Modelon AB (publ) (MODEL) Earnings Call Transcript

A warm welcome to the Modelon investor presentation for the first quarter 2022. And without further ado, I would like to hand over to the CEO, Magnus Gafvert; and the CFO, Jonas Eborn. Please go ahead. Next slide.

Thank you, Jenny. So my name is Magnus Gafvert. I'm the CEO of Modelon and one of the co-founders. And as Jenny said, with me today, I have also our CFO, Jonas Eborn, also one of the cofounders. And we will present the financial report from the first quarter. So I will start with walking through some of the business highlights of the quarter and a brief introduction to the company, and then I'll hand over to Jonas, who will elaborate a bit on the financial developments in the period. And then in the end, we'll wrap up with a Q&A session and you are welcome to send in your questions by e-mail. So I'll start with the bullet highlights of the quarter. We are pleased to report that our ARR growth continues and amounts to 29% in the quarter. Likewise, our software revenues grew with 32%. And we continue to see that the account wins, the new wins for our flagship product Modelon Impact continue to have a global spread in line with our strategy. And we see a high activity in all regions, the Europe, North America and Asia, where we are operating. In total, this means that we remain confident in the targets we have set out for 2024 to arrive at annual recurring revenues of SEK 100 million. And before elaborating a bit more on those highlights, I'll give a brief introduction to the company. Modelon is a business-to-business software company, providing solutions for our systems, modeling and simulation. And that means that we're helping our clients to digitize engineering workflows related to the innovation, development and operation of high-technology products and systems. And that could be anything from an aircraft to a car or a power plant. And in digitizing such workloads, you need to have a digital representation of your product and system that can reproduce and predict the behavior of your product in the digital domain. And this is precisely what we provide, tools to create such digital models and to operate them, simulate them for these purposes. And this comes with tremendous benefits for our customers. It means that they can bring their product to the market faster, at lower cost and also with a higher quality because of the methods that are available in our platforms. It also enables our customers to operate these products in a more optimal and economic fashion once realized. And we are serving technology companies around the world with these solutions, and you will see some examples further on in the presentation today. We were founded in 2005. We are today around 100 people. We distributed over 10 offices in 6 countries in North America, Europe and Asia, headquartered here in Lund, Sweden. So we have a very high level of internationalization compared to the size of the company. We've been doing this for 15 years, and we have grown with our own profits until 2019, when we decided to bring in investment capital for the first time and also even more so in the IPO that we did in the second quarter last year. And the reason for that is to invest in our cloud SaaS platform Modelon Impact, which is the first product of its kind in the systems modeling and simulation market. So it's a great opportunity that we're leveraging on. And that resulted in the first release of this product in the third quarter of 2020. Notably also in the period 2018 to 2020, we had a quite significant co-development collaboration with one of our U.S. customers, where they cofounded part of the early development of this platform. The total simulation and analysis market is really big. It's estimated at more than $8 billion in 2020 and growing at a good pace. So with the positioning of Modelon Impact being a unique cloud-based platform in its space and the size of this market, we have set out ambitious goals to arrive at annual recurring revenues of SEK 100 million in 2024. And also by that time, turn cash flow positive and come out of the current investment period that we're in. And we are really pleased to see that the investments we are doing is having effect in that we see a -- now an established and consistent growth of our annual recurring revenues amounting to 29% in the first quarter. And looking a bit more at that ARR development. We can see that compared to the fourth quarter, we had 31% growth. And the first quarter last year, it was 4%. That was before the Modelon Impact growth had taken off like it has now. There is a seasonal effect usually in the first quarter in that orders tend to concentrate by -- before the year-end, meaning that January, February are typically a little bit slower. Still, we see in the first quarter, a solid growth for Modelon Impact with 14% quarter-to-quarter. We also see a good development in our pipelines in the quarter. And all in all, this means that we do, as I mentioned, remain confident in the targets we set out for 2024. And going a little bit further into the details of the activity in the first quarter, I'll show here, I'll start with highlighting the core target industries that we're working with, that's automotive, energy, industrial equipment and aerospace. And I also want to put your attention to some of the existing customers we have in these industries illustrated with their logos. And you can -- I'm sure you recognize most, if not all, of these companies has very well renowned and leading companies in their respective spaces. We're, of course, extremely proud that they are choosing to work with Modelon solutions for their product development purposes. In the quarter, we have won a number of new accounts, a number of wins with Modelon Impact, as highlighted here. We are employing our land and expand strategy, and it means also that the majority of the wins that we're doing in this space is new accounts. And even though we are seeing a share of upsell or expand business also increasing. Some interesting observations here is that we see some engineering consulting companies. And it's very good to see that they are picking up Modelon Impact. It means that the platform and the tool is getting exposure to these -- to their customers. So it's a very good way to leverage and drive growth to attract these consulting pros. And it's both niche, smaller niche players, specialists, but also really big global companies. Another observation here is if we look in the energy domain, we see representatives for the hydrogen economy trend and in particular, fuel cell applications. So we have a good traction in that segment, which is very interesting. And we're also seeing several wins here related to say, general digitalization, industrial digitalization, industrial Internet of Things, digital twins, automation, smart factories and so on. So it's great to see that we're positioned. We have positioned Impact to leverage on these important trends. Another thing to observe here is that about half of these companies are really large, meaning that they have employee counts between 20,000 and 70,000. And that also means that they constitute very good opportunities for upsell down the road in line with the land and expand business that we are employing. We're also seeing, as indicated here, robust activity across these industries, across all regions in the quarter, meaning that we generate good new leads for new business. And again, like in the previous quarter, we continue to see particular strength in North America and the energy sectors. And the pipeline activity, the lead generation is driven by marketing activities that we do. In the period, in the first quarter, we're very happy to see face-to-face engagements returning. For example, here, we were attending a large industry expo in Las Vegas on HVAC and refrigeration. There were more than 30,000 attendants at that -- and these kind of engagements do generate high-quality leads for us. So it's very nice to see this coming back. Also, one of the more important tools in our marketing, of course, is customer testimonial. So we're very pleased to see the type of testimonies we have received here. from the CTO of 1W1 Methanol Systems, that's a German innovator in fuel cell applications. And he testifies how Modelon beats the other solutions because of the range of model libraries provided in the tool and the ease of use. And this acknowledges precisely the type of positioning that we strive for. So it's great to see this. And it's also a very interesting application. It's the hydrogen economy. They have an interesting technology related to using liquid methanol as fuel instead of compressed hydrogen, which has several benefits, for example, an energy density that is 3x what you get from compressed hydrogen. So very, very exciting to be part of these type of advancements. And this company is a good representative for one of the key trends that is driving -- that are driving the simulation market as such, the one on a clean technology, and we are very happy to see that the majority -- the vast majority, I would say, of our new customers with Modelon Impact are using our solution for these kind of purposes. And all industries, all technology industries are subject to an enormous pressure to come up with more sustainable technologies and solutions, and it's simply impossible to do that in a competitive way without using simulation of the type that we provide. So we're very happy to be contributing to that. Likewise, I already mentioned the general digitalization of engineering work. You need to have these digital models, so it puts us right at the center of this trend. This is also illustrated by the wins we're doing in industrial IoT kind of applications that you saw on the previous slides. And again, to be pioneering in our segments, the shift towards SaaS cloud is, of course, a very, very strong position to be. All this comes from our Modelon Impact platform, how that is defined and positioned. And again, Modelon Impact is designed such that it can support engineering workflows throughout the full product life cycle with our customers, from early research and innovation through detailed design, testing and into operations. And we can address these key application areas often related to clean technology because of the model content, the very broad content of model components that we provide in the tool. And that enables our users to build sophisticated digital models of complex products. Almost like building with LEGO bricks, you drag and drop and put together these small components to build your system. It's very convenient. It's very powerful. And all this is packaged on the cloud platform and offered to customers in a way that's easy to scale with the pricing model that encourages scale and further deployments. So in the period, we are focusing development efforts in further strengthening the cloud deployment capabilities for scale and to drive further growth and to -- for our positioning to be with the -- unique positioning to be providing a solution on the cloud. As well as we are focusing on strengthening the model and content in the tool to even further leverage on the key trends we see, for example, in the hydrogen-based energy systems. And I'm also very pleased to say that in the quarter, we continued to receive interest and commitments from our customers to share their success stories with our tools in keynotes and technical presentations in our upcoming International User Conference that we're planning in Stockholm in October. It's our first user conference of this kind. And it's good timing now when we have had Modelon Impact on the market for a couple of years, and we have built up a base of customers that can share their stories. Customers that, again, in many cases, represents the most demanding and innovative companies on the planet. So we're really thrilled to see that they are willing to share details on their stories at this conference. And we are looking forward to presentations covering applications from -- stretching from autonomous transportation systems, solar power, thermal management in electric vehicles, offshore technology, fuel cells, digital twins and intelligent asset management and renewable energy storage. So it's a broad array of applications that are all extremely exciting. So we -- this will be a vibrant conference, and we really look forward to report out more on the source from that. And with this, I hand over to you, Jonas, to give some more detail on the financial development.

Thank you, Magnus. And you can switch to the ARR slide. So the ARR increased to SEK 39.4 million at the end of Q1, as Magnus also said, which is an annual growth of 29% compared with the comparison period. This is showing continued growth towards the target that we set. There is a little bit slower than Q4, 2% quarter -- quarterly growth. As Magnus discussed, this is partly a seasonal effect that impacts the numbers quarter-to-quarter here. And there's also, of course, a strong FX component. The previous quarter actually has been FX adjusted with SEK 1.7 million, the reported number last quarter was SEK 37 million. And now with the stronger U.S. dollar, it's SEK 38.7 million. And the currency will have an effect on us for the rest of the year, it will be also impacting our revenues at actual currency. The Modelon Impact ARR grew 14%. So this is the still the growth driver, and we expect that to remain a very strong driver. We see good pipelines as Magnus also mentioned, and a strong driving force in our Modelon Impact sales. And I think we can move to the next slide, Magnus. The net revenues. In Q1, they increased over Q4. So we're now in a growth period. It is -- decreased over the comparison period Q1, which still had the co-development services. We can say that after the second quarter this year, the revenues will be more on a like-for-like basis since we will be completely past the 12-month period after ending that co-development service project. Very good number for soft revenues in the quarter, SEK 11.6 million, up by 32% compared with last year. And now that means that the software revenue is showing a similar growth as the ARR. ARR and recurring revenues is typically 85% to 90% of our software revenues. There are some other royalties and paid-up licenses actually, primarily Q1 is affected by this. That's the Asian market where there can be some paid-up licenses sold also. The financial result is impacted by the development costs. They are still growing at a slightly lower pace than before, 23% in the quarter compared with last year. And this marks the end of this transition period from the co-development service project. The transition is more marked in the trailing 12-month number. So there, we see a 48% growth, but this is not indicative or reflecting of the period going forward. I would say the Q1 is more typical development. And we want to stress that all of these development costs are taken as operating expenses. So that explains the negative EBIT. Basically, all of the negative number there, minus SEK 12.7 million is from development costs. And Magnus, we can switch to the next slide. So the EBIT, as I mentioned, and this financial development is showing really the completed shift now into a period of strategic investments -- increased strategic investments for accelerating our growth. On the cost side, we had a moderate growth in operating expenses. Q1 increase of 3%. This is partly from planned new recruitments, also, of course, cost for sales and marketing. We expect that growth to continue through 2022. We do have a lot of open positions we want to recruit for our growth. The cash liquidity is still good, SEK 157.6 million at the end of the period here, and we maintain our investment pace. We expect that this cash will take us through the investment period through 2024, where we turn cash flow positive and also will -- is targeting the SEK 100 million ARR for the end of 2024. Regarding cash flow in the period here, minus SEK 11.2 million in the quarter. This is slightly better than the EBIT explained by then changes in working capital. The main factor, although not a very big difference, but it's SEK 2 million plus roughly from the increase in prepaid annual licenses. So that's -- as long as we're growing our software sales, we will also have a positive number on the prepaid annual licenses in our balance, and that also gives a cash flow that is better than the EBIT. And that was the main highlights that I wanted to bring up. So we can move on to the next slide, Magnus.

Thank you, Jonas. So to summarize here, we are executing on the growth strategy that we are working with. We are investing the funds we have brought in into commercial expansion. That means increased sales capacity, marketing activities. We are investing in realizing the product vision, the product road map with capacity -- engineering capacity that we need for that and to operate and deploy our cloud platform. Overall, we see that this is driving growth on our ARRs in line with our plans. So we do remain confident in the targets we set out for 2024. The ARR number, SEK 100 million and also turning cash flow positive by that time. And with that, I believe that we are moving into the Q&A. I'm handing over to you, Jenny.

[Operator Instructions]. I would like to start with the questions from Stefan Ward from Pareto Securities. This one is for you, Magnus. Software growth accelerated in the first quarter, and the pipeline is described as increasing. Does this suggest that you will grow software revenues at a higher pace in 2022 compared with 2021?

So I'll just repeat here that we do remain confident in the growth targets we have set out for 2024. We can note that -- also that in the product road map, we have capabilities in the product that is being realized that we also expect to further support scaling and growth. So I think that should state the -- how we see this.

Okay. Second one for you also Magnus. Can you describe the pipeline development overall and add some more color to the increased activity in Asia? Does it relate to Japan? Or are you growing in other markets as well?

That's a good question. So I tried in the presentation also to give some more overall description of what we see in the pipeline. So first, I'd say that we see fairly balanced activity. We see good activity in all the regions where we are present. That means North America, Europe and Asia. A lot of the activity, again, is related to what you described as key trends like the hydrogen economy, for example. And also, we are focusing marketing efforts to target those sectors where we see good opportunity and momentum. If we look at Asia specifically, we did -- we have done some investment in additional sales capacity, and we are planning to do even more. So we're seeing an effect of that. Even though our team is located in Japan, the activity we see and the business that they are doing covers also -- as a mainly also North -- not North, South Korea and China, where we have good activity.

And as a follow-up on that one, from Stefan Ward, Pareto Securities again. I mean, can you elaborate, give some more insight to the sales strategy deployed in Asia? It's a big region.

It's a big region, and it's also special in many ways, culturally and so on. So it's not necessarily easy for a European company to enter into Asia and perform well. We are fortunate to have recruited a very strong team with local people who are sort of driving business there. Still, this is a region where we are also strategically having a larger portion of indirect sales via channel partners. So we have resellers in Asia to a larger extent than what we have in other parts of the world. And that is working very well for us. And we have -- we're happy to have identified and onboarded several very good partner companies that supports our business development in these regions. And that's, actually, in all of Japan, China and South Korea, we have good partners that support our business development.

Okay. Next one from Stefan Ward, Pareto Securities. That's one for you, Jonas. So the 48% increase in development cost, is that rate possible for the full year 2022? And what should we expect for 2023?

Thank you. So that number is the trailing 12 months growth, 48%. So that reflects the transition from the co-development service project that we did in [indiscernible] and those resources are now shifted into self-funded development. So the Q1 growth is 23% or the Q1 increase in cost -- development costs. That is a better indication of the development costs from 2022 and forward. I can't give a prognosis for the longer-term development costs, how they will change, but they will be significantly lower than the sales growth, of course. That's -- it is a driver for the sales growth, but it should be also a stable business. So we will see more moderate growth in development costs.

Thank you, Jonas. And last one from Stefan Ward, Pareto, to you, Magnus. What type of R&D level is assumed in the long-term operating margin target of 20%?