Earnings Call: Q1 2021

May 31, 2021

Quarterly report

A warm welcome to the Modelon Q1 presentation. And without further ado, I would like to introduce you to the CEO, Magnus Garett and the CFO, Jonas Sjeboorn. Please go ahead. So thank you, Jenny, and welcome everyone who is joining us this morning for the presentation of our Q1 report. My name is Magnus Gevit. I'm the CEO of the company. And with me, I have Jonas Bjorn, our CFO. We are both also co founders of Modland. And we'll start with an introduction to the company briefly and then transition into the highlights of the And the financial development. And after that, we'll go to a Q and A session. So you can send in your questions during the presentation, I believe. Software solution provider in the computer aided engineering space. More specifically, we're operating in what's called the simulation and analysis Segment of this domain, where we are pioneering the global market with a cloud native solution for systems modeling and simulation aiming at the SaaS business model. This solution is called Modern Impact and was released in July last year. So we'll show you a little bit more concretely on the next slide Exactly what kind of solution we provide capabilities. At a higher level, you can say that what we offer to our clients It's tools to enable digitalization of workflows In the development and operations of complex technical systems, and that could be anything from a car to an aircraft or, for example, a power plant. And in order to move workflows from the physical domain into the digital, you need to have a digital representation Of your product, of your system that can reproduce the behavior and performance of this product in the digital domain. And that is precisely what we provide, modeling and simulation solutions for that. And this is a tremendous value proposition for industry. It means that you can move very time consuming and often also Very expensive workflows working with physical prototypes and experiments in the real world into the digital domain, perform these at a much lower cost at a much higher pace and also being able to apply methods that are only applicable in the digital domain, such as mathematical optimization and so on. So it's a tremendous value proposition that we represent. We are a Lund based company. We have around 100 people distributed over 10 offices, 6 countries on 3 continents, headquartered in Lund, Sweden. Our customers are global, distributed over the world. Often, they are large, well known technology enterprises from various industries. And we'll look closer at Some of those further on in this introduction. We have been in this business for 15 years, more than 15 years now, developing software and providing solutions to these industries, and done that with a consistent and mostly profitable growth over the years. Since around 2018, when we To find the opportunity to pioneer our market with a cloud based solution, we are investing in this cloud product model on impact. And we have also brought in capital from the financial markets to further boost that growth journey and also with the recent IPO. So this is the path we're on now, investing in our product And the commercial capabilities in order to drive growth based on modern impacts a lot higher. If we look at the overall, the global simulation and analysis market, it's very large and it's also consistently growing with a slight exception for the pandemic year, last year. High single digit rates, 7 Estimated over $7,000,000,000 in 2019. So based on our position with Morgan Impact and this market, We have put a stake in the ground in 2024 where we say that we will grow our annual recurring software revenues to SEK 100 million Swedish crowns. So this is our key targets KPI that we're measuring our performance on. Could say also here that we have a high level it's a very high threshold That we're in, meaning that you need very deep competence in order to provide solutions in this space. This is represented by the fact that we have more than 20% of our employees having a PhD degree in Engineering. So let's look at the next slide where we provide an example of what this Looks like to our customers what we provide. So this is an example from the automotive domain and more specifically from the development of Electrical Vehicles, where one of the key components, most important, of course, is the battery pack. So in order to develop, design and engineer this type of component in the digital domain, you need to build a Model of this component, the battery pack. What you see to the right is what this looks like in our platform model on impact, where we offer a very large collection of predefined model components, 1,000 that you can use almost like Lego bricks To build a digital representation of your product and system. Once you have done that, you can put this model In digital test environments, and you can evaluate its performance in simulations. And you can then, of course, iterate your Engineering design and test again until you meet all the requirements that are set up. So it's a very powerful way of working with complex engineering tasks in the digital space. This was an example from the automotive industry. The technology, the solutions that we offer are agnostic more or less to industries, which means that our target industries span broader and we have Our key target industries is automotive, but also energy and process, industrial equipment and aerospace. And as I believe you can see from this slide, we are very happy, very proud to have earned the trust for many Very well known, well recognized leading technology enterprises within these domains. So we have a very fine portfolio of customers where we are now leveraging our new platform to grow our footprints. We also have a number of OEM licensing partners. Those are other software companies in the simulation domain that is licensing Our state of the art technology input in the interior of their respective products. Notably here, we can mention ANSYS and Siemens, both are in the at least top 3 companies globally in modeling and simulation. So it's a very strong receipt that the technology we have is State of the art. One example of customers here in the energy space is Malta, this is a very exciting domain space, as I will Elaborate a bit on later on also. So Manta is an American company in the energy industry. They are incubated by Google, they are inventing, developing new technology for energy storage on electrical grids. And they are thereby addressing the challenge of having renewable energy sources on the grids, which don't have a reliable energy production, weather dependent solar wind, etcetera. So with large scale storage Capabilities on the grid, you can even out those variations and have a stable electrical supply to the communities. And Malte is working with a very interesting technology based on molten salt. So it's like an electro Chemical type of solution, which is very well supported by our solutions to model Simulating the digital domain. So they are designing their technology in the digital space using our solutions and they are also evaluating in the digital space, simulating under various grid and load scenarios and so on. So it's a very, very exciting type of application to support from our side. And this is an example of one of the large trends out in the world that is very positively affecting our business, The sustainability. So what's going on there is that almost all companies throughout Across all industries are experiencing an enormous pressure to innovate, to modify, improve their products to be more Sustainable, that means adopting new technologies, new energy concepts and so on. Lots of new Lots of innovation that needs to happen, come up with new ideas, rapidly evaluate those ideas and develop them, productify them and put them to the market. This is simply impossible to do at a reasonable cost and the pace needed without working in the digital space. So Malte is a great example of that. We also have the general trend of digitalization. I think I already sort of mentioned that, move more and more workflows into the digital space with all the benefits that In terms of lower cost and a shorter time to market. This is a very big transformation going on in The industry, it has been going on for several years and it will continue to go on for many, many more years. So it's a tremendous amount of work Close and so on, that is being addressed. And then, of course, we also have the general trend Across all software domains really to move to cloud based solutions. And as I mentioned, we are pioneering in our system simulation segment, offering a solution for this purpose. And this is these trends and others are also what's fueling the simulation and analysis markets for the consistent growth it has been showing And it's projected to continue to show for the foreseeable future. High single digits, as I mentioned in the introduction, With the pandemic 2020 being an exception as a flat year, but already this year, we see that we're back on the growth track. Interesting here is the market trends. As I said, the data here is taken from one of the analysis houses That are good on our industry. SimData is an American analyst house. So they are also identifying some key trends and that is to use simulation more in the product development Product Life Cycles, also earlier in the development phases. Democratization is very important. That means in order to move workflows in the digital space, a lot more engineers need to work with the simulation technology It needs to be made accessible to completely new user groups. And the interoperability and collaboration It's, of course, very important, not the least demonstrated during the pandemic where people are working remotely even from their homes. So to work on the digital platform that enables this is key. And overall, using simulation more in the world, This is an unexpected interruption from I'm very, very sorry about this. So I hope we can continue. It's on another floor in the building. I'm so sorry. So based on this, I also want to comment a little bit on how we position ModelOn Impact in relation to those key trends. So we are positioning ModelOn Impact to be the hub, to be at the centre of the model based workflows That's happened throughout the full product life cycle. Illustrated by the V shape, it's a common way to illustrate a Product Life Cycle and Technology Industries. So it's about using simulation Throughout all these spaces and we are positioning Moloney Impact to be the hub throughout all this. And that also means supporting all the key workflows necessary, Creating models, collaborating on models and performing various types of experiments and validations in the digital domain. And then to deploy the models to broader range of users and that this is speaking to the democratization trend I mentioned on the Previous slide. We support doing that in the form of web apps, which is a very strong way to address non expert users. So it's a key capability to grow the exposure to new user groups. Also illustrated here well, this is what's illustrated on the right side. The traditional expert user group, the more broader engineering space of users and then some non expert, non technical users that we can also address with this platform. To the left, we also illustrate how Moloney Impact is targeting a range of industries. So it's not sort of myopically targeting small segments. It's a broad solution. And with that, let's move into the highlights of the Q1. So First observation here is that we're seeing a very good momentum in the software business in the Q1. So remember, the ARR is our key metric to measure our performance and we're extremely satisfied to see how Morgan impact is picking up and reached a very high growth rate of 88% compensated for currency effects in the Q1 and thereby having an increasing share of the total software ARR, a share that's It's rapidly growing right now. We have won several new industry accounts in this period with Modland impacts And there is a particular momentum we're seeing in North America with this and actually also in these clean energy applications. And this is also sort of representing that the simulation and analysis market is now continuing to improve from the pandemic 2020. So strong order intake in the Q1 with more than impact. We're also seeing a positive trend in our services business that was a bit more affected by pandemic effects last year. We're seeing a recovery there. We also there have a weight on the energy sector and the U. S. And we're actually seeing that the market activity and that the Pipeline are approaching the levels we saw before the pandemic, so that's really good. Also very good is that we see that many of those most of those New engagements actually are related to Mogulon Impact Sales and Adoption. So our strategy to have A services business that in synergy with our product business is surely visible in this. Again, we're very happy to see several projects, both in U. S. But also in Asia, where we're helping customers to build these web apps I spoke about based on the platform and to address broad user spaces in their respective applications. So it's really encouraging and the receipt of our strategy and product road map. We're also seeing as previously guided that the co development project that we have done with Mod On Impact 2018 to 2020 that was planned to ramp down in 2021. What's ramping down is in Q1 in line The projections that we have shared previously. We are also seeing that the activity level in this project It's decreasing more rapidly now than we had previously estimated. So we're also updating an estimate for our Full year that we expect the service revenues from this project to decrease now in the range SEK 30,000,000 to SEK 40,000,000 instead of the previous estimate of SEK 30,000,000. And this ramp down is largely in line with our strategy and plans as we are transferring the funding of our product development introducing the funds we have brought in from financing activities. In the period, we also released the next Version of Modern Impact 2021.0 with again, we're keeping a very high pace on Road map development here. So there are a range of new capabilities in this release identified in conversation with clients' prospects. So among the highlights here, I would mention the support for Modena's vehicle dynamics library and the aircraft dynamics library. You see the screenshots of those in the lower right part of the screen here. So the Vehicle Dynamics Library has been used by industry in almost 15 years in applications ranging from passenger cars to heavy vehicles as we See here in motorsports, and we also have a very strong support for hybrid and electrical vehicles and new concepts And so on. So it's a great addition to the model on impact. And we're also immediately starting To see business coming in based on the support for this library. We also, I should mention here, Focused efforts on the development side on clean energy related applications and capabilities. So there are some words listed in the top right. I will not go into details on what technology behind these labels, but we have experts that Understand all about that. But the reason for the focus we're putting on these applications is on the next slide here. We're definitely seeing now clean energy emerging as a focus segment for us with a lot of activity going on, Not only in the energy industry, but really broadly across all industries, driven by these needs to make products more Sustainable. We're seeing also notably a strong pull from Innovation groups in automotive industry that are working very broadly on energy applications. Interesting here also is that Many of the technologies that we see coming up now and with a strong call for like carbon capture, Fuel cells, lots about different types of storage solutions. We have very strong support for these applications in our model libraries. So that's also why we are increasing, intensifying our activities on the digital marketing side to capture the opportunities that are out there. Also interesting, we're seeing a lot of broad interest in hydrogen related technologies in the energy sector. And this is, Again, very large economic trend really. It's about being able to Decarbonize parts of the economy that you cannot electrify, which then otherwise typically is the first thing you want to do. So it's really, really exciting what's going on out there, and we feel we're in a very good position to leverage on these trends. And one Example of this is on the next slide. So in the period, we received a very fine customer testimonial from 1 of the Giant's dominant players in the clean energy sector, that's MAN Energy Solutions, German Company headquartered in Germany about more than 120 global sites and around 14,000 employees, over €3,000,000,000 in revenues 2020. So this is not a small customer. And They're working on various types of energy storage solutions, what they call electro thermal energy storage, and Domain fairly similar to the one I described with the Malta use case previously. So another type of technology to address The shadows with renewable energy sources. And we're extremely happy about the testimonies we received from them. And in the full testimonial, they also declared that they consider the selection of Model and Impact as their platform for transient simulation as a strategic step to realize on their deliver on their product plans. So it's extremely proud of this. And there will be more, I believe, publications on use cases basically together with these customers coming up. And with that, I hand over to you, Jonas, to on the financial development. Thank you, Magnus. Very good to hear about the development and the clean energy. That's an exciting segment. So in the financials, we start with the ARR development. We see positive signs, good signs with the new sales, And particularly for the Model on Impact product. We see the total software ARR On a constant currency basis, growing by 4%. It's at SEK 29,300,000 in the Q1. And as part of that, the Modland impact It's been growing with a quarter to quarter growth rate of 88%, as Magnus mentioned previously. So it's Starting from a low level since the Impact launch mid last year, but it's forming a rapidly increasing share of the total If we look at the historic ARR development, we've been growing at the Market rate, and that means a few percent like Magnus said, single digit Percent Growth. In the pandemic, we saw a flat development, slower new sales mainly. So That's the impact that we saw from the COVID-nineteen pandemic mid-twenty 20 and also towards the end. And we now see that changing with sort of renewal of the sales and going back to a good growth rate. We do see that the renewals have continued throughout the pandemic and that's a good sign of the product stickiness that we have with our customers. And now from the Q1 as a stepping stone, we're expecting higher growth towards the 35% target that we set, Although we don't expect to reach that in 2021 already. We can move on with the net revenues. The next slide. So looking at the net revenues, we see the sign here that we're starting the investment plan according to the Publication of our prospectus, we have the expected earnings that we published in the prospectus. So The Q1 performance is completely in line with that publication. If we look at the historical Development, we've had growth, as Magnus mentioned, and we've always been reinvesting our profits in the development. So we don't have any activation of development costs. Instead, we're reporting the adjusted EBIT taking into account the New developments. The main effect we see here is the drop in the service revenues in the period. So going down to Roughly SEK 12,000,000 and that's an effect from the ramp down of the co development Project that Magnus also mentioned, that's in line with our plans as published. There are also significant currency effects, as I'm pointing out Here on the slide. So compared to the U. S. Dollar exchange rate in the first half of 2020, really, we see a decrease by about 13% and we do have significant exposure to U. S. Dollar. We do Most of our business towards the U. S. Market and with U. S. Dollar customers. And of course, the Decreased service revenues that shows also in the total net revenues. It's still in line with the 2021 Plants and the software ARR is growing in the period, as mentioned on the previous slide. I can also just point out you do see seasonal effect that's from the service revenues during Q3 last year. We That's a lower volume because of summer vacation period in Sweden mainly. And we can also point out that Some of the government support that we received in 2020 during the pandemic has strengthened our financials, particularly in The Q4, there was a 3,100,000 U. S. Pandemic loan that was forgiven and included in the earnings. We can move on, Magnus. So looking at the comparative numbers here, The development of net revenues is in line with the strategic initiatives, the strategic investments that we're starting. There are mainly 2 effects part of this. The development teams that were engaged in the co development is now shifting to Roadmap Development. That's sort of funding our development with the capital that we have. Also, the engineering teams are engaging more in Modlon impact presales. So landing new customers is our primary objective and that's what we see also in the model and impact ARR growth. Good success rate in that area. Looking at the operating expenses, those are still at the 2020 level through the Q1, so there's no major change there. But we are starting Recruitments. So we will have some growth or increase in expenses, although It will likely not show immediately in the second quarter. It will be towards the second half of the year that we do grow our teams at a more rapid pace, according to our plans, of course. And also again pointing out that the Magnus, you can mute while they're doing construction work here. We're not doing any Activation of the development. Instead, we're showing the adjusted EBIT for comparison. And we're showing the number here. The costs that would be available for activation is the new Product development, new functionality developed in our product, which amounts to SEK 4,900,000, up from last year. And we expect that to continue to grow. Typically, the new development is roughly half of our total Product Development. The total development also includes, of course, maintenance, the continuous release work on Both our platform products and the Model and Impact product itself. Finally, a word on the cash book liquidity, Which is good. The Q1, we have positive cash flow. This is a typical pattern that we see in the beginning of the year. We receive a lot of Customer payments from renewals that happen around the end and beginning of the new year. And we also now finished the IPO at the end of April. So we see and we have the growth proceeds from the IPO further strengthening our cash liquidity. So financing our growth journey going forward. And we can look to the next slide then with our targets. So the IPO funds Received, we will move those into an investment for growth, both in our commercial teams So and also the product development. So both growing our commercial sales teams And also application engineering, which is important for the new sales to support the new customers coming in. And then also, roadmap development in the product development organization, so increased capacity in there, moving towards a public cloud deployment in the next year. Magnus, don't switch quite yet. So I want to stay on the target slide. Thank you. Just saying that the funds that we received in the IPO, Those are fueling our growth journey. So they are expected to take us to the goal of SEK 100,000,000 in 2024 and then reaching the target growth during that time of 35% average. As I mentioned, we will move towards this goal in 2021. Likely that will happen sometime next year. And then further down the road, we expect the long term EBIT margins to be well above 20%. So that's a target we will reach Also around 2024 where we turn cash flow positive. And with that, we can move to the Q and A session, that was what I intended to cover in this. Sorry that we took a little bit longer time than expected. Thank you, Jonas. And please send in your questions, if you haven't already done that. And I would like to start off with you, Magnus. So, Clean Energy is a focus segment for Mardellon. I would like to better understand the short and long term opportunities for this customer segment. Can you elaborate a little bit further on the activities? Absolutely. So first, as I believe I mentioned in the presentation, we have been working with related solutions For a long period of time and develop capabilities, not the least in our model libraries. Often, because what we have done is has been in the past driven by the automotive industry And the very, as you know, high pressure on that industry to make cars more sustainable in terms of fuel consumption, the use of energy, the type of energy being used and so on. So we have developed a fairly strong portfolio of technology capabilities, if you like, For the automotive industry, and we are seeing that we can take this technology and apply also more broadly on other in other industries with only minor really modifications or adaptments or adjustments. And we're also similarly, we have been working in the past in the energy sector with taking an example here, Power plants, some 10 years ago, there was very much activities in Technology for carbon storage, CCS Technologies as they were called. And that sort of we did some really great projects with some of the big players there. And then This technology sort of went off the map for almost a decade, mostly because of political decisions and the cost of The emitting carbon dioxide to the atmosphere. Now this is changing and this technology has now become a hype again and we can pull out what we have in our drawers And use that to address these sectors. So what we're seeing is really that we can exploit Technology that we have been developing and offering clients in some of the more narrow niches and now Much more broadly. And of course, on general terms, the need for solutions to Make technology more sustainable. That will certainly not stop. It will just grow and increase. So we're very happy to see that we have a good position in this area. Okay. So looking forward to see more coming out of that. Okay. Second question here. According to plan the service revenue from the co development customer is decreasing. So I'm curious about the IP perspective. Does the Customer has any right to resell the co develop technology? Or what is your relationship going forward? It's a good question. So the rights this customer have is to use the technology for their purposes. They cannot resell it broadly on the market. We own all the IP that goes into our product, our platform. This co development project was set up it was being planned out in 2017. It started it was Originally planned to go on for 2 years, 2018, 2019. It was then extend So we had a fairly high volume over those 2 years. And then this was extended also throughout the full 2020 at similar volumes. So the planned ramp down was sort of pushed from 2020 and now into this year. And what's happening then is that they are using The platform, they had a very urgent need for this type of technology, and that's why this customer Was prepared to invest a fairly significant amount of money in order to speed up the development and the road maps so that they could Get their hands on this solution and deploy it in their business units. And this is where they are right now. They are deploying to the business units. They are paying license fees to us for that. And They can use it, we own it. That's the simple setup. So it has been a great So this has been a great accelerator for us before this started, before we brought in Capital from the financial markets, which is a way for us to head start our investment phase based on the support from the customer. Okay, that's clarity. Thanks. And then, I mean, model and impact really grows in the quarter in comparison like Q4 previous year, 8% to 8%. So, of course, I mean, Can you share some light on the customer intake? We heard about U. S, we heard about Germany. But what regions do you have do you see the highest Tivity Inn and also maybe elaborate a little bit more on customer segment sectors. Absolutely. So I think I also mentioned in the presentation that the region where we see lots of activity Well, I should say, we see an uptake of activity after the pandemic globally everywhere, but particular strength we Experience in North America. And that was actually a situation also before the pandemic. In a way, You could say that there are many, many segments in the U. S. That are fairly early in their phases in adopting simulation technology compared to other parts of the world. So this means that there is lots of opportunity there. And I'd say we expect this to continue and we're also addressing the situation with the investments we're doing in commercial capacity to make sure that we Can explore the momentum that we see there. Again, it's any applications across the industry that relates to sustainability, To clean energy, we see a lot of activity, so both maybe particularly in the energy industries, But also other automotive aerospace. The energy industry energy segment as such was, As we experienced it also a little bit less affected by the pandemic last year, which means that the momentum has been sort of Uphold during that period and now increasing. So we expect that with the sort of recovery in other industries, we will probably see More balance across the industry, so also as time goes on here. Okay. Thank you. And next question coming up is for you Jonas, the CFO question. So I mean, in comparison to other companies, you are not activating any of your product development cost. And now you are accelerating the development after the IPO with the funding. So will you continue to take the investments over the P and L? Yes. Short answer is we don't have any immediate plans to change the accounting policies. So historically, we've reinvested our profits and done so with still showing a profit. Of course, this is now changing with our strategy, but we are publishing the adjusted EBIT as a measure of how much we are investing. And the focus is really on developing our product development organization. Of course, the financial measures are Important, but they will also likely mean some additional overhead if we're switching accounting policies. So no immediate plans to do that. Okay. And then the final one for Jonas as well. So the FX effect seems to be rather high in the quarter. How much How's the FX affected revenues versus last year? So on the U. S. Dollar, I gave a number, 13% on the Exchange rate and overall, we don't have an exact number. We do sort of take the Accounts or the revenue in the actual rate at each period. For the ARR, we can evaluate the exact effect of foreign exchange. We see, for example, when we do the constant currency calculation On the ARR, the Q1 last year has an FX effect of SEK 2,500,000 Swedish out of the roughly €30,000,000 total. So that's almost 10%. And I would estimate that Overall, that's also the kind of effect that we see on our net revenue. We will look into doing More work in this area because at least historically we've seen that we have a lot of fluctuations in currency And we do have a high exposure with a lot of the market in the U. S. And also euros in the European market. Okay. Thank you. And I think that's all questions I have coming in here. So With that, I would like to hand over back to you Magnus to wrap up the Q1 presentation. Thank you, Jenny. So let's move to the next slide here. So I'll repeat Some of the highlights here. So major highlight is the momentum we see with modern impact and the Quarter to very high quarter to quarter growth rate of 88%. So this is, again, the growing the ARR is our key objective. So we're aiming at the average growth over the next 4 years, so 35% of the total ARRs. So with this development, we're on track to move towards that and that's Really good. Also that the financial results that we have presented in this report It's in line with the earnings that we Q1 earnings that we forecasted or Projected in the listing prospectus. We are, again, I'd say, the Positive trend we're seeing not only in the software business, but also in the Services business related to Model Impact is really encouraging, pointing us in the right direction for the upcoming quarters. Also repeating here that we do see an increased Pacing the reduction of this co development activities that also leads to an updated estimate on the Effect of that on the full year as published in the report. And looking at clean energy as A focused sector, we see magnificent opportunities for us to develop more business there and exploit this Trent for a long period of time. And we have good capabilities in our products and we also have a Very good competence and expertise in our organization to address this kind of customers. And lastly, I'd repeat also that what we're seeing now in the company is that we are transitioning into an Investment phase that is fueled by the capital that we have brought in. Again, we're not activating any development cost or anything. So we are using the money we have brought in to build up A stronger product to accelerate the growth and the commercial capabilities to push that out to customers worldwide. So we're very excited about where we are right now and the direction we're taking and the momentum we're feeling. And with that, I want to thank everyone for joining us this morning, and I hope to see you all again in Quarter August 2020, we have the 2nd quarter interim report coming up. So thank you.