Welcomes all participants to this presentation of Q4 year-end report from Modelon. We have Modelon's CEO, Magnus Gäfvert, and CFO, Jonas Eborn, ready for us. Modelon, the audience is yours.
Thank you, Fredrik, for that introduction. Welcome everyone to this presentation of Modelon's year-end and Q4 report for 2022. My name is Magnus Gäfvert. I'm the CEO and one of the cofounders of the company. With me today, I have also Jonas Eborn, our CFO, and also one of the cofounders.
Good morning.
We present today, after a quick introduction to the company, I will walk through the business highlights of the fourth quarter. I hand over to Jonas, who will provide a financial update for the period. At the end, we go into a Q&A, I believe that you're all welcome to send in questions by email during the presentation. We start with the bullet highlights. We're pleased to report that in the fourth quarter, we have continue our ARR growth, amounting to 12% and continue to be driven by new customer acquisitions. We also have in the quarter a solid growth of our software revenues amounting to 36%.
In the quarter, we also signed a contract with the European Defence Fund, amounting to EUR 11.2 million over four years that will accelerate our product development during this period in this sector. In the period, we're also happy to receive several new and fine customer testimonials that demonstrate the positioning of our flagship product, Modelon Impact. With that, let's go into a quick introduction of the company. Modelon is a business-to-business software company in the system simulation sector, and that means we're helping technology companies around the world and across industries to digitize engineering workflows related to the innovation, development, and operation of high-technology products and systems. That can be anything from an aircraft to a car or a power plant.
In digitizing such workflows, you need to have at hand a digital representation of this product that can predict and reproduce the behavior and performance of this product in the digital domain before it exists in the real world. That is precisely what we provide software solutions to build such models and to operate them for these purposes. This brings tremendous benefits to our clients. It means that they can develop their products faster, cheaper, with a better performance and a higher quality in the end. Our flagship product, Modelon Impact, is pioneering the industry, being the first cloud-native SaaS platform for system simulation worldwide. It is based on proven technology that we have developed over more than 15 years.
It was first launched in the third quarter of 2020, and we're investing in that product to drive and grow our annual recurring revenue business. We are pleased to see that since the launch of this product of Modelon Impact in the third quarter of 2020, we have consistently grown our annual recurring revenues quarter by quarter since. We are highly internationalized for our size. We are around 100 people, distributed over 10 offices in Europe, North America, and Asia. We have almost all our business outside Sweden, even if our headquarters are located here in Lund where we sit. The simulation and analysis market is very large, and it's continuously growing for a foreseeable future.
Based on the positioning of our product, Modelon Impact, our international presence and access to the global markets and the size of this market, we have set up ambitious goals to reach an annual recurring revenue growth of 35% in the medium term, to turn cash flow positive in the short term after the current investment period, and to approach and exceed EBIT margins of 20% or more in the long term in the mature phase. Turning into the fourth quarter details then, as I said, we are pleased to report an ARR growth, double-digit growth of 12%. Notably, Modelon Impact, the flagship product, is driving this growth, and itself has an ARR growth amounting to 63% versus 2021.
Again, the growth is dominated by the acquisition of new customers. We also have a solid growth of our software revenues in the fourth quarter, and that also includes so-called paid-up licenses from Asian customers. That's because the Acceptance for subscription-based business models in that region is not yet as mature as in Europe and North America, which means that we have also this kind of more traditional software revenues coming in from there. Drilling into some more detail on the business. I start by introducing our core focus industry segments that we're addressing, the automotive, energy process, industrial equipment, and aerospace. We'll also show some sample customers in these sectors here on this slide to give a flavor of the kind of companies we work with.
They are typically leading and global innovation-driven technology companies. Many of them are large and very well-renowned, and I'm sure you recognize most, if not all, of the logos that we have on this picture. In the fourth quarter, we have acquired several new customers of the same character. We're not able to provide or disclose the identity of the customers yet. We hope that several of these will turn into future customer stories and testimonials and, so we can tell more about them. We have among them an Asian global ICT solutions provider that is working in the automotive space. We have a European expert consultancy in offshore renewable energy. We have a European fuel cell innovator.
We have a U.S. multinational medical technology company we list under industrial equipment. Again, several of these companies are really large. We are employing a land and expand strategy, meaning also that several, many, most, the majority of these customers actually also constitute a very good potential for future upsell and become a part of the drivers for our growth. Looking at the pipeline development in the quarter, it was steady. Notably, we see continued high activity in the U.S., which is great, and also in the HVAC&R, that's heating, ventilation, and air conditioning and refrigeration sector, where we are also having some focus on our marketing efforts.
It's an area where we have a very well-positioned to deliver solutions and happy to see this activity. Also notably, we see activity related to our professional services offerings in the Q4, notably higher than the preceding quarters. This is very good. Our professional services business is a driver of the software business. We help our clients to adopt and use and scale the use of our software products. This is also a result of targeted efforts that we have to promote these services more actively.
The clients and the customers we present there, the new customers we acquired, they all continue to confirm and demonstrate the positioning of Modelon Impact being firmly positioned to support the key big trends out in industry that is also driving the growth of the simulation and analysis market. This, of course, it means that we are well-positioned to benefit from this growth and take our share of that. It's about the ongoing digitalization of engineering workflows. Again, we're positioning Modelon Impact as the hub where to create the digital models required for these workflows. It's a very good position at the center of this very important trend. Also, of course, clean technology.
Almost all industries are subject to these very high requirements on coming up with new solutions, innovations, and put new solutions quickly on the market that are clean, cleaner, provide clean energy, and sustainable technology. Again, we're seeing the majority of our customers using our products for these purposes. It's a great honor to be able to support this global trend. Also, of course, as accelerated by the recent pandemic, the transition to SaaS cloud and remote collaboration and so on. Of course, it's a great position to be pioneering the system simulation market with an offering in on the cloud.
In the quarter, we also had our first ever international user conference with Modelon Impact on the market for a bit more than two years. We have built a user base that makes it meaningful to really start nurture community around the platform. We were very happy to meet more than 50 companies in Stockholm coming from 15 countries. We got great feedback from the attendees about the high value in networking with other users, as well as meeting and engaging with Modelon experts to learn more about system simulation, model-based engineering, and how to get most value out of our solutions. Of course, also tremendous value for us to meet all these customers and understand their needs and requirements and challenges at a deeper level.
Information that we can bring back home and make sure to use when we develop our solutions, develop and promote our solutions. During this conference, we also recorded 10 video customer testimonials. 5 of those have been published to date as you see on this slide. Great testimonials. Collins Aerospace is one of the world's largest supplier of aerospace products. They are using our solutions to design air management systems for commercial aircrafts and we have the opportunity here to spread in with that customer into a lot of other areas as well.
We have been working with them for quite a long time and they are also testifying here the value, the benefit of working with Modelon as a long-term partner for system simulation. Heliogen is a innovator in renewable energy in the U.S. They are using our solutions for concentrated solar power plants, design and operation. They are testifying how rapidly they were able to start with our solution and get productive and get meaningful results that supports their engineering decision-making. Newcastle Marine Services is a U.K.-based company that is working with zero-emission ship propulsion. They are using Modelon Impact to validate the retrofitting of new replaced diesel fuels with alternative fuels on ships, like, for example, liquid hydrogen.
They are highlighting the value of being able to work with high-level energy modeling as well as the detailed physics in the same platform. They also have a vision to use Modelon Impact also for the design of new ships and for digital twin applications. Electric Power Research Institute, EPRI, is a U.S. institute. They are working with more than 450 energy companies around the world about clean, safe, and affordable electric energy. It's a great customer to have. Working with them gives exposure also to their clients, their partners, a network of these 450 companies. It's very good. They are using Modelon Impact for green hydrogen generation and storage for gas turbine electricity generation.
They are testifying how quick, how they rapidly can get meaningful insights from Modelon Impact to make decisions about design, optimization, and configuration of these systems. Again, great feedback. We have Volvo Autonomous Solutions. They are using Modelon Impact for testing and validation of autonomous driving systems, detailed vehicle models in that context. They are highlighting the benefits of working with the standards-based solution that allow them, enables them to collaborate, share, and integrate their different engineering tools, tool chain integration. Very successful conference, great value for us, and we are already planning for the next one. Stay tuned, and we'll let you know when that will be and where. As demonstrated by these testimonials, industrial systems where system simulation contributes are found pretty much everywhere.
We saw aircrafts, cars, power plants exemplified in the and ships exemplified in the testimonials. We also saw demonstrated here how our solutions and Modelon Impact is being used across the product life cycle, from the early phases of innovation and then into the detailed design, the testing and validation, and then also in the operation phase of these systems. It's a great demonstration of the large addressable market we have with this product. Also, we're leveraging the cloud to deliver these customer values and to monetize. We have the subscription-based licensing, and then also we monetize the amount of work that users do on the platform, the productivity aspect we call it.
Also we can monetize on deploying web apps and similar to a large number of users on the platform. In as we also highlighted in the third quarter, we are currently prioritizing and focusing on strengthening these cloud scaling aspects of the platform to support and accelerate our growth. We expect to have substantial new capabilities in this area planned for release starting in the first half of this year. It's a very intensive development work ongoing. Also in the quarter, we signed a contract with the European Defence Fund. NEUMANN is a large program aiming to develop novel energy and propulsion systems for next generation fighter aircraft. This is a program with more than 40 participant organizations.
In this program, we have signed up for EUR 11.4 million over the four years, or starting this year, actually already started. The value of this project for us is both the financial contribution, the acceleration of our product development in this segment, and also of course, the exposure we get and the collaboration with key industry actors here. I think that some of you may recall that in the third quarter, we also shared a customer story with Saab, the maker of Swedish maker of the Gripen fighter aircraft. We have good solutions in this area that we can sharpen even more in the context of this project. With that, I'm handing over to Jonas for comments on the financial development.
Thanks, Magnus. I must say we are very excited about the, this new project and other new projects that we will be starting in 2023. If we go to the first slide here showing the ARR, we can note that this is growing steadily since 2020 when we launched Modelon Impact. We are growing at a pace that we're not satisfied with across in 2022. We are aiming at the medium-term target, 35%. We see for the annual growth here, 12% and better improvements in Q4 with a 5% quarterly growth. Should also note that this is the report at constant currency. This is the real volume growth.
There are also FX effects that sort of are below the numbers here, if you say so. The main growth driver is Modelon Impact. We have an annual growth of Modelon Impact with 63%. This is something we expect to be continuing forward and be driving the total ARR that we're showing here. We can move to the revenues and costs. Thank you. In the net revenue, we see increased in the fourth quarter, we see increased net revenue for the second quarter in a row, growing over 2021 numbers.
Looking at the 12-month period, rolling 12 months, we see both net revenue showing growth and also a steady growth of software revenue, which is very important. We're now past the sort of historical project that we had this co-development service that was ended at the beginning of 2021. We've sort of turned the ship and are on a growing trajectory. If we look at the development costs at the bottom here, they are high in Q4. As Magnus mentioned, we are in an intense development phase. This is something that we're not expecting to continue at this sort of growth rate forward.
Note that the development costs, they are taken as operating expenses, and of course, then contribute to the negative EBIT that we see here also in Q4 with roughly a 100% negative margin. This is also something that we expect to improve on in 2023 towards our financial targets. We can move to the next one, a little bit more detail. Looking at the operating expenses, they also increased more than usual in Q4, 33% compared to 2021. This is partly the development, of course, but also sales costs that are increasing. We're now fully past the pandemic period. We had, for example, the Modelon Innovate conference, that was a great success, and of course, also incurred some costs, some of them that landed in Q4.
There's also more sales activity, so we see the travel costs increasing. We have several conferences that the sales and our engineering staff have been at to show Modelon Impact and get in touch with our customers. An example in Q4 was Enlit in Europe, a very large conference. We've, in the past few weeks, seen a couple of conferences in the US market, AHR in the HVAC&R area that Magnus mentioned was a month ago, and recently the PowerGen conference in Florida in the energy sector. I mentioned the development costs before. In the quarter, we had higher costs partly due to external consultant engagements.
We've been using expert consultants quite a lot, and with a high intensity and pace in Q4. Now several of these, a majority of these, external consultant engagements, are ending at the end of December. We will see a lower.
Cost, starting in this year. We're also looking to grow our staff with employees. That's also partly starting in Q4 here. Finally, I can mention the cash flow. We have a cash liquidity at the end of the period of roughly EUR 112 million. This is the funds from the IPO that we're still investing from. If we're looking at cash flow in the quarter, we have EUR -15 , roughly the same as the historical comparison period.
This, we should note, is influenced a lot by changes in working capital, and there is a seasonal pattern that we have more negative cash flow in the second half of the year, and more positive or at least less negative in the first half of the year, where we do get many renewals of licenses, prepayments of licenses, and customer payments. We see that this is sort of improving, at least for the near term, the cash flow. But this is all according to our strategic plans, and this is according to the budget and plans that we do for long-term growth, accelerating the growth of Modelon Impact. With that, we can move into the Q&A.
I will leave the word back to you, Fredrik.
Thank you, Jonas. We are trying now to unmute our analysts here. Can we have you unmuted, Stefan? Can we have Alexander unmute? While I continue with some questions of my own while we have these two analysts unmuted then. Customer intake continued to be strong also in the fourth quarter. Can you describe if this development is a ramp up, and if so, what is driving this increased success rate?
The growth in the fourth quarter, new customer acquisitions in the fourth quarter continue to be driven by Modelon Impact. As we guided in Q3, we are expecting a ramp up of the customer acquisitions to be driven by the capabilities, cloud capabilities that are currently under development. I would say I agree, we have a strong, we have a good acquisition of new customers in Q4, but not yet what I would say a significant ramp up towards the financial goals that we have set to drive that growth rate. This we have still ahead of us and related to these new capabilities that are coming up.
Can you help us describe the dynamics between the software growth and the ARR growth?
Yes. The ARR growth, I mean, that's the contract value of recurring licenses. It's a leading indicator of the software revenues. A leading indicator of the recurring software revenues. We have also the non-recurring. As I said, we have some regions still where part of the software business is done with the more traditional paid-up licenses, like in Asia. That comes on top of the A-ARR driven revenues.
What role does the Modelon Impact play in the growth in this quarter?
As I said this, we have in our ARR, the Modelon Impact contributing with a 63% growth of its share of the ARR. Modelon Impact plays a key role in the growth of our annual recurring revenues. We have also what we call our multi-platform offerings, which is other packagings, you could say, predating Modelon Impact that we still have quite many customers on. We also exhibit some growth on this part of the portfolio. The driver is really Modelon Impact that grows at the rate of 63% in the fourth quarter.
The EU contract you were awarded, how will this be noticed in the P&L for 2023?
Should I take that one?
Jonas, please.
Yes.
Yes.
This is a research contract or research funding from the European Union. Typical for those is that they are long-term. This is a four-year contract. We are recognizing that revenue as we work the tasks that are given to Modelon in the contract. This revenue will be basically recognized over the full four-year period. Depending on the pacing in the project, I would say evenly spread more or less, this depends a lot on the planning. We are already ongoing. There's been a kickoff, and we've started the project. Another key factor in the European research projects is that they are usually prepaid.
You do get some of the funding already at the start of the project. In this case, roughly half of this funding was received in the quarter, in Q4, and will have an impact on the cash flow because of this.
Now I'm happily to welcome Stefan Wård from Pareto into the to meeting. Please, Stefan, give us your questions.
Can you hear me now?
Yes.
Yes. Yes. Hi, Stefan.
Hello, hello. Thank you for a very interesting presentation. I would like, if you can help us a little bit more on the OpEx development and what you say with the reverse or improved working capital and so forth, just to see. To start off, you said, Jonas Eborn, you said that, the development cost will not continue to grow at the same rate, but what does it mean in absolute terms? Will they be at this level in absolute terms without the growth, or will they come down a bit? How should we think about, because the cash position is EUR 110 roughly at the end of the year, and you had the R&D or development cost of EUR 57, I believe.
We need some clarification here on how certain you are that you are still well-funded to profitability.
Yes. Yes. Thanks, Stefan, for that question. In absolute terms, I can't give a number, but we, as we mentioned, are targeting that the revenue and ARR growth will be higher than the cost growth. Of course, everyone knows we are in a period with high cost growth, with inflation, et cetera. We are managing that, although we do see some effects of that already in 2022 in Q4. We are expecting a lower growth of costs in 2023, both in terms of relative and absolute terms. This will be a focus area for us for sure.
We need to both be looking at the cost side as well as the revenue and growth side, which is our primary focus, of course. I think that's roughly what I can say about it.
Okay. Thank you.
Do you have any more questions, Stefan?
I can have a question on just if you can give some more flavor on the Modelon Impact development. It's good growth there. How, yeah, how it has been distributed in the different markets, if you can give any recommendation there? Also how big share it is of total ARR? I might have missed that, but.
We haven't disclosed that share yet. We're disclosing the growth rates here. The share is, if you look at distribution over different markets, we have launched Modelon Impact in Europe and the U.S., in Asia, we are introducing it a bit slower. Currently we have the largest customer base in the U.S., and with a significant share also in Europe and some and growing also in Asia. One of the reasons for that is also that in Asia, we are relying more on indirect sales channels that, than in the U.S. and Europe.
We need to also prepare and build our channel partners and to make them capable of distributing Impact. This is also activities that are ongoing in that region. If we look at the split over industries, it's a fairly good split. It's not entirely even, but the We have substantial customer bases in energy and automotive. I'd say these probably are the would be the largest segments.
Okay. Thank you. That's all for me.
Thank you, Stefan.
Thank you, Stefan.
Thank you, Stefan. Development costs continue to increase. Can you please guide what we can expect from them the next coming years?
I believe I answered most of that in with Stefan Wård's question. The one thing to note is as I mentioned in the presentation, that we are using some external consultants also in our development. We have been doing that since the previous co-development project that ended in 2021 and kept these external consultants for the Modelon Impact development as well. Several of those are now ending those engagements. We will have less consultants engaged for the development going into 2023, and that will have a sort of a less or reduce the costs at least.
Then if you look more long-term, the answer is really in the balance between revenue growth and our development costs. We are stabilizing our development costs. We'll sort of flatten out, and the growth we're looking for is as the targets say, medium term, 35% total ARR growth, and the Modelon Impact part is much larger than that. So that's sort of the leading indicator of our software revenues.
I understand. Finally, question, though. Can you please give some insights into the overall sales strategy, what your plans are, and in what markets you're adding extra resources?
Sure. I can comment a bit on that. With Modelon Impact being a new product, we are starting off with focusing on direct sales, and that's how we're marketing the product currently in Europe and the U.S. In Asia, we are, as I said, relying more on indirect channels, so we are currently working to introduce channel partners for Modelon Impact in that region. If we look more long-term, we also see that to complement our direct approach in Europe and the U.S. also with channel partners.
To cover regions or territories, countries where we do not have our own presence and also specialist partners that are niching in on special segments of our addressable markets. To increase our contact surface and leverage on both these strategies. I think part of the answer to this on our sales strategy is also to highlight the land and expand strategy that we have and noting that we have many customers that offer a very high potential for future upsell business.
Even though we continue to have our growth in Q4 dominated by new customer acquisitions, we are also doing upsell on existing customers, and we do expect that share to grow also over the years and be a significant contributor to our growth.
With that, the final question, I am done from here from Finwire. Thank you both for this presentation, good luck to you all and company in the future.
Thank you, Martin.
Fredrik.
Fredrik, sorry. I also want to thank everyone who is listening in. Our highlights for the quarter was the 12% ARR growth, 36% software revenue growth, the EU Defence Fund contract of EUR 11 million. We're concluding 2022, heading into 2023 with confidence and a good understanding of our priorities and opportunity. We are looking forward to meet you again when we publish our first quarter interim report for 2023 on May 16. Looking forward to see you again then. Thank you.
Thank you.
Thank you.