Modelon AB (publ) (MODEL) Earnings Call Transcript

Good morning. FinWire welcomes all participants to this presentation of Q4 Year End Report from Modelon. We have Modelon's CEO, Magnus Gafvert; and CFO, Jonas Eborn ready for us. Modelon, the audience is yours.

Thank you, Fredrik, for that introduction. And welcome, everyone, to this presentation of Modelon's year end and Q4 report for 2022. My name is Magnus Gafvert, I'm the CEO and one of the co-founders of the company. And with me today, I have also Jonas Eborn, our CFO and also one of the co-founders.

Good morning.

So we present today. After a quick introduction to the company, I will walk through business highlights of the fourth quarter. Then I hand over to Jonas, who will provide a financial update for the period. And then at the end, we go into a Q&A and I believe that you're all welcome to send in questions by e-mail during the presentation. And we start with bullet highlights. So we're pleased to report that in the fourth quarter we have continued our ARR growth amounting to 12% and continue to be driven by new customer acquisitions. We also have a quarter a solid growth of our software revenues amounting to 36%. In the quarter we also signed a contract with the European Defence Fund amounting to SEK 11.2 million over 4 years that will accelerate our product development during this period in this sector. And in the period, we're also happy to receive several new and fine customer testimonials that demonstrate the positioning of our flagship product, Modelon Impact. And with that, let's go into a quick introduction of the company. Modelon is a business-to-business software company in the system simulation sector and that means we're helping technology companies around the world and across industries to digitize engineering workflows related to the innovation, development and operation of high technology products and systems and that can be anything from an aircraft to a car or a power plant. And in digitizing such workflows, you need to have at hand a digital representation of this product that can predict and reproduce the behavior and performance of this product in the digital domain before it exists in the real world. And that is precisely what we provide software solutions to build such models and to operate them for these purposes. And this brings tremendous benefits to our clients. It means that they can develop their products faster, cheaper, with a better performance and a higher quality in the end. Our flagship product Modelon Impact is pioneering the industry being the first cloud native SaaS platform for system simulation worldwide. It is based on proven technology that we have developed over more than 15 years. It was first launched in the third quarter of 2020 and we're investing in that product to drive and grow our annual recurring revenue business. And we are pleased to see that since the launch of this product of Modelon Impact in the third quarter of 2020, we have consistently grown our annual recurring revenues quarter-by-quarter since. We are highly internationalized for our size. We are around 100 people distributed over 10 offices in Europe, North America and Asia. And we have almost all our business outside Sweden even if our headquarters are located here in Lund where we sit. The simulation and analysis market is very large and it's continuously growing for foreseeable future. And based on the positioning of our product Modelon Impact, our international presence and access to the global markets and the size of this market; we have set up ambitious goals to reach an annual recurring revenue growth of 35% in the medium term, to turn cash flow positive in the short term after the current investment period and to approach and exceed EBIT margins of 20% or more in the long term in the mature phase. And turning into the fourth quarter details then. As I said, we are pleased to report an ARR double-digit growth of 12%. Notably Modelon Impact, the flagship product, is driving this growth and itself has an ARR growth amounting to 63% versus 2021 and again the growth is dominated by the acquisition of new customers. We also have a solid growth of our software revenues in the fourth quarter and that also includes so-called paid-up licenses from Asian customers. That's because the acceptance for subscription-based business models in that region is not yet as mature as in Europe and North America, which means that we have also this kind of more traditional software revenues coming in from there. And drilling into some more detail on the business. So I start by introducing our core focus industry segments that we're addressing; the automotive, energy process, industrial equipment and aerospace; and we'll also show some sample customers in these sectors here on this slide to give a flavor of the kind of companies we work with. And they are typically leading and global innovation driven technology companies. Many of them are large and very well renowned and I'm sure you recognize most if not all of the logos that we have on this picture. In the fourth quarter, we have acquired several new customers of the same character. We're not able to provide or disclose identity of the customers yet. We hope that several of these will turn into future customer stories and testimonials so we can tell more about them. But we have among them an Asian global ICT solutions provider that is working in the automotive space. We have a European expert consultancy in offshore renewable energy. We have a European fuel cell innovator. We have a U.S. multinational medical technology company who lists under industrial equipment. So again several of these companies are really large. We are employing a land and expand strategy meaning also that several -- the majority of these customers actually also constitute very good potential for future upsell and become part of the drivers for our growth. Looking at the pipeline development in the quarter, it was steady. Notably we see continued high activity in the U.S., which is great and also in the HVAC&R; that's heating, ventilation, air conditioning and refrigeration; sector where we are also having some focus on our marketing efforts. So it's an area where we are very well positioned to deliver solutions and happy to see this activity. Also notably, we see activity related to our professional services offerings in the Q4 notably higher than the preceding quarters. This is very good. Our professional services business is a driver of the software business. We help our clients to adopt and use and scale the use of our software products. And this is also a result of targeted efforts that we have to promote these services more actively. And the customers we present there, the new customers we acquired. They all continue to confirm and demonstrate the positioning of Modelon Impact being firmly positioned to support the key big trends out in the industry that is also driving the growth of the simulation and analysis market. And this of course it means that we are well positioned to benefit from this growth and take our share of that. It's about the ongoing digitalization of engineering workflows and again we're positioning Modelon Impact as the hub to create the digital models required for these workflows. So it's a very good position at the center of this very important trend. And also of course clean technology, almost all industries are subject to these very high requirements on coming up with new solutions, innovations and put new solutions quickly on the market that are cleaner, provide clean energy and sustainable technology. Again we're seeing the majority of our customers using our products for these purposes so it's a great honor to be able to support this global trend. And also of course also accelerated by the recent pandemic the transition to SaaS cloud and remote collaboration and so on. So of course it's a great position to be pioneering the system simulation market with an offering on the cloud. In the quarter, we also had our first ever international user conference. With Modelon Impact on the market for a bit more than 2 years, we have built a user base that makes it meaningful to really start nurture community around the platform. We were very happy to meet more than 50 companies in Stockholm coming from 15 countries. We got great feedback from the attendees about the high value in networking with other users as well as meeting and engaging with Modelon experts to learn more about system simulation, model-based engineering and how to get most value out of our solutions. And of course also tremendous value for us to meet all these customers and understand their needs and requirements and challenges at a deeper level, information that we can bring back home and make sure to use when we develop our solutions -- develop and promote our solutions. During this conference we also recorded 10 video customer testimonials, 5 of those have been published to-date as you see on this slide. Great testimonials. Collins Aerospace is one of the world's largest supplier of aerospace products. They are using our solutions to design air management systems for commercial aircrafts and we have the opportunity here to spread with that customer into a lot of other areas as well. We have been working with them for quite a long time and they are also testifying here the value and the benefit of working with Modelon as a long-term partner for system simulation. Heliogen is an innovator in renewable energy in the U.S. They are using our solutions for concentrated solar power plants design an operation. They are testifying how rapidly they were able to start with our solution and get productive and get meaningful results that supports their engineering decision making. Newcastle Marine Services is the U.K.-based company that is working with 0 emission ship propulsion. So they are using Modelon Impact to validate the retrofitting of new replaced diesel fuels with alternative fuels on ships like for example liquid hydrogen and they are highlighting the value of being able to work with high level energy modeling as well as the detailed physics in the same platform. And they also have a vision to use Modelon Impact also for the design of new ships and for digital twin applications. Electric Power Research Institute EPRI is a U.S. Institute. They are working with more than 450 energy companies around the world about clean, safe and affordable electric energy. So it's a great customer to have. Working with them gives exposure also to their clients, their partners, their network of these 450 companies. So it's very good. They are using Modelon Impact for green hydrogen generation of storage for gas turbine electricity generation and they are testifying how they rapidly can get meaningful insights from Modelon Impact to make decisions about design, optimization and configuration of these systems. Again, great feedback. And then we have Volvo Autonomous Solutions. They are using Modelon Impact for testing and validation of autonomous driving systems, detailed vehicle models in that context. They are highlighting the benefits of working with the standards-based solution that allow them -- enables them to collaborate, share and integrate their different engineering tools to chain integration. So very successful conference, great value for us and we are already planning for the next one. So stay tuned and we'll let you know when that will be and where. So as demonstrated by these testimonials, industrial systems where system simulation contributes are found pretty much everywhere. So we saw aircraft, cars, power plants exemplified and ships exemplified in the testimonials. We also saw demonstrated here how our solutions and Modelon Impact is being used across the product lifecycle from the early phases of innovation and then into the detailed design, the testing and validation and then also in the operation phase of these systems. So it's a great demonstration of the large addressable markets we have with this product. Also then we're leveraging the cloud to deliver these customer values and to monetize. We have the subscription-based licensing and then also we monetize the amount of work that users do on the platform, the productivity aspect we call it and then also we can monetize on deploying web apps and similar to a large number of users on the platform. And as we also highlighted in the third quarter, we are currently prioritizing and focusing on strengthening these cloud scaling aspects of the platform to support and accelerate our growth. And we expect to have substantial new capabilities in this area planned for release starting in the first half of this year. So it's a very intensive development work ongoing. Also in the quarter we signed a contract with the European Defence Fund, NEUMANN is a large program aiming to develop novel energy and propulsion systems for next generation fighter aircraft. So this is a program with more than 40 participant organizations and in this program we have signed up for SEK 11.4 million (sic) [ SEK 11.2 million ] over the 4 years starting this year, actually already started. And the value of this project for us is both the financial contribution, the acceleration of our product development in this segment and also of course the exposure we get and the collaboration with key industry actors here. And I think that some of you may recall that in the third quarter we also shared customer story with Saab, the Swedish maker of the Gripen fighter aircraft. So we have good solutions in this area that we can sharpen even more in the context of this project. And with that, I'm handing over to Jonas for comments on the financial development.

Thanks, Magnus. I must say we are very excited about this new project and other new projects that we will be starting in 2023. If we go to the first slide here is showing the ARR, we can note that this is growing steadily since 2020 when we launched Modelon Impact. We are growing at a pace that we're not satisfied with of course in 2022. We are aiming at the medium-term target 35%. We see for the annual growth here 12% and better improvements in Q4 with 5% quarterly growth. I should also note that this is reported at constant currency so this is the real volume growth. There are also FX effects that sort of are below the numbers here if you say so. The main impact -- the main growth driver is Modelon Impact and we have an annual growth of Modelon Impact with 63%. This is something we expect to be continuing forward and be driving the total ARR that we're showing here. Then we can move to the revenues and costs. So in the net revenue, we see increased in the fourth quarter. We see increased net revenue for the second quarter in a row growing over 2021 numbers. And looking at the 12-month period, rolling 12 months we see both net revenue showing growth and also steady growth of software revenue which is very important. And we are now past the sort of historical project that we had this co-development service that was ended at the beginning of 2021. So we've sort of turned the ship and are on a growing trajectory. If we look at the development costs at the bottom here, they are high in Q4. As Magnus mentioned, we are in an intense development phase and this is something that we're not expecting to continue at this sort of growth rate forward. But note that the development costs there are taken as operating expenses and of course then contribute to the negative EBIT that we see here also in Q4 with roughly 100% negative margin. This is also something that we expect to improve on in 2023 towards our financial targets. And we can move to the next one, little bit more detail. Looking at the operating expenses, they also increased more than usual in Q4, 33% compared to 2021. This is partly the development of course, but also sales costs that are increasing. We are now fully past the pandemic period. So we had for example the Modelon Innovate Conference that was a great success and of course also incurred some costs, some of them that landed in Q4. There's also more sales activity so we see the travel costs increasing. We have several conferences that the sales and our engineering staff have been at to show Modelon Impact and get in touch with our customers. An example in Q4 was Enlit in Europe, very large conference. And we've in the past few weeks seen a couple of conferences in the U.S. market, HR in the HVAC&R area that Magnus mentioned was a month ago and recently the POWERGEN conference in Florida in the energy sector. I mentioned the development costs before. So in the quarter we had higher costs partly due to external consultant engagements. We've been using expert consultants quite a lot and with a high intensity and pace in Q4. Now several of these, the majority of these external consultant engagements are ending at the end of December so we'll see a lower cost starting in this year. We're also looking to grow our staff with employees, that's also partly starting in Q4 here. Finally, I can mention the cash flow. We have a cash liquidity at the end of the period of roughly SEK 112 million. This is the funds from the IPO that we're still investing from. If we're looking at cash flow in the quarter, we had minus SEK 15 million, roughly the same as the historical comparison period. This we should note is influenced a lot by changes in working capital and there is a seasonal pattern that we have more negative cash flow in the second half of the year and more positive or at least less negative in the first half of the year where we do get many renewals of licenses, prepayments of licenses and customer payments. So we see that this is sort of improving at least for the near term the cash flow. But this is all according to our strategic plans and this is according to the budget and plans that we do for long-term growth accelerating the growth of Modelon Impact. And with that, we can move into the Q&A. So I will leave the word back to you, Fredrik.

[Operator Instructions] Can we have you unmuted, Stefan? Can we have Alexander unmute? Well, I continue with some questions of my own while we have these 2 analysts unmuted. Customer intake continued to be strong also in the fourth quarter. Can you describe if this development is a ramp up and if so, what is driving this increased success rate?

So the growth in the fourth quarter or new customer acquisitions in the fourth quarter continued to be driven by Modelon Impact. As we guided in Q3, we are expecting a ramp-up of the customer acquisitions to be driven by the cloud capabilities that are currently under development. So I would say I agree we have a strong, we have a good acquisition of new customers in Q4; but not yet what I would say a significant ramp-up towards the financial goals that we have set to drive that growth rate. So this we have still ahead of us and related to these new capabilities that are coming out.

Can you help us describe the dynamics between the software growth and the ARR growth?

Yes. So the ARR growth, I mean that's the contract value of recurring licenses so it's a leading indicator of the software revenues -- leading indicator of the recurring software revenues. Then we have also the nonrecurring. As I said, we have some regions still where part of the software business is done with the more traditional paid-up licenses like in Asia so that comes on top of the ARR driven revenues.

What role does the Modelon Impact play in the growth in this quarter?

As I said, we have in our ARR the Modelon Impact contributing with a 63% growth of its share of the ARR. So Modelon Impact is a key role in the growth of our annual recurring revenues. Then we have also what we call our multi-platform offerings, which is other packagings you could say predating Modelon Impact that we still have quite many customers on and we also exhibit some growth on this part of the portfolio. But the driver is really Modelon Impact that grows at the rate of 63% in the fourth quarter.

The EU contract you were awarded, how will this be noticed in the P&L for 2023?

Shall I take that one?

Jonas, please.

Yes. So this is a research contract or research funding from the European Union and typical for those is that they are long term. This is a 4-year contract and we are recognizing that revenue as we work the tasks that are given to Modelon in the contract. So this revenue will be basically recognized over the full 4-year period and depending on the pacing in the project, I would say evenly spread more or less. But this depends a lot on the planning. We are already ongoing so there's been a kickoff and we have started the project. Another key factor in the European research projects is that they are usually prepaid so you do get some of the funding already at the start of the project. In this case roughly half of this funding was received in the quarter in Q4 and will have an impact on the cash flow because of this.