mean, aerospace, automotive, we've talked about the renewable energies and now data centers. So very quickly, will we move and follow the money. So I think the short answer is that we will be able to adjust and focus our sales effort and product efforts on growing markets, and that's what we're doing right now. So with that kind of shift to growth markets, I think achieving 20% ARR is well within reach. If we do the right thing and if the market stabilizes a bit. We've actually been there also. I mean, it's only a year ago.

And you spoke recently about the North American market, and we have a question here regarding your visibility of the resumption of this U.S. public funded contracts in 2026? And what percentage of your current ARR is still dependent on U.S. public funding?

Well, the 3 publicly funded or federal accounts that paused the use of our tool, those were the main federal accounts that we have had. We've had them for many years. We still have the ambition to bring them back. But right now, the majority of the reduction in ARR that we had in Q4 came from those 3 accounts.

And if the revenue recovery is slower than anticipated in the coming quarters, do you have room for additional cost reductions to achieve your short- to midterm target?

We've done a lot on the efficiency of the company. And right now, our strategy is to stay where we are, to stay on the annual R&D investments. It's a very competitive market. And I believe that we have a cost structure right now and an organization that is sustainable going forward. So that's our current view.

And last question. What could investors expect from Modelon during 2026?

Investors should expect continued innovation, continued focus on product supported by some expertise and services. Investors should expect that we stay focused on growth market also. North America, Europe, Northeast Asia. We've actually recently strengthened a bit on the go-to-market side in those markets. And I assure everyone that our focus right now is uniquely on business growth, winning customers, new customers and upselling and creating more value at our current customer base, which is quite impressive and significant across those 3 markets.

Thank you very much, Jan and Jonas.

Thank you. Thank you.