A warm welcome to the Modelon investor presentation for the third quarter and first nine months, 2022. Without further ado, I would like to hand over to the CEO, Magnus Gäfvert, and CFO, Jonas Eborn. Please go ahead.
Thank you, Robert, for that introduction. Welcome everyone to the presentation of the interim report for the third quarter. My name is Magnus Gäfvert. I'm the CEO of the company and one of the co-founders. With me today, I have my colleague, Jonas Eborn, CFO, and also one of the co-founders. Today I will start by walking through some of the business highlights of the quarter, and then I'll hand over to Jonas, who will elaborate on the financial development in the period. In the end, we'll do a Q&A, and you are all, as usual, invited to send in your questions via email during the presentation. I start with the bullet highlights.
We are pleased to report that our ARR growth continues and amounts to 16% in the quarter and is driven mostly by new customer acquisitions. Modelon Impact, our flagship product, continue to be the driver for our ARR growth, with 12% quarter-on-quarter growth. We have some new fine customer testimonials that demonstrate the strong positioning of Modelon Impact on the market.
We were in the quarter also officially announcing Modelon Impact on public cloud offering, with a very encouraging initial response that we're exceeding our expectations. All in all, this means that we do remain confident in our financial targets, which were updated to reaffirm the ambition level that was set at the time of the IPO last year. I'll turn to a brief introduction of the company.
Modelon is a business-to-business software company in the system simulation sector. This means that we are helping technology companies around the world and across the industries to digitize engineering workflows related to the innovation, development, and operation of high technology products and systems.
That can be anything from an aircraft to a power plant or a car. In digitizing such workflows, you need to have at hand a digital representation of your product that can predict and reproduce the performance and behavior of your product in the digital domain before it is built or exist in the real world. That is precisely what we provide, tools to build such digital models and to operate them for these purposes. This brings tremendous benefits to our clients.
It means that they can bring their product to the market faster, cheaper, and at higher quality and performance in the end. Our flagship product, Modelon Impact, is pioneering our industry. It is being the first dedicated cloud SaaS platform for system simulation worldwide. It is based on proven technology that we have developed over more than 15 years.
It was first released in the third quarter of 2020, and we are currently investing continuously and intensively in this platform to accelerate and grow our annual recurring revenue business. We are pleased to see that since we put this offering on the market, we have consistently been growing our ARRs quarter by quarter since. The simulation and analysis market is really big and also constantly growing. This, in combination with the strong positioning of Modelon Impact, means that we are enabled to set ambitious-
I'm sorry, Magnus, we have some audio problems.
Okay.
Try again.
Okay.
You need to switch microphone.
Yeah, I'm sorry.
Now I can hear you.
Okay.
Try a different microphone. I think that's better.
Okay. Did you get feedback from Financial Hearings also? Let's see. Okay. Is this better?
Much better, yes.
Much better. Okay.
Just repeat like the last 30 seconds.
Okay. I don't know exactly where that was. So, tell me, Jonas, where I should start. Is it on the flagship product or? Our flagship product, Modelon Impact, is pioneering our industry in that it is the first dedicated SaaS cloud platform for system simulation worldwide. It is based on proven technology that we have developed over more than 15 years, and it was first released in the third quarter of 2020.
We are constantly investing and intensively investing in this platform to accelerate and grow our annual recurring revenue business. We're pleased to see that since we put this on the market, we are showing a consistent growth of our ARRs quarter by quarter. The simulation and analysis market worldwide is very large, and it's constantly growing.
This, in combination with the positioning of Modelon Impact allows us to set ambitious targets for the company to reach and exceed an annual recurring revenue growth rate of 35% in the medium term, to turn cash flow positive in the short term and to reach and exceed EBIT margins of 20% in the long term. With that, let's turn to the third quarter, some more details. The ARR growth was 16%, compared to last year, taking us to SEK 42.1 million. Modelon Impact is the driver of our ARR growth at a substantially higher growth rate of 12% quarter-on-quarter and with new customer acquisitions dominating versus upsell.
We are employing a land and expand strategy, meaning that we're targeting companies where we see a high potential for future growth by upselling. Should also for awareness, the sales cycle in our industry are fairly long, so typically six to 12 months for a new sale and sometimes longer. We do have also a pattern with the Q3 typically being the seasonally weaker quarter of the year and also with orders coming in late after the summer season.
This is also the case this year. All in all, we see good activity in pipeline and the development as I said provides us confidence in meeting the medium-term growth targets that we have. Next slide here will provide with some more details on the activity.
Start by introducing our target industries, automotive, energy & process, industrial equipment, and aerospace, and also exemplifying on this slide some of the typical customers that we have, leading global innovation-driven technology companies with a very high recognition. In the quarter, we have been landing a number of new accounts of this same character.
We cannot disclose their names, but we hope that several of these customers will turn into customer stories or testimonials that we can share publicly down the road. We have continued to have a good spread over both sectors, industries, and regions. We continue to see energy sector standing out with particular activity as well as Americas as a region.
We note also that, just looking at the total of the new accounts that we brought in in the third quarter, they represent well over 250,000 employees in total. Not all of them engineers, of course, but it illustrates that we are continuously building a solid foundation for the future upselling and expand business. We also see increased activity in the defense sector, not surprisingly given the state of matters in the world today. Let's shift to this first customer case study, which also illustrates this. This is from Saab, Swedish Saab developing the Gripen fighter aircraft. We have worked with Saab for quite a long time.
The Gripen aircraft took first flight in 1988, and since then, it's being evolved and developed continuously with new generations to meet new demands and stay top of the line and competitive. A fighter aircraft is an incredibly complex system and also extremely expensive to test and try in the real world and dangerous often. Saab is relying heavily on working in the digital domain and with digital methods.
They are using our solutions specifically in the context of the fuel system of this aircraft, which is a very complex system with more than or around 15 connected fuel tanks, where the fuel is moving around and sloshing as the aircraft is maneuvering in the air, and a system that's also subject to rapid changes in temperature, pressure, humidity, and also tightly connected with other systems on the aircraft. To work with design changes of this system, Saab relies on our solutions, and they simply state that our technology works for them.
They provide them with the results within the ranges and with the accuracy they need, which gives them confidence in their product and also confidence in the design direction they're taking based on decisions from our solutions. This is a very fine, maybe a bit extreme, illustration of the value of moving engineering workflows to the digital domain and how we are positioned to address the most challenging applications out there. This is the first really notable long-term growth drivers for system simulation, that of digitalization, simply moving and working more in the digital domain.
The digital models and the simulations are at the center of these workflows, which puts us and our product Modelon Impact at the center of this very important trend. Another strong driver is that of sustainability and clean technology. We all know that all industries are subject to extreme pressure to come up with better improved new technology that is more sustainable and cleaner and bring it to the market very fast.
That's simply impossible to keep that pace without working extensively in the digital domain and with the kind of tools that we provide. We're also very proud, and we're happy that many of our customers are using our products for these purposes, and then of course, grateful that we are able to help and actually in the end take the world in a better direction.
We have also the driver of the shift to SaaS cloud, and we all know also now post-pandemic how workplaces are shifting to work more distributed, more remotely, more collaboratively, and cloud is an indispensable tool in this. Also for simulation, it gives access to almost endless compute resources, which is a very important aspect. Again, we are uniquely positioned pioneering with a dedicated system simulation platform on the cloud, which is of course a very good place to be. These trends are across all industries essentially, and systems are everywhere.
Modelon Impact addresses the full life cycle of a product, of a system used for the early innovation phases, for the more detailed design phases, integration and testing phases, and also in the actual operations of systems, so all across the life cycle. As a modern cloud platform, we are also monetizing across several dimensions. We have the regular sort of per user access to the platform that we monetize on with a subscription fee.
We also have a monetization on the volume of usage on the platform, we call that productivity. We also monetize on what we call deployment. That's basically access to the platform via web apps, custom web apps or integrations. In the third quarter, we were officially announcing the public cloud option of Modelon Impact.
It was actually soft launched in Q2. The initial response is very encouraging and exceeds our expectation. We see that more than 30% of new users in the second and third quarter are coming in on the public cloud. Also companies that we would have believed to be a little bit more conservative in taking this step, so it's very encouraging. This also means that in the near term, we're prioritizing the product roadmap to optimize this transition towards public cloud. And that's a trade-off with some other functionalities that are also requested by customers.
This interest for the cloud is also very well illustrated by the next case study here with Siemens Energy, really big energy company with more than 90,000 employees in more than 90 countries. They are working with sustainable, reliable, and affordable energy in a wide sense.
The division that we work with here develops large heat pumps that basically takes energy from seawater, wastewater, similar, and move that into where it's needed, and in this case, to integrate into district heating systems. They are leveraging Modelon Impact to develop and adapt these large heat pumps with the new energy technology and to configure for new setups of district heating systems.
They are leveraging the built-in models that we provide on the platform that allows them to rapidly set up accurate models that they can use for their important design decisions. To emphasize here is also how they testify the importance of cloud that Modelon Impact being cloud-based makes it easy for them to access the platform for several, many users and also helps them to drive and foster collaboration in teams and to streamline their design process. This is a very fine testimonial to the strong positioning of Modelon Impact being pioneering system simulation on the cloud. This is my last slide before handing over to Jonas.
We, in the quarter, also prepared our first ever international user conference for Modelon. The actual conference took place in this quarter in October and in Stockholm. It was attracting more than 50 companies from 15 countries, which is fantastic. Here we got an event that was just as vibrant and as we had hoped for. We had users exchanging experiences across building like a community. We were getting feedback on our roadmaps, good new ideas, deeper understanding of the needs of our users and so on. Fantastic event. And also very fine customer presentations by the companies listed at the bottom here.
Most of them, or if not all, will also turn into stories that we can share publicly in our marketing channels, moving forward. This is a great value, great outcome also. This conference will most certainly become a recurring event. Overall, a very great success for us. I'm very proud and humbled to meet all these users and listen to them. With that, I'm handing over to you, Jonas.
Thank you, Magnus, and you can move forward to my first slide. Looking at the financial highlights, we start with the ARR that continues to grow. Magnus also reported this. Our software ARR grew to SEK 42.1 million at the end of the third quarter, and this is an increase of 16% compared to last year. We should mention that this is reported at constant currency. This is the volume growth that we're showing. The details on the foreign exchange adjustments are at the bottom. I will not read those out. The quarter-to-quarter growth is 1%. This is, as Magnus also explained, a seasonal effect, partially at least.
There are late deals in the third quarter, most of them coming in September, which also means that we're not taking a lot of the new revenue in the quarter. The full impact will be seen in the fourth quarter. There's also a lot of very good sales activity towards the end of the quarter that carries into Q4. Modelon Impact, of course, is the driver for the increase. We have a 12% quarter-to-quarter growth rate of Modelon Impact new sales. We can switch to the next slide. In the third quarter, we see net revenues increasing to SEK 16.1 million over SEK 14.1 million third quarter last year.
This revenue is in line with our long-term targets, and we see that there's a turning point now over the second quarter. We can't give any prognosis, but we do see that the history that we had with this co-development service project with an American customer. This is now behind us and not showing in the historical figures any longer.
We also see continuous improvement of software revenues in line with the ARR increases, of course, so that increased to SEK 10.9 million in the third quarter. We also see an increase in service revenues to SEK 5.2 million. There is very good synergies here between the new sales of Modelon Impact and also many new service projects.
We have a strategy to help our customers, of course, getting the most use, the most being efficient with Modelon Impact, and that is a strategy that will also increase the Impact sales as we have more users, more effective users, that will also drive upselling and continued more higher usage. The development costs, of course, are still increasing.
There are SEK 13.1 million in the third quarter, an increase of 12%. This is, I would say, the typical trend that we're seeing here. We have stabilizing development costs. They will continue to grow slowly, but not at the pace that we saw sort of the second half of 2021.
The EBIT for the quarter is also improving, SEK -15.9 million, which is almost two million SEK better than the second quarter. This is a result that's in line with our long-term strategy. It is an investment phase that we're in. We're continuing to develop the Modelon Impact platform, and this is reflected in the cost here. We can move on, Magnus. This is the completion basically of the strategic shift into this phase of strategic investments. The operating expenses that we're showing here in the third quarter increased by 28% compared to 2021. This is a little bit out of season, I would say. There are higher sales and marketing costs.
We do see a lot of higher activity now in 2022 after the pandemic period, so we have more travel. We also, of course, did the Modelon Innovate event, and we are continuing to recruit new personnel for our growth journey. This is at least partly the costs are affected by a little bit one-time expenses in the third quarter. I mentioned the product development costs.
It's of course important to mention that these are all taken as operating expenses, so they affect the reported EBIT almost at the same level as the EBIT in amount here. Cash liquidity, of course, is a very important item. It is SEK 127 million at the end of the period. We are maintaining a high investment pace.
The cash flow, as we see, is higher than previously or more negative than previously, SEK -20 million. This is very much depending on the EBIT, of course, that's the primary factor in the cash flow. It's also influenced by changes in working capital.
For example, the deferred revenue, that's the new sales coming in that we're periodically taking as revenue then periodized revenue. The deferred revenue is seasonally at the lowest point in Q3, then it grows in Q4 and also in Q1. The higher negative cash flow here is also partly a seasonal effect from deferred revenue. With that, I would say that we can move on, and you can continue, Magnus.
Thank you, Jonas. That takes us to this slide where we published updated financial targets yesterday. The background for that is that we wanted to take the opportunity to reaffirm the ambition level that was in the previous targets that we set in the context of the IPO last year. This is based on the first two years of sales and the positive market reception of Modelon Impact platform, and it also reflects the market opportunity and the expected growth of Impact and the sales cycle that we see in our industry. The specific targets are to reach and exceed annual ARR growth of 35% in the medium term.
Modelon Impact is then expected, as the driver of this growth, to grow at a substantially higher rate than the 35%. Our EBIT margin, we aim to reach and exceed 20% in the long term, and that it turns positive after this current investment period. The operating cash flow, we seek to reach positive cash flow in the short term. I should emphasize that the financial targets here, they are not to be seen as forecasts.
We are not providing forecasts. Rather they express the ambition level that the board and the management believe is a reasonable long-term objective for the company. With that, we are ready to go into the Q&A session. I believe you, Jonas, have received the questions.
Right.
Yes?
Yes. We don't have the assistance of Jenny here today, so I will take the questions. We start with some from our analysts. We have received questions from Stefan Wård at Pareto. First one for you, Magnus, is the ARR expansion slowed a bit in the quarter, partially due to the strong reception of the public cloud offering. Can you help describe the dynamics here and what we should expect going forward?
That's a good question. It may seem a bit contradictory, the strong interest and the slowdown. Basically, what we see is that interest for the public cloud option is high, and some prospects are requesting functionality, cloud functionality that we do not yet have in place. Therefore, we have this priority in our roadmap to accelerate bringing these capabilities in place to really exploit the momentum of the public cloud interest.
Okay. Thank you, Magnus. Another one, customer intake continued to be strong also in the third quarter with at least 10 new customer wins, adding to the 13 wins in the second quarter. Can you describe if this development is a ramp-up, and if so, what is driving the increased success rate?
Another good question. Yes, Q3 being typically a seasonally weaker quarter, you could make that hypothesis. We are satisfied with the customer intake in the quarter. I would be hesitant yet based on this to say that we see a trend change, or whether these are more normal fluctuations. We'll see over time. Overall, what drives success for us with Modelon Impact, it's maturing the product.
That by itself attracts more customers, expands the base. As well as building more awareness and visibility for Modelon Impact. We're a small company and working at a global level, so we need to work hard really to be noticed and for the awareness, really.
We work a lot with digital methods, of course. They are very appropriate for this, but also visiting conferences and similar to meet the communities that we address. Something that very much adds to this are the customer stories that we can tell, case studies and so on. We're very happy that we have a good flow, a good number of such stories coming up quarter by quarter.
Okay, thank you. We have many more questions. Can you give a more detailed update on the customer situation in the U.S. market demand from aerospace and other segments?
We see good activity in the U.S. overall. I'd say that also, and this is not specific for our sector, is that in this region, you tend to see larger transactions. The scale of business is overall larger. Of course that has effect here. Also that there is often a good appetite to try new solutions and to move fast, compared to some other regions. Aerospace, so we see, aerospace and defense often have a sort of tight coupling. We do see increased activity in defense and that also creates some pull on the aerospace as we see.
Okay. We have a few shorter questions here also. Have you landed any new segments, leads or actual contracts during the quarter?
We always, you can say we have some wins outside our focus segments, and also this quarter, but none that I would sort of say defines a new focus segment for us, just yet.
Okay. Customer spending plans and sales cycles, how have these developed during the recent quarter?
I think we see no particular pattern on or change in pattern on customer spending. We are ourselves, we're working to shorten the sales cycle, so we are investing in our self-service platform and to streamline the onboarding and evaluation processes for prospects and customers. We can see some indications that sales cycles are going down, but I would be hesitant yet to quantify that. There are also other factors weighing in here, but we do expect to be able to bring down sales cycles and yes, there may be indications of that happening.
Okay. Any client area that you would highlight as a potential new segment for Modelon?
The one segment that is emerging or has been emerging for some time is buildings' HVAC systems. We see activity there and we are well positioned also and we have a partner network in that space. This is something that is, yes, emerging and we are also hiring competence in this area.
Yeah. HVAC there is heating and ventilation.
Yes
Clarify. Can you give some insights into the overall sales strategy? What are your plans and in what markets are you adding extra resources?
Yeah, I mentioned in the presentation we have this land and expand strategy. We have primarily direct sales channels, our teams, business developers working with customer success engineers and subject matter experts in teams. That's a strong setup. We also have complementary indirect channels, resellers, partners with the focus on regions where we're not present with staff ourselves or within regions where this for other reasons is a good options like in Southeast Asia, for example.
The strategy for us here is to, of course, to continue to expand and grow our own sales capacity in line with the growth plan that we have. We're also actively looking at expanding the indirect channel network. That's again, we're focusing on certain regions there.
Final question from Stefan Wård about the financial targets. What is the main message you want to convey with the new targets?
The main message is simply that we are reaffirming the ambition level that we set last year with the targets in the context of the IPO.
Okay. Thank you, Magnus. We also have some questions from Redeye Analyst Alexander Flening. We can start with the ARR growth rate for Impact. It was 12% quarter-to-quarter compared to 20% the previous quarter. Given that the third quarter is typically a slower period, can you expand on the change in Impact during the quarter and what can we expect in Q4?
Yes. As indicated already in the question, there is a seasonal effect that have impact. It's hard to quantify how large that impact is. I'm not sure I can add much more to that. Again, we are satisfied with the customer intake in the quarter. We also see good activity in pipeline. For now, I would attribute that to mostly seasonal. In Q4, we're not, as you know, providing forecasts. Again, I would refer to that we see good activity and that we have healthy pipelines.
Okay. Another one from Alexander Flening. You mentioned that more than a third of all new Modelon Impact licenses in second and third quarter is on public cloud. Can you give some color on the added value for customers and the potential for cloud scalability?
Yes, I think that the added values in our sector are not much different from other software sectors. It enables easy, simple deployment or onboarding or access to this tool for users also that are distributed on multiple sites or even working remotely compared to traditional software where you install on desktop computers software packages. Modelon Impact, you just click on in your browser and go to URL and you're in. It removes a lot of complexity to manage software installations and versions and so on in large companies. The built-in functionality for collaboration, that's also something that's becoming increasingly important.
Being able to collaborate remotely, distributed and seeing the same data, working, sharing seamlessly information. The cloud is simply a fantastic way to do that. We also, as I mentioned, added value for customers is that you have access to almost endless compute capabilities on the cloud. This also attracts some. You can do really sort of large studies that would simply be impossible to do on your desktop computers. I would also add one last thing, and if the potential for cloud scalability is also that you can build in...
We are building in the product also functionality with that can bring viral aspects to the scaling. Like, if you want to share information with a colleague, you do that from within Impact to a colleague that has not yet been using Modelon Impact. They get a URL and click and get into the platform and get exposed to it and so on. This is also we expect to have significant effect as we move forward.
All right, thanks. Next one is about personnel costs was SEK 19.8 in the third quarter versus SEK 20.3 in second, and currently there are 15 advertised positions on the website. As we've mentioned, we have an aggressive recruitment plan. Are you able to find and keep the talent you require? What motivates employees to work at Modelon?
Yeah, good question. I would first start by commenting that the advertised positions that we have do not necessarily represent our detailed recruiting plan. We are also proactively seeking talent, and some positions we are not also seeking with public advertisement. But it's true, we have an aggressive recruitment plan.
And, of course, there are some profiles that are more challenging than others to find that are simply very attractive. Benefits we have here is the global presence that we have, offices in six countries, and 10 offices distributed over six countries, which means that, yeah, we have access to a large talent pool. This is absolutely a benefit that we're leveraging. What was it? What are-
What motivates employees to work at Modelon?
Yes. Also good question. If you're a talented engineer, we are a very exciting company in the way. We're working with, you could call it deep tech, working with mathematics, computer science, computer programming, software development, physics of various sorts. You're exposed to very broad and deep array of technology and engineering challenges.
We're standing out compared to many other companies in that. The size of the company, we're still fairly small, which means that we are also fast-moving and agile. We're working hard on our internal culture to be that open, entrepreneurial, and so on. Which works well for us.
It is overall attractive. Of course, we're also subject to challenges that are globally with employee turnover after the pandemic is a bit higher than it has been before. That also means that we need to work even more actively with talent finding and recruitment.
Okay, thank you. There's another question here from Alexander about the updated financial targets. Can you comment on the reasons behind the decision to change the timeframe of these targets?
Yes. Again, I'd say that we're taking the opportunity here to reaffirm the ambition level. That's the sort of key messaging. We're not providing. Modelon is not providing forecasts. The previous targets were defined as a single point in time in 2024, and that is becoming too close, and risk of turning into something close to a forecast. We need to reformulate the target to avoid that. We're taking the opportunity then to reaffirm the ambition level.
Okay. Thank you, Magnus. I got a specific question about that, the target to reach SEK 100 million by 2024. Is it still in place? I think basically what you said, that we need to drop the 2024 to avoid a forecast is an answer to that, right?
I'm sorry, was that a new question or?
Yes. I actually got that directly from the audience here.
Yeah.
Explicitly about the SEK 100 million target in 2024.
Yeah. We're not talking in terms of near-term dates, but we're again repeating the key messaging here is that we are reaffirming the ambition level from the previous targets.
Yes, I think that's sufficiently clear. There's a question from Alexander about development cost has decreased from SEK 14.2 in second quarter to SEK 13.1 in Q3. Is this an effect of a shift in development or is it a seasonal effect? I believe I can take that one.
This is mainly a seasonal effect during the vacation period. This looked more or less the same last year. If we compare with Q3 2021, we do have a 12% increase, that's 13.1 from 11.7, right? There is a trend I would say that reflects the planned growth in development. As I said also before, the development is stabilizing.
We're continuing to increase and invest, but not at the same sort of high growth pace that we had in the second half of 2021. Finally, one more question from Alexander. You mentioned an ongoing shift slowing ARR growth compared to the target growth rate until the new cloud functionality is established. Can you comment on when you expect the transition to be completed?
Yes. As I said, we are based on the interest for cloud, we are prioritizing this functionality in our roadmap, and we expect to continuously develop and deliver new important functionality in this area during the near-term period.
Okay. Thank you, Magnus. I do not think there are any further questions, and we do have spent 45 minutes in the presentation, so you can maybe just take the end there. The slide says Q2, it should be Modelon Q3 highlights. I noticed that just now.
Apologies for that. Yeah, of course. Repeating the highlights here. ARR growth continues, driven by Modelon Impact growth, which is significantly higher. Good customer testimonials. Officially announcing Modelon Impact on public cloud with good response and remaining confident in targets. I want to thank everyone for listening in, and I hope to that we will meet you all again in on March third when we're presenting the 2022 year-end report. With that, thank you for today.
Thank you, everyone.