A warm welcome to the Modelon investor presentation for the second quarter and first half year 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, please.
Thank you, Jenny, and welcome everyone to this presentation of the interim report for the second quarter for Modelon. My name is Magnus Gäfvert. I'm the CEO of the company and one of the co-founder. As Jenny said, with me today, I have my colleague, Jonas Eborn, CFO, and also one of the co-founders. We will present the report today. I'll start with walking through some business highlights of the quarter, including a very brief overview of the company, and then I'll hand over to Jonas, who will elaborate on the financial development in the period. In the end, we'll have a Q&A, and I believe you're all welcome to share your questions by email during the presentation.
I'll start with the bullet highlights, and I'm pleased to report that we continue our growth of our annual recurring revenue, and in Q2 at a level of 24% compared to Q2 2021. This is driven by continued account wins for our flagship product, Modelon Impact, with a good global spread across regions and with notable wins in Japan during this quarter, which I'll tell more about. We continue to see continued good activity across regions, Europe, North America, and Asia. In the quarter, we also released a new version of Modelon Impact with important new functionality to drive the further growth of our ARR business.
All in all, this means that we do remain confident in the targets we have set out for 2024 to arrive at a level of SEK 100 million of annual recurring revenues at that point. With that, I'm moving into a quick brief overview of the company. Modelon is a business-to-business software company in the systems modeling and simulation sector, and that means we're helping our clients to digitize engineering workflows related to the innovation, development, and operation of high technology products and systems. That can be anything from a car to an aircraft or a power plant.
In digitizing such workflows, you need to have a digital representation of your product that can reproduce or predict the behavior and performance of your product or system in the digital domain before it exists in the real world. This is precisely what we provide tools to create such models and to use them for those purposes. This brings tremendous benefits to our clients. It means that they can bring their products to the market faster at a lower cost, since they can reduce or even eliminate the use of expensive physical prototypes and testing. In the end, also arrive at a higher quality product with better performance because of the methods that are available in the digital domain for engineering design.
We also enable our customers to operate these products and systems in a more economic and optimal fashion, after deployment, when they are realized. We serve technology companies across the world and in several industries with these solutions, and I'll give some examples later in this presentation. We have been doing this for 15 years. We were founded in 2005. We are currently around 100 people working from 10 offices in six countries, in Europe, North America, and Asia, headquartered in Lund, Sweden. We have among our employees a high portion of PhDs among the engineers.
That speaks to the fact that we're working in a very high entry threshold technology domain, and the software that we develop is of a very sophisticated nature, deep tech, if you like. Our technology is proven both industrially and commercially since many years. We are currently, based on that technology, investing in a new and pioneering cloud-native platform, Modelon Impact, that was first released in the third quarter of 2020, with the purpose to drive and grow a recurring revenue business based on that. The simulation and analysis market is really big. It was estimated to $8 billion in 2020 and growing at an annual rate of close to 8% every year.
These are numbers provided by a U.S. analyst, CIMdata, who are very good at our industries. Modelon Impact is a unique product in its space. It's the first cloud-based systems modeling and simulation platform, and that is a very exciting position to have. That in combination with the market size and growth means that we have set out targets for 2024 to grow our annual recurring revenues to SEK 100 million. At that point, also turn cash flow positive again after the ongoing current investment period. Start approaching profitability levels of EBIT margins of 20% or more. We are executing on that strategy.
As you can see from the chart at the bottom here, since the release of Modelon Impact in 2020, we have consistently grown our annual recurring revenues quarter by quarter. Which takes us to the second quarter this year, where we are again pleased to report that we are growing our annual recurring revenues with 24% compared to Q2 2021. Now at SEK 41.1 million compared to SEK 33.2 million at that point. Also, we're pleased to see how Modelon Impact drives this growth. And in the second quarter, we're at a pace of 20% growth of the recurring revenues from Modelon Impact quarter by quarter. That translates to roughly a doubling of the revenues from Modelon Impact on an annual basis.
We can report that the lead generation for Modelon Impact has also approximately doubled compared to the same quarter last year, which illustrates how we are scaling our business appropriately. We also then see pipeline development in the quarter that gives us continued confidence in meeting the goals that we have set out for 2024. The next slide here provides some more color to the activity in the quarter. I'll start with introducing the four main target industries that we are addressing, automotive, energy process, industrial equipment, and aerospace. Also illustrating with the sample of existing customers that we have in these industries. You see the logos here, and I'm sure you recognize that these are very well-renowned companies, often leading and very high-demanding customers in these respective sectors.
We're of course extremely proud that we earned the trust from such fine companies to use our solutions for their product innovation and development. In the quarter, we have won a number, a good number of new accounts across these industries and around the world, as listed on the chart here. You see it's good spread across the industries with some weight on the industrial equipment. In past quarters, we have seen that weight a bit more on the energy process side. We also notably can observe that we have several wins in Asia, in Japan specifically.
Some of you may remember that a couple of quarters ago, we reported about investing in increased sales capacity in that region, and we're happy to see that this is now paying off with the results. We are employing a land and expand sales strategy. With, in the phase we are with Modelon Impact, we are currently dominated by winning and landing new accounts. Many of the customers that we bring in are really large companies, really huge, often international with thousands of employees, and that means that they constitute great opportunities for further growth of business with them, expand business.
This is something we also see quarter by quarter, customers that we brought in start increasingly to add more users to their Modelon Impact accounts. In the second quarter specifically, we're happy to see a European global aerospace company continue to expand their use of our solutions. In the quarter, we also published this very nice customer story, and this is from a Dutch company, Lightyear. That started using Modelon Impact a couple of quarters ago.
They are an innovator in the electric vehicle domain, and they are developing a solar-powered electric vehicle with integrated solar panels, which means they can charge on the go and thereby expanding the range by up to 70 km per day from solar power alone, and thereby saving great consumption. This is very exciting technology, and in developing this kind of novel technology, there is a very large number of critical engineering decisions to make, related to the configuration, selection of components, trade-off, weight, cost, performance for each components and so on.
We're very happy to see how Lightyear are using Modelon Impact to evaluate all those different options in the digital domain and reporting that they are by that able to make good decisions that saves time to market and cost for them. Modelon Impact is now an integral part in their engineering design process. They are specifically also highlighting the importance and the value of the built-in models that we provide with Modelon Impact that helps them to quickly get the results that they need and results that they can trust. Lightyear and basically all the companies we bring in are driven by a number of big trends that we see out there.
Trends that is driving companies to adopting more simulation of the kind that we provide. The first one I mentioned, it's that of digitalization. It's simply necessary to work more in the digital domain, to have more engineers try out ideas, options, make decisions based on digital models rather than physical prototypes. This is precisely what we provide with Modelon Impact, the capability to work with important engineering workflows in the digital domain. Virtually all these companies are also subject to very strong pressure to improve. Well, it's a challenge and it's an opportunity of course.
To meet the demands and requirements on sustainability, there's an enormous pressure on innovation to come up with new ideas, to test them, and realize the best ideas into new products that are of a more cleaner or more sustainable nature. It's simply impossible to do this in a competitive way without working extensively in the digital domain with the kind of tools that we provide. We also have very strong support in the built-in models for precisely these kind of applications related to clean technology. We're very happy to see a large portion of our customers working with that kind of products.
Of course, the general trend of moving to cloud, to using cloud software, that's related also to developments that have been accelerated during the pandemic, to work collaboratively, remotely over distances, across teams and so on, greatly facilitated by cloud software. Again, Modelon Impact is a unique solution for systems modeling and simulation on the cloud, and that's of course a very exciting position to be in. All in all, Modelon Impact very well meets the needs of these companies and in these related to these three important trends. These trends, we have all reasons to believe that they will remain important and strong drivers for a decade or more. Modelon Impact is a modern cloud-based software platform.
You operate it from your regular web browser, no installation required. Using the built-in model components, engineers can very easily, using simple drag and drop operations, take components. We provide thousands of built-in components, representing the different parts that you have in a vehicle, a car, an aircraft or a power plant, mechanical parts, electrical parts and so on. You take drag and drop components, you connect them into your unique individual engineering design, and then basically just press a play button and you can experience the behavior and performance of that design. It's a tremendously powerful way of working.
The provided model components cover a broad range of applications across the target industries that we work with, and with a focus on clean tech, sustainability kind of technologies. These models then support engineering workflows across all the product life cycle for the customers. That means from the early innovation and research activities when you want to try out ideas into the detailed requirements and design phases throughout the integration testing and all the way to deployment and operation. It's a very strong value proposition. We are with Modelon Impact also able to monetize, of course, each individual user that we onboard to the platform, but also the volume of work that is done in the platform. That's what we name the productivity licensing.
In addition, we have support to build, based on the platform, lightweight web apps, to use for specific purposes that can be deployed to a large number of users, and that's another way for us to monetize. In the period, in the quarter, we released a new version of Modelon Impact with, again, important new functionality to drive the further growth of our business. One part of that is related to scaling our cloud business, and that includes both customer facing new features such as a new app mode for sharing and collaboration, but also significant improvements under the hood to be able to scale our deployment to the next level on our hosted services.
In addition to that, we have many improvements related to the library and model content and workflows on the platform. That those new features expand the addressable market for Modelon Impact in that it means we support an even broader range of applications across the industries we're working with. For example, we have a focus here on improvements related to electrification. That could be electrification in cars or it can be electrification also in other industries, aerospace, for example, model components to support that. Likewise, improvements to models to work with hydrogen-based energy technologies such as fuel cells, to work with hybrid aircrafts and also improvements in a segment that's related to industrial refrigeration, which is a large energy consumption across the world.
It's very important for companies to improve those products. It's very exciting, very important updates. Very pleased to see the response. I'll also take the opportunity here to highlight our global team, which I'm immensely proud of. We are highly, as you may recognize, internationalized for our size, with 100 people distributed over 10 offices, six countries, three continents, and working together on a daily basis across time zones, language barriers, culture barriers, and so on. In order to make that work well, we usually bring all the team together, all the global team together once a year to get to know each other and create the bonds and connections that make us work effectively on a remote basis.
Now, for obvious reasons, during the pandemic, we have not been able to do this, so we're extremely happy to be able to resume this annual get-together in June this year, where we brought all the global teams together at Bäckaskog Castle in Sweden, for three intensive days with social activities, workshops, meeting new colleagues that have onboarded since 2019 for the first time. We had, for example, a very successful Modelon Impact hackathon activity where a lot of new ideas were brainstormed, great ideas, and presented and realized in a short period of time. I hope to see several of those coming into the product sometime soon. I also want here to highlight our team in India.
It has been growing since we started there in 2015. In the quarter, we moved into new office premises, larger premises for this growing team. It's a very strong team of simulation engineers, software developers and software testers that are working integrated with our global teams. A benefit of having a globally distributed team like this is also that we have access to talent pools across the world. Many of the position profiles that we look for are very specialized, and it's a great benefit then to be able to find talent all over the world, basically. Part of our recruitment and the employee branding activities is that we feature employees on social media.
On LinkedIn, you find these snippets with employees telling their stories about working with Modelon, which I can recommend. Finally, I should also mention that, of course, having a globally distributed team, a major benefit with that is also that we're able to serve our customers with feet on the ground in all the important markets, meet and get to know and support our customers with training, consulting services to drive the adoption of our software solutions and so on. It's very exciting to see the level of internationalization and how we make that work at a global level. I'll conclude with this. In the quarter, we are continue to prepare for our upcoming user conference in October in Stockholm.
It's actually our first user conference. We've had Modelon Impact on the market for pretty much exactly two years now. In that period of time, we're very pleased to see how we have onboarded a number of high-profile customers, as mentioned here, representing some of the most demanding and innovative technology companies in the world to use our software and also be willing to share their stories and experiences at the conference here. We very much look forward to meet customers from all over the world telling stories about how they use Modelon Impact for fuel cell system development, solar power plants, digital twins, offshore solutions, large-scale energy storage, nuclear power, electric vehicle thermal management, and autonomous driving.
It's an extremely exciting range of applications that we will learn more about. We're also extremely pleased to have a keynote presentation by the Chief of Future Methods, Tony Phipps, from Rolls-Royce. That will be extremely interesting to listen to.
I look forward to report back after the conference about more details on what we learned there. With that, I'm handing over to you, Jonas, to talk about the financial developments in the quarter.
Yes. Thank you, Magnus. You can go to the first slide here with the ARR, where we start. So we already heard that the software ARR is growing. 24% is the annual growth since Q2 2021. I would like to note that this is reported at constant currency, so this is showing the real volume growth. We are seeing increased foreign exchange rates, so the number from 2021 has been adjusted with SEK 1.6 million, so that's the change since Q2 2021. Over the last quarter, 4% quarter-over-quarter growth has very small FX effect. So the changes in currency is basically since February, when we sadly had the war in Ukraine. These effects are expected to continue throughout the year.
That's what we see. Modelon Impact is, of course, the largest engine driving the growth with the 20% quarter-over-quarter growth here since the last quarter. Now we can shift to look at the net revenues. We do see a decrease here in Q2. Of course, compared to last year, this is the final quarter where we have the comparison numbers with the co-development service with this U.S. enterprise customer. This is now past our history. If we look at the difference between Q2 and last quarter, Q1, the decrease in net revenue is two-part. There's a drop in software revenue with SEK 1.1 million. This is entirely due to paid-up license sales in Q1.
This is a pattern that we've seen historically. In Asia is where we do sell paid-up licenses, permanent licenses that have a larger initial fee. Those usually come in Q1, which is the final fiscal quarter in that region. The other part is the service revenues. Of course, there, the numbers are affected by the co-development service, but also affected by some delays and reduced projects that we do see with European customers. This is again related to the war in Ukraine. Some of our German automotive customers, they have supply chain issues, and therefore, are more cautious in their ordering. These effects are expected to be temporary. Development costs, I will talk more about that later, are taken as operating expenses.
Of course, then that is included in the EBIT, which is - SEK 17.5 million. If we look at the difference with Q1 again, we have a drop of SEK 4.8 million, which is mainly due to the drop in net revenue. The cost increase part is SEK 2 million. That is split between costs actually for the employee event that Magnus mentioned. This is something that we haven't been able to do in 2020, 2021. It does carry a cost, of course, that we see as an important investment in our staff and employees and the efficiency how we're working together. Also there are parts, of course, we're recruiting, so there's recruitment costs, and we had the global salary revision in Q2.
This is also now with increased inflation, for example, having an impact. We're past that. This is for the entire staff then the global salary revision. Now we can go to the next slide, Magnus. Here are some of the details, of course, with the numbers of net revenue. Operating expenses, if we look at those, there is a growth 18% compared with 2021. This is primarily the new recruitments, increased sales and marketing costs. We have just launched a new website, which of course included some development. If we compare with also Q1 here, the change is SEK 2 million from Q1 to Q2, so there's a growth of 6%.
Those are the factors that I mentioned, the salary revision and the employee event, one-time costs in relation with that. International travel, for example. We can note with the development costs here, they are growing as planned, SEK 14.2 million in this quarter. All those development costs are taken as operating expenses. We can compare them, of course, with the cash flow, -SEK 9 million in the period. Note that the development costs are significantly higher than the negative cash flow. If we are taking them as operating expenses, if the development costs were activated, we would actually be at a positive cash flow. We have chosen this path. This is seen as an integral part of our business.
We do take the ongoing development, of course, as operating expenses. These investments, they are at a pace according to our strategic plan. Our cash liquidity is SEK 148 million at the end of the period. Target is to be cash positive in 2024, and we believe that this is the right pace for us to take us to that goal in the next two years. I think that was what I intended to say here, Magnus, so we can conclude, I believe.
Thank you, Jonas. Before turning to the Q&A, and Jenny, I'll repeat the highlights, the bullet highlights of the quarter. We have a continued ARR growth of 24%. We have several good new account wins for Modelon Impact with a global spread and with notable wins in Japan, and continued good activity in sales pipelines across all the regions, Europe, North America, and Asia. Strong new release of Modelon Impact in June. All in all, remain confident in targets we have set out for 2024. With that, I hand over to you, Jenny, for the Q&A.
Thank you, Magnus. I would like to start off with questions from Stefan Ward at Pareto Securities. The first one is for you, Magnus. Customer intake during Q2 was strong with in total 13 new contracts versus 9 in Q1. The level of qualified leads is described as doubled versus previous year. Can you describe the demand in general and comment on your focus segments?
Yes, a good question. The demand of the type of solutions that we provide is well, basically huge or in all industries over the world. What's important for us is to make those companies aware of our solution. We are a small company, so it's very important, the marketing activities, in particular, what we're doing in the digital domain to expose us to these opportunities. I'd say the doubling in lead generation is an effect of our increasing market activities and also increasing exposure leading to higher awareness. If we talk about the focus segments, again, we have the core, the four target industries.
In those industries, again, we have particularly strong solutions related to the development of clean technology type of technologies. It's electric vehicles, hybrid aircrafts, and various type of clean energy and so on, more energy efficient industrial equipment. This is what we're exposing, this is what we're strengthening in the products, and this is what the market and the companies increasingly learn more about and reach out to us.
Okay. Thank you, Magnus. A next question coming from Stefan Ward, Pareto Securities as well, and it's for you, Magnus. It looks like you have invested additional capacity in sales. Can you share how you allocate the resources geographically and if targeted towards specific segments?
Yes, another good question. The way we sell our solutions requires a team effort with sales reps that well starting at lead generation and marketing but sales reps and supported by application engineers that helps our prospects to evaluate our solutions answer questions help them to understand how to resolve their specific problems using our software and so on. When we are increasing sales capacity, it's both on sales rep side but also on the application support engineering side. We're scaling that together. Again, we're seeing good opportunity and activity across all regions. What we're doing is to try to sort of continuously balance the growth of sales capacity in those regions.
As mentioned, we realized some quarters ago that we had need in Japan specifically, and we see that has paid off now with that investment. This is something we're continuously evaluating and acting on. I should also mention that in addition to the application engineers and sales reps, we have our what we call industry solutions teams with simulation engineers that deliver consulting services to customers to help customers bring the most out of our software solutions and thereby also supporting the more adoption and expanded use of our solutions.
In those teams, which were somewhat reorganized to be in a more globally efficient way in the second quarter, we have deep expertise related to the different industry segments we operate in. These experts are also supporting our sales teams to present our solutions in the best possible way for our prospects.
Okay. Next one for you as well, Magnus, from Pareto Securities and Stefan Ward. Can you describe your current fastest growing customer engagement?
Fastest growing, yeah. I would say here that there is really no engagement that sort of stands out as being particularly important. The flip side of that is that we believe we have a good spread on our engagements on a number of customers and a number of parallel engagement that we are growing in parallel. We're not really depending on any specific single customers at this point. I mean, this is also a balance and the spread that we're also striving for.
We expect, of course, as I mentioned in the previous answer here, that we, if we talk about the growth pace with different customers, we expect that the increased exposure that we have as the awareness grows about our offerings, that will also lead to faster growth of the average customer engagements. That if we're well renowned and well-known at a broad scale, that will drive larger initial transactions and also faster growth on all accounts.
Okay. Moving on to the annual recurring revenues, and a question to you, Magnus, from Stefan Ward at Pareto Securities. You are at an ARR of SEK 41 million, up from SEK 33 million a year ago. You will add additional SEK 60 million next coming two and a half years. How comfortable are you in reaching your financial targets? Where and when should we expect the sales to accelerate?
Yeah. As I said, we do remain confident in the targets we have set out. We realize that we need to increase the growth pace, and I mean it's between now and 2024. The reason that we have confidence in this is that we are increasing our awareness. We are evolving our product. It was a fresh product two years ago. It's maturing by each quarter. In particular, we're maturing and focusing on the scalability on the cloud, and this is also what we believe will be a very important factor to accelerate the growth, our capability to bring in users quickly and at scale on our hosted services.
Last question from Stefan Ward, Pareto Securities, to you, Magnus Gäfvert, and it's about the service revenues. Service revenues is again slightly weaker as a result of the geopolitical uncertainty, mainly in Europe. You describe the situation as temporary. Can you please elaborate further on how we are expected to interpret temporary?
Yes. Again, we see that the effect we have seen was in our sales pipelines for services mainly in Germany. Germany, as I think many are aware, German industry has been particularly exposed to uncertainties resulting from the war. Now, we are working at a global level, so we are shifting our focus to regions which are sort of less affected, and we also believe, and we're also seeing, it's not by any means that we are at a standstill in Germany. We're also seeing that things are starting to move more again there also. Temporary, I'd say quite quickly we expect to shift focus to other regions.
How quickly things will return back to something more normal in Germany, of course, we don't know. Again, we are seeing activity there.
Okay. Thank you, Magnus. Moving over to you, Jonas, and some finance questions from Stefan Ward at Pareto Securities. The first one is about OpEx. OpEx is coming in slightly above our expectation. It looks like you have increased investments in sales activities and resources. Can you please share more details about the development? How is the number of head count expected to develop for the rest of 2022 and 2023? And how do you expect the personnel costs salaries to develop for the company?
Yes. Thank you, Jenny. We are investing a lot in both development and sales and have quite aggressive recruitment plans. Although it's a challenge to find good talent in general. I would say since last year we have increased our staff. Recruitments have now also picked up in Q2 this year after some delays in Q1. As I mentioned before, in Q2 we also had a global salary revision. I would say we managed to keep this at a reasonable level, although already then we saw the rising inflation numbers that have even increased since. Well, looking forward to 2023, we will continue to grow, I would say at a balanced pace compared with our revenue growth.
We keep our plans aligned, and sort of grow in step, and the cost should then also of course, then, grow slower than the revenue are growing.
Okay. Thank you, Jonas. A final question to you from Stefan Ward at Pareto Securities, and it's about the cash. You have SEK 148 million in cash. Is it enough to bring you into profitability? Can you share more information about potential needed investments and other activities that will or could have an impact on your liquidity?
We have sufficient cash to bring us to our strategic targets in 2024. That's the strategic plan we have, to be cash positive in 2024. There are no current plans for financing. I think that's the thing I can say, basically.
Okay. Thank you. With that, let's wrap up the Q&A session. I hand over to you, Magnus, for some final remarks.
Yes. Let me get back here. Those final remarks will be very brief. Basically showing here, the bullet highlights again, and inviting you all to also join us again for the third quarter report that will be published on November 11th. I look forward to meet you all again at that point. Thank you for attending today. Thank you for great questions.