Modelon AB Interim report Q3 2024

Q3 Highlights

• ARR increased to MSEK 56.4 (47.1), an annual growth of 20%.
• Net revenue amounted to MSEK 20.5 (19.1), of which software revenue was MSEK 14.4 (12.4).
• Cash flow from operations amounted to MSEK -17.6 (-11.9).
• Adjusted EBIT amounted to MSEK -12.0 (-11.5).
• Operating expenses were MSEK 39.8 (30.7), including non-recurring items of MSEK 7.1 (0.0) and development costs of MSEK 13.8 (11.4).
• Net income amounted to MSEK -18.8 (-11.6).
• Earnings per share amounted to SEK -1.11 (-1.05) before dilution.

Comments from the CEO

Commercial update
Revenues in the third quarter were SEK 20.5 million, an increase of 7 percent compared with the same period last year. Growth was driven by software license sales, and total annual recurring revenues were up by 20 percent. Our flagship product Modelon Impact showed an ARR increase of 53 percent, thanks to new customer wins and increased license sales to existing customers. A new contract with a North American supplier of sustainable energy storage was among the new deals in the quarter. Operating profit was SEK -12.0 million, adjusted for non-recurring items. Operating cash flow was SEK -17.6 million.
During the third quarter, we launched an efficiency program to accelerate the path to profit and positive cash flow. This program will take full effect from 2025 and is expected to yield annual savings of SEK 25 million. We achieve this by reducing external costs, and by removing sites and overhead functions. I am convinced that these changes will make us leaner and increase focus on software growth. Our service expertise enables an increased adoption of our platform and supports development of high quality content for software customers. All restructuring costs associated with the efficiency program, SEK 7.1 million, are booked in the third quarter.

Customer feedback
During my first months, I had meetings with more than 15 customers and prospects in North America and Europe. I received a lot of positive feedback on our company, especially on the responsiveness and expertise of our employees, as well as on the usability of Modelon Impact. The combination of a user-friendly interface, a cloud-native software architecture, and a rich library of simulation components gives us a position to challenge all existing players on the system simulation market. In addition, we provide flexibility for customers to add their own knowledge, thanks to development and simulation environments that are based on open standards and interfaces.
My discussions with customers showed that we have expansion opportunities by deploying Modelon Impact to a wider group of users in each company. These users are often domain experts without experience of simulations, which puts additional demands on us to have simple workflows, interfaces, and tool configurations. I also see future growth coming from customers that create virtual sensors and digital twins of their physical systems, to improve system performance and reduce maintenance costs.

Strategic review findings
One of my first actions as CEO was to initiate a strategic business review, covering the market potential, competitive landscape, product offering, and internal efficiency. A key finding is that the market for system simulation has a higher potential than we had previously considered. A growing number of companies have decided that the traditional way of developing new products, through prototyping of innovative technology, takes a long time and is too costly. Instead, they are moving their engineering activities into a virtual environment with our system simulation platform as the main tool. This means faster revenue generation for our customers, thanks to shorter design cycles and products that are better optimized for market requirements.
As a result of the strategic review, I decided to adjust and simplify Modelon’s organization from October 1. All customer interfaces for sales and delivery are consolidated under a Chief Revenue Officer, with a mission to acquire new contracts and generate success for existing customers. A Chief Product Officer and Chief Technology Officer will together ensure that we invest in growing markets, prioritize customer requirements, and execute effectively. A new Chief Strategy Officer role increases our focus on innovation, both internally and through contacts with partners and academia. The Chief Finance and Human Resources Officers drive external reporting, process development, recruitment, and competence development to continuously improve operational efficiency.

Market references
A few weeks ago, we hosted the conference Modelon Innovate in Copenhagen on the theme of “sustainability meets simulations.” The list of speakers included representatives from Meta, Volvo, Siemens, MAN, and EPRI, sharing experiences from their respective application domains. It was fantastic to hear how companies address some of the most important questions of our time, like carbon-free fuels, carbon capture, environmentally friendly datacenters, digital health care, and autonomous vehicles. The conference was a success, and I feel encouraged by the optimism among all conference participants that system simulation is the way to accelerate progress towards a more sustainable future.
We are always grateful when customers publicly share their experience of our products. A recent case study with MAN Energy Systems is a fitting example of how a market leader in energy systems is shifting focus to decarbonization. MAN ES develop large industrial heat pumps that use carbon dioxide as an environment friendly refrigerant. This has many advantages but requires precise engineering to be effective. MAN ES selected Modelon Impact for virtual prototyping and testing, both for steady-state and for dynamic behavior during start, stop, and varying operating conditions. The next step is to compare simulation results with real-world operations in the Danish city of Esbjerg, where MAN heat pumps are deployed at large scale. More details about the MAN case can be found on our home page, www.modelon.com.

Summary and outlook
I am inspired by many customer meetings during my first quarter as CEO and I am optimistic about the business prospects. Our customers work on important projects that increase efficiency and sustainability for people, industries, and society, and I am convinced that system simulations will help companies develop better solutions, faster and at lower cost. Based on customers’ feedback, I am confident that we have a product that can win against any alternative on the market. However, competition is fierce, and we need to continue investments in usability and scalability to address new requirements of demanding customers.
We have unique knowledge in physics-based system simulation and are well-positioned to win market share and grow revenues. Our business model is based on cloud Software-as-a-Service, which scales in capacity as well as across industries and geographies. We are in an investment phase where product development and customer acquisition costs, in the short term, are higher than revenues, but we see opportunities in the mid- to long term to generate significant operating profit and cash flows.

Jan Häglund, CEO Modelon
Lund, November 7, 2024

Investor presentation
Modelon invites investors to a presentation of the Q3 interim report at 10.00am CET on November 7, 2024. CEO Jan Häglund and CFO Jonas Eborn will present the Q3 earnings in a webcast.

The complete Q3 interim report is attached to this press release and is also made available on the company webpage: http://www.modelon.com/investor-relations/#FinancialReports.