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

Good morning, and welcome to this Live Q following Modelon's Q3 report. Here to present the report is Modelon's CEO, Jan Haglund; and their CFO, Jonas Eborn. But before I hand it over to the company, I would like to remind you to send in questions to the company, and you do so via the chat function just below the video window. And with that, I hand it over to the company.

Thank you very much, Jessica. My name is Jan Haglund, and I'm here to present the interim report for July to September 2026 for Modelon. I will be joined by Jonas Eborn, our Chief Financial Officer. We will be together giving the highlights of Q3. Jonas will give a deeper financial update, and I'll be coming back at the end with a summary and outlook for the quarter. And as Jessica mentioned, there is an opportunity to ask questions at the end. So Q3 2026 was a quarter of progress, progress on many fronts, progress on new customers, progress on new offerings and also financial progress. I'm very happy to see that our ARR, annual recurring revenue, came back to sequential growth after a year of negative development. We had a plus 1% quarter-over-quarter ARR in Q3, yielding SEK 47.2 million of ARR. That translated into a net revenue of minus 2% that we are hampered by previous quarters' negative ARR development, but we were helped by a very solid growth of our services business, plus 31% in the quarter. And that's evidence that we are now able to provide value-added services to our customers that are well aligned with our product offering. For the period, net revenue was down by 13%, which is the consequence of previous quarters' falling ARR and license revenue. ARR was also down year-over-year as a consequence of previous quarters. But our profitability and profit margin, operating income continued to improve. Thanks to lower operating expenses than last year, minus 5% in the quarter and minus 18% in the period, we generated an adjusted EBIT of minus SEK 3.1 million, which is an improvement of SEK 0.9 million since last year. We have now improved the operating income of Modelon 7 quarters in a row. For the period, adjusted EBIT came down at minus SEK 14.7 million, an improvement of SEK 7 million since last year. So I mentioned that it's been a quarter of bringing in new customers. And we have here 3 prestigious new customers that have chosen to buy Modelon's both products and services. Starting from the left here, Munters -- or Munters' American branch and company have selected Munters (sic) [ Modelon ] for system simulation of data center cooling solutions. Munters is a global leader in climate solutions and air treatment control, and they are heavily into data center solutions. And I'm really happy to see that they selected us after a thorough process of evaluation. We have both licenses and services, so we'll be working together with Munters to develop their solutions for data centers. NCBR is Poland's National Research Institute -- Research and Development Institute. And they are launching a project around heat pumps for climate-friendly heating. And they selected now Modelon for both licenses and services for that project. Also a very important win that I'm very proud of, and we really look forward to working with NCBR on this important project. And then going east, we have won business with a Japanese industrial engineering company. And this time, the application is in hydrogen fueling, also an important technology for climate-friendly transportation. Again, it's about licenses and services with this Japanese company. And I'm really happy to see the development here. This adds, in fact, to other business we have had during this year in Japan and Korea, where we see an annual growth in revenues year-to-date. We are expanding our reach for Modelon. And we, of course, have offices in key markets in North America, in Europe and Asia. Australia, we don't have an office, but we now have a reseller for the Australian and New Zealand market. It's Simetrix Digital Technologies, which is a digital engineering firm in Sydney, Australia. We've closed a reselling or partnership deal where Simetrix will be acting as value-added reseller of Modelon's full portfolio. The initial focus is on the data center market. Again, data center is a rapidly evolving and growing market, not the least in Asia, where there is a lot happening and a lot of growth in that area. So together with Simetrix, we'll be targeting that using Modelon's suite of platform, simulation platform and data center libraries to add value to customers in that region. So talking about data center, we have had added data center customers since a couple of quarters. One of those, Resalta, an Eastern European engineering company, came back and provided a report on how they've been using our products and tools during the last couple of quarters. And it's quite astonishing the results they've been achieving. In this case study, which you can find on our homepage, modelon.com, Resalta report how they've been modeling a particular configuration of data center. In this case, it's actually a gas turbine-driven data center where the excess heat from the gas turbine is used in reverse to cool the IT equipment. Now that's an interesting setup. It's actually highly relevant because for many data centers, it's difficult to get enough energy from the electricity grid. And that's why this case is of relevance in many markets. What Resalta has been able to do is, thanks to Modelon, the libraries and the fact that you can model both the energy production as well as the cooling system to try out different configurations in a much, much shorter time than would have been possible before. Resalta here report that they can do things in a week that took them more than a month before. And the results are very favorable. What they've come up with here are solutions where you can save more than 80% of the energy for the cooling system with the right configuration and the right setup. I think this is a very telling case showing the power of simulating the solutions before you start to build or prototype them. And I look forward to other case studies and other customers achieving results in line with this. During the quarter, we have also continued our development in the data center space. And just a few days ago, we launched a new version or an updated version of our data center library, one of Modelon's now flagship offerings, where we have ready-made models and systems that you can simulate, use to design, build and optimize data centers. The new thing driving our development here is the continued growth of energy consumption in data centers. And specifically, the energy density per rack. Before, the energy density was perhaps a couple of kilowatts per rack. Now, the energy density is surpassing 100 kilowatts per rack and the projections are that this soon will pass more than 200 kilowatts per rack. I mean that's an enormous amount of energy to cool and new type of technology is needed. Technology here in this area has moved from air cooling, where you basically blow fans to get the heat out. That has its limitations, which is why the dominant solution right now is liquid cooling. You have liquid that passes through the entire rack and on the chips in order to get the heat out. Now that will not be enough at the densities that are projected here, which is why the so-called 2-phase cooling is entering the scene. 2 phases where you combine liquids with vaporized liquids. And that kind of both technology and underlying physics is something we're very good at, at Modelon. So we've now, in fact, included that in our libraries. We have models for that, and we're working with leading customers on using these new models to project and design their solutions. We've been working with some leading external parties in this, specifically the University of Maryland in the U.S., and we're really happy and proud of that collaboration also. So I expect that this will make us even more competitive and hopefully help us win new deals in the data center market going forward. The other big focus area this year for Modelon has been to strengthen our AI capabilities. And our tool is now fully equipped with a very capable AI agent. And customers are already across the board using this AI agent to get more done, to increase their productivity, and we see quite astonishing and amazing results coming out. We also use it internally to increase our own efficiency, for example, in service delivery and product development. Now one thing with AI is that it helps you to do more, but it also means that you can consume more compute resources. You can do more in parallel. And that's why we're now launching new packages for our customers, add-on packages to the standard license, and these add-on packages give you the opportunity or give customers the opportunity to work more in parallel to get more compute power, memory and storage capability. We call these packages Boost and Scale. And you can use them, customers can use them to get an up to 12x increase in capability, which can be translated into much higher productivity. You can get more done. So this is good for our customers. It's also going to be good for us because it will add potential revenue for Modelon as we use our underlying cloud platform to scale this offering to customers. So a lot of progress in AI, and this is tuned to continue into coming quarters. So with that, I'll hand over to Jonas Eborn for a financial update and details on the third quarter. Welcome, Jonas.

Thanks, Jan. So I will report on the financial highlights. First, the ARR. In Q3, we reported an annual recurring revenue of SEK 47.2 million, which is a sequential growth over the previous quarter by 1%. This is thanks to a higher rate of renewals and, of course, the new Modelon Impact sales, the 3 accounts that we've heard about. Year-over-year, the development is negative, minus 12%. This is primarily due to the accumulated effect of the churn that we saw at the end of the -- or the second half of 2025 and some of the smaller accounts that were reported lost in the first half of 2026. We report the ARR at constant currency at the current quarter's average rate. In this quarter versus Q3 2025, there is actually very little adjustment, minus SEK 0.2 million, although the currencies have shifted a lot over the year-to-date period, but they happen to be the same more or less in the third quarter. Looking at the revenues. Our net revenue in Q3 is roughly stable, SEK 15.9 million, which is a 2% decrease over the previous year. Our software revenues were SEK 12.2 million, which is a decrease of 9%, while we see a slowly growing trend in 2026, as you can see from SEK 12 million to SEK 12.2 million. Our services grew by 31% over the third quarter in 2025. And all in all, our EBIT has improved by almost SEK 1 million, minus SEK 3.1 million, which is a margin of minus 20%. Development costs were SEK 6.2 million in the quarter. And we note that this is 19% below the previous year's development costs. And we've also been stable around SEK 7 million for the past 5 quarters. This is a level that we expect to continue working at. Looking at the financials, costs, we see lower costs. Operating expenses are SEK 19.3 million, down SEK 1 million over last year. Primarily, this is lower personnel costs, which decreased by SEK 2 million in the quarter to SEK 13.1 million. Adjusted EBIT, as I said, improved by about SEK 1 million. Cash flow in the period was minus SEK 10.6 million, which is also an improvement, minus 16.9 million in the third quarter of 2025. We can note that the third quarter in our yearly cycle is typically the lowest cash quarter. We have a lot of renewals now towards the end of the year. So end of the year and beginning of next year is the sort of strongest cash flow quarters in the yearly cycle. And the cash at the end of the period is SEK 21.8 million. And that's everything for me. So we'll go over to the summary by Jan.

Thank you, Jonas. So I'll just wrap it up at the end. Q3 was a quarter of progress. We came back to sequential ARR growth, 1% versus the previous quarter. We had a strong development of service revenue, the second quarter in a row now with growth. And we continued for actually the seventh consecutive quarter to improve our adjusted EBIT. And note here that the adjusted EBIT is the same as the EBIT. We did not have any adjustments in this quarter. And we brought in new customers, 3 new customers, all very important. We have brought in a new reseller that gives potential to grow in the Australia and New Zealand market. We see now positive results coming out from customers that we won in previous quarters, especially in the data center space. And we're positive about the potential in data center, which is why we have continued to invest into new data center solutions and technologies. AI is a focus area for us, and we see a lot of interest from customers, and we expect that this will drive productivity increases and demand for more capacity, which is why we have launched these add-on packages called Boost and Scale. Now looking forward, we had positive ARR development in the quarter. We see opportunities for continued positive ARR development, thanks to new revenue streams driven by AI, new libraries, platform capacity, albeit with quarterly variations as usual. The financial target, the long-term target of ARR above 20% stays the same. Profitability will be driven by continued ARR growth and cost control. That combination is what drives continued profitability. And I believe that the long-term target of a profit margin above 20% is fully realistic. In terms of cash flow, we have also improved that consistently with higher EBIT. We don't capitalize anything in Modelon, which means that the cash flow follows the operating profit very closely, although with quarterly variations because we have prepaid licenses, which makes that the first half of the year is typically stronger than the second half in terms of cash flow. But we project free cash flow positive from beginning of 2028, and we hold that projection. So just at the end, as Jessica mentioned at the beginning, we are actually calling for a Capital Markets Day on November 10, 2026. There are so many things happening in our industry, especially driven by the new opportunities of AI. So we want to spend some more time with you to explain those trends. We'll show also how we have developed our product to capture the opportunities of AI-driven product innovation. We also want to show how we are applying that to some of our application-specific packages, not the least in data center. And all of this opens up for new business models and revenue streams that we both have launched and will be launching from Modelon's side. So with that, as a teaser, I welcome everyone to listen in either on site at Redeye's premises in Stockholm or live via a live broadcast on the web. November 10 at 1:00 p.m. Central European Time. Welcome. So with that, I'll hand it over to Jessica, the moderator, for any questions that you may have. Thank you very much.

Thank you very much, Jan and Jonas. Let's move on to the Q&A session. So I figure we'll start talking a bit about the ARR, which grew quarter-over-quarter in Q3. However, ARR was down 17% year-over-year due to federal account churn and other smaller account churning last year and this year. Given that the federal account will not be -- will be going out from the books in Q4, when do you expect to return to year-over-year growth in ARR?

Yes. Thank you, Jessica. It's a good question. So as you point out, the decrease in ARR that we've been experiencing since -- well, since a year now, is primarily triggered by a couple of federal accounts at the end of last year, specifically NASA Jet Propulsion Laboratory, which were big accounts for us on a relative scale. And well, due to budget limitations that I think several federal -- American federal institutions had, they unfortunately, at that time, decided not to continue. That could still be changing for the future. But right now, we don't have them on our customer list. And then we have also reported that we have had higher volatility with smaller accounts. So one-seat accounts, customers coming in perhaps for a project or time-limited projects or perhaps just trying out the tool. We have seen higher volatility with those customers than with customers that had more licenses and that have worked with us for a longer time. Now I think it goes without saying that quarter-over-quarter growth for a couple of quarters will generate year-over-year growth. And as you point out, the bigger churns we had in Q4 last year. So I can't really give a prediction on when we return to year-over-year growth. I'm happy to see that we start with quarter-over-quarter growth.

And you mentioned that you see a high renewal rate in Q3. How does this translate into your view on the big renewal cycle that usually happens in Q4? And do you expect upsell amongst your largest customers here in Q4?

You're right that the bigger part of our renewals, it's, give or take, half of our revenue base that is renewed in the fourth quarter, and that's happening right now. We are in discussions with many customers. And in general, we see -- we have a lot of good discussions where customers see continued value of Modelon Impact. And some of them are also looking to do more. So I'll be reporting on that progress once we have closed the fourth quarter. It's ongoing right now.

And what can you tell us more about the Munters deal? How large is it? And can we expect more revenue from the same deal? And what does this kind of put in -- what kind of situation for other data center suppliers?

Yes, Munters is an important deal for us for many reasons. Munters is a well-respected global company, and they have a lot of traction in their own data center business, thanks to their legacy in climate control and air treatment solutions, they've been able to be very successful with a new business unit in data center. So it's, of course, important for us that they selected Modelon Impact as a platform. They will be using our libraries, and they're also using our expertise to get going because they are in a hurry as everyone else is in data center industry. Now Modelon have -- or Munters have evaluated Modelon quite thoroughly, probably with competitor alternatives also, which is why we're happy that they selected us. They do like most other customers, they start small. They start with a few engineers and a few licenses. And let's see where that takes us. I think our tool has the capability of being relevant for many more engineers and many more applications, not only in the early design phases, but also in the engineering and operation phases. We see that with other customers. So we'll be working with Munters as well as other customers to see how we can help them to be and be relevant in more domains.

And was this from Munters -- order from Munters in Sweden? Or was it from Munters in North America?

It's Munters in North America that is our primary contact point that is where this kind of development happens for Munters, at least our project. So the contract has been closed with Munters' American branch. But they are a global company and their initiatives go across the globe.

We have a couple of questions from the audience as well. And this one is from [ Johan ]. Has AI changed Modelon's value proposition in terms of business model?

Yes. Thank you for the question. So AI changes a lot for our industry. It changes things for our customers, and it has created opportunity for Modelon. I think it's really good news. AI is good news for Modelon. The main reason is that AI makes it so much simpler to deal with system simulation, which is what we do. System simulation traditionally has been a little bit difficult. It's been a task mainly for experts who have the knowledge in either physics or simulation to be able to get the full value. With AI now, you can, in clear text, in clear language, ask questions not only on a detailed level, but actually on a high level. You can ask engineering questions. So it really does change the opportunity. From a business model point of view, this will drive potential -- several potential revenue streams. I mean the obvious one is that we can be more relevant to our customers, which means that more people can get access and can get -- make value -- get value out of our tools and libraries. So that's the first step. We are obviously looking into other revenue models, for example, usage-based models. And this is one of the topics we'll be coming back to, in fact, at the Capital Markets Day on November 10. So I think I'll leave it as a cliffhanger for now.