Welcome to the Modelon Investor Presentation for the first quarter 2022. Without further ado, I would like to hand over to the CEO, Magnus Gäfvert, and the CFO, Jonas Eborn. Please go ahead. Next slide.
Thank you, Jenny. My name is Magnus Gäfvert. I'm the CEO of Modelon and one of the co-founders. As Jenny said, I am joined today by our CFO, Jonas Eborn, also one of the co-founders. We will present the financial results for the first quarter. 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 on the financial developments in the period. We will then conclude with a Q&A session, and you are welcome to send in your questions by email. I 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 by 32%. We continue to see that new customer wins for our flagship product, Modelon Impact, continue to have a global spread in line with our strategy. We see a high activity in all regions, 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 reach annual recurring revenue of SEK 100 million . Before elaborating a bit more on those highlights, I give a brief introduction to the company. Modelon is a business-to-business software company providing solutions for systems modeling and simulation.
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. In digitizing such workflows, 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. 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. 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're distributed over 10 offices in 6 countries in North America, Europe, and Asia, headquartered here in Lund, Sweden. 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. 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. It's a great opportunity that we're leveraging on. 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 co-funded 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. 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. We are really pleased to see that the investments we are making are having an effect in that we see now an established and consistent growth of our annual recurring revenues amounting to 29% in the first quarter.
Looking a bit more at that ARR development, we can see that compared to the fourth quarter, we had 31% growth, compared to 4% in the first quarter last year. 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 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.
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. I also want to draw your attention to some of the existing customers we have in these industries, illustrated by with logos. I'm sure you recognize most, if not all of these companies, as very well-renowned and leading companies in their respective spaces. we are, of course, extremely proud that they choose 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 phase is new accounts. Even though we are seeing a share of upsell or expand business also increasing. Some interesting observations here are 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 their customers, so it's a very good way to leverage and drive growth to attract these consulting firms. 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. We have a good traction in that segment, which is very interesting. 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. It's great to see that we have positioned Impact so 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 I indicated here, robust activity across these industries across all regions in the quarter, meaning that we generate good new leads for new business. Again, like in the previous quarter, we continue to see particular strength in North America and the energy sectors. 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 attendees at that. 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 testimonials, so we're very pleased to see the type of testimonials we have received here from the CTO of Blue World Technologies. That's a German innovator in fuel cell applications. He testifies how Modelon beats the other solutions because of the range of model libraries provided in the tool and the ease of use. This acknowledges precisely the type of positioning that we strive for, so it's great to see this.
It is 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 three times what you get from compressed hydrogen. Very, exciting to be part of these type of advancements. This company is a good representative for one of the key trends that are driving the simulation market as such, the one on clean technology. 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.
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. 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 in the previous slides. Again, to be pioneering in our segment, the shift toward SaaS Cloud is, of course, a very, very strong position to be in.
All this comes from our Modelon Impact platform, how that is defined and positioned. 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 to detailed design, testing, and into operations. We can address these key application areas often related to clean technology because of the model content, the very broad model content of model components that we provide in the tool, and that enables our users to build sophisticated digital models of very complex products, almost like building with LEGO bricks. You drag and drop and put together these model components to build your system. It's very convenient. It's very powerful.
All this is packaged on the cloud platform and offered to customers in a way that's easy to scale with a pricing model that encourages scale and further deployments. In the period, we are focusing our development efforts on strengthening the cloud deployment capabilities to support scale, drive further growth, and strengthen our positioning to be with a 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 hydrogen-based energy systems.
I'm also very pleased to say that in the quarter, we continue 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, and 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, represent the most demanding and innovative companies on the planet. We're really thrilled to see that they are willing to share details on their stories at this conference.
We are looking forward to presentations covering applications 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. It's a broad array of applications that are all extremely exciting. This will be a vibrant conference, and we really look forward toreport more on these stories from that. With this, I hand over to you, Jonas, to give some more detail on the financial development.
Thank you, Magnus. You can switch to the ARR slide. 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 a continued growth towards the target that we set. Quarterly growth of 2% was slightly lower than in Q4 . As Magnus discussed, this is partly a seasonal effect that impacts the numbers quarter-t o- quarter here. 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.
The currency will have an effect on us for the rest of the year. It will also impact our revenues a t actual currency. The Modelon Impact ARR grew 14%, so this is still the growth driver, and we expect that to remain very strong driver. We see good pipelines, as Magnus also mentioned, and a strong driving force in our Modelon Impact sales. I think we can move to the next slide, Magnus. The net revenues in Q1 increase over Q4, so we're now in a growth period. It is a decrease 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 software revenues in the quarter, SEK 11.6 million, up by 32% compared with last year. Now that means that the software revenue is showing a similar growth as the ARR. ARR and recurring revenues is typically 85%-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. This marks the end of this transition period from the co-development service project. The transition is more marked in the trailing twelve month number. 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. 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, SEK -12.7 million, is from development costs. Magnus, we can switch to the next slide.
The EBIT, as I mentioned, and this financial development is showing really the completed shift now into a period of strategic investment, 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. We maintain our investment pace.
We expect that this cash will take us through the investment period to 2024, where we turn cash flow positive and also target SEK 100 million ARR for the end of 2024. Regarding cash flow in the period here, SEK -11.2 million in the quarter. This is slightly better than the EBIT, explained by the 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. 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. That also gives a cash flow that is better than the EBIT.
That was the main highlights that I wanted to bring up so we can move on to the next slide, Magnus.
Thank you, Jonas. 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 roadmap with the engineering capacity 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. 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. With that, I believe that we are moving into the Q&A.
I'm handing over to you, Jenny.
Thank you, Magnus. I would like to start with the questions from Stefan Wåhld from Pareto Securities. First 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?
I 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 roadmap, we have capabilities in the product that is being realized that we also expect to further support scaling and growth. I think that should sort of state the how we see this.
Okay. Second one for you as well, 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. I tried in the presentation also to give some more sort of overall description of what we see in the pipeline. First I'd say that we see a 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 could describe as key trends like the hydrogen economy, for example. We are focusing marketing efforts to target those sectors where we see a good opportunity and momentum. If we look at Asia specifically, we have done some investment in additional sales capacity, and we're 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, I say mainly also South Korea and China, where we have good activity.
As a follow on that one, from Stefan Wåhld, 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. 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. 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. We're happy to have identified and onboarded several very good partner companies that supports our business development in these regions.
Mm-hmm.
That's actually in all of Japan, China, and South Korea. We have good partners that support our business development.
Next one from Stefan Wåhld, Pareto Securities. That's one for you, Jonas. So, the 48% increase in development cost, is that rate plausible for the full year 2022, and what should we expect for 2023?
Thank you. That number is the trailing 12 months growth, 48%. That reflects the transition from the co-development service project that we did in 2021, and those resources are now shifted into self-funded development. The Q1 growth is 23%, or the Q1 increase in cost, development cost. That is a better indication of the development cost 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 is a driver for the sales growth, but it should be also a stable business. We will see more moderate growth in development costs.
Thank you, Jonas. Last one from Stefan Wåhld, Pareto to you, Magnus. What type of R&D level is assumed in the long-term operating margin target of 20%?
Again, we are confident in the targets we've set out for 2024 and to become cash flow positive by that period, and so that gives some information on the relative growth of top line revenues versus the costs. We also remain confident in the long-term EBIT margins of 20%. I can add that the business we're in and the opportunity on the system simulation market means that it is absolutely rational for us to continue to invest substantially in R&D to be able to address larger and larger portions of this market and really exploit the opportunity we have out there.
Long-term, we will absolutely have significant R&D activities, and we absolutely expect to reach the long-term margins that we have set out.
Mm-hmm. Thank you. We have more questions coming in, so next one for you as well, Magnus. Regarding the land and expand strategy, how far has the development of the Deployment Suite progressed? Can you describe its functionality today, and in what way your customers use it? What is the most common feedback from these customers?
Yeah, that's a good question. First, to clarify a bit, we have a product called the Deployment Suite that we've had for several years. I do assume that this question relates to what we call the deploy option of Modelon Impact, which is the functionality that we have introduced to allow for scale-up of non-expert users on the platform. What I can say on that functionality is that it supports today to develop web apps that sort of streamlined web interfaces for certain workflows that can be deployed to many users. We do have that functionality in place.
That's not to say that the, I mean, there is still a roadmap of additional refinement of those functionalities that we are planning for. We have customers that use this and need to recall. It's industry customers that are using it, for example, for a certain kind of factory operations purposes. Web apps for operators in factories or plants. Feedback from customers, I mean, there's a very strong interest in getting this kind of functionality. It is fairly unique to be able to access and work with the detailed or sophisticated models in the platform from streamlined, simplified web UIs.
I guess, I mean, the feedback is that this is very useful, and there is a request for more and additional functionality in the same direction, and this is in our roadmaps.
Thank you, Magnus. Next one is for you, Jonas. On a year-on-year basis, solution service revenues increased by 17%, while software revenues increased by 32%. What is driving the increase in software share in the revenue mix?
This is a big part of our strategy to increase our software share. Long term, we're looking to have the license sales and software sales at around two-thirds or more of the total revenue. I think we just came above 50% since we've transitioned from a more service business and the co-development service that was ended last year. However, the solution services they will not go away. They are a key driver also in driving the adoption of system simulation with our customers and also explaining and widening the use of Modelon Impact for our customers.
We're doing both, customer success, sort of as a regular support to the licensed customers, but also the services, with expert services, real, domain experts, that can explain the benefits of system simulation to our customers. That will be important. There's a very strong synergy between those two parts of our business.
Thank you. Next one is for you as well, Jonas. Development cost was SEK 13.5 million for the quarter, an increase of 23% year-on-year, but only an increase of 1% quarter-to-quarter. Is development spending estimated to increase or remain at this level for the year?
Thank you. that is similar to the previous question, Stefan Wåhld from Pareto Securities asked. As I said, the 23% increase, that's a good indication of the expected growth, at least for now. The quarterly difference of just 1%, that's more other effects. You can have seasonal effects also in the costs between quarters. Main thing is really that I want to stress that we remain confident with our goals for 2024. We should be cash flow positive during 2024, and long term, the EBIT margin target is higher than 20%. That's the level we expect to be shortly after 2024. We will continue to increase the development spending, although, as I said also before, at a moderate pace.
Somewhere in between 1% and 23% is a good number.
Thank you, Jonas. Two final questions, and I will put them forward to you, Magnus, as they are focused on the top line. First one here, upselling on existing accounts increased in the quarter. Does this increase originate from many or few customers? Can you expand on the potential of upselling and the usual case?
What we see now is that the early customers that came on board with Modelon Impact, we start to see expand and upsell. The typical journey we expect is that a company, a customer starts to use the platform, and then after a year or so, we expect to see opportunity for this kind. This is pretty much what we see happen also. It means that many or few, I guess that depends on the reference you have, but it's a sort of moderate portion of the total customer base where we see this happening. We definitely expect it to continue to grow.
If you look at the potential of upselling and the usual case, so what we typically see, again, we're talking about entering with a sort of handful of seats with companies that may have 20,000 to 50,000, 70,000 employees. Of course, I mean, getting into one team and department, it means that we get exposure to adjacent teams, colleagues that drives interest and we can sell more into other teams and departments. It's a process that will take some time, but the potential in these companies of this size is really large. It's really big. the usual case we are seeing now is what I just said.
We could add to this and relate also the opportunity related to the previous question with this deploy options where you can build more sort of lightweight streamlined interfaces for different categories of users. That we expect to be another sort of use case that will be of growing importance down the road.
Thank you. This one for you as well, Magnus. In Modelon's client list, there are several large enterprises with huge organizations. While considering the many benefits of open cloud solution, what concerns might these companies have regarding switching from an on-premise solution to a public cloud solution?
I would say it's the main concern and that I can think of, and maybe almost the only one is that of information security. The shift of this kind of software engineering software that's dealing with blueprint data of the next generation of products for these companies is really sensitive data. You can go back and already 10-15 years ago there were expectations from analysts that this would start moving to the cloud, but it has been slow. It's only now that it really starts happening. There have been concerns for a long time regarding data security.
I would say that in the past maybe five years these companies have become convinced that the security levels offered by the big providers like Microsoft, Google, Amazon is on par or better than what these companies can obtain with on-premise solutions. I'd say the sort of momentum has started now for this change. We could also say that the recent developments in the world with the Russian aggression and conflicts have again introduced the concerns for information security. It definitely
We do not expect this to be a blocker by any means or stop this trend, but it's of course extremely important for us and everyone else to have these topics at the top of the agenda and make sure that the solutions that we implement are secure and protect the customer data properly.
Mm-hmm. Okay. Thank you. That's all in the Q&A session. I hand over to you, Magnus, to wrap up this presentation. Next slide, please.
Yes. I'll just repeat the highlights of the quarter. ARR growth continues, amounts to 29% in the first quarter. Software revenues grow with 32%. We continue to see the wins for our flagship product, Modelon Impact, to have a good global spread, and we continue to see good activity in all the regions, and we remain confident in the targets we have set out. With that, we conclude this presentation. We have the second quarter report coming up on August 24, and I hope to meet you all again then. Thank you.