Modelon

Q2 Highlights

• ARR increased to MSEK 53.9 (45.5), an annual growth of 18%.
• Net revenue amounted to MSEK 21.9 (21.1), of which software revenues were MSEK 14.4 (14.4).
• Cash flow from operations amounted to MSEK -14.6 (-19.8).
• EBIT amounted to MSEK -12.9 (-12.8).
• Operating expenses were MSEK 34.8 (34.1), including development costs of MSEK 13.5 (12.4)*.
• Net income amounted to MSEK -12.4 (-12.4).
• Earnings per share amounted to SEK -1.13 (-1.13) before dilution.

Comments from the CEO
My first day as CEO of Modelon was July 1st, and I am proud to have been entrusted to lead this great company. I look forward to working with colleagues to build customer success and shareholder value. I will share my initial thoughts and impressions, together with a summary of the second quarter's key events and results.

Commercial update
Net revenue in the second quarter of 2024 was 21.9 MSEK, an increase of 4 percent compared with the same period last year. Software revenue was 14.4 MSEK, flat versus last year. Operating loss was in line with last year at -12.9 MSEK, affected by increased operating expenses. Our company has higher growth and profitability ambitions, and my focus is on accelerating revenue and profit generation by aligning our go-to-market efforts with growing customer segments, improving our product-market fit through targeted product enhancements, and by implementing efficiency measures based on automation and adoption of new cloud technology.
Despite the second quarter’s flat trend in total revenues and operating profit/loss, there are underlying growth trends that give me confidence that we are on the right track and that our Software-as-a-Service business model has potential to generate healthy long-term cash flows. Our total ARR in Q2 2024 was 53.9 MSEK, an increase of 18 percent versus last year. Growth came mainly from our flagship product, Modelon Impact, where ARR increased 37 percent year-over-year. Software revenues from our multi-platform business, i.e., Modelon libraries running on third-party simulation platforms, had a lower growth rate, primarily because these revenues are from legacy customers running applications and third-party platforms that are stable in terms of number of users.
The increased sales of Modelon Impact were mainly driven by new software license contracts, and customer wins in the second quarter include multi-billion-dollar revenue companies in energy supply and hyperscale cloud services. Growth in ARR also came from customers expanding their deployment of Modelon Impact from a few simulation experts to a wider group of users. For example, one customer that recently selected Modelon Impact has plans to significantly increase the number of users compared to their previous deployment on a competing platform. This customer has a strategy to use Model Based Simulation throughout the full product life cycle to reduce design lead times, cut costs, and improve performance.
Service revenues were up by 11 percent on last year. There are variations in how service projects generate revenue and the trend for our services business over the trailing 12-month period has been flat. This is because many of our service projects are delivered to legacy customers running Modelon’s libraries on third-party platforms, a business that is growing more slowly than our Modelon Impact business. I am impressed by the level of experience and competence in our services team. I see potential to expand and better leverage consulting services in driving Modelon Impact sales, combining that part of our offering with enhanced training and onboarding for a robust value proposition to our customers.

Product enhancements
We have during the quarter launched a new solution where simulation models for hydrogen, electricity, and thermal production are included in Modelon Impact in a prepackaged and more easy-to-use format. I believe that our new product offering, supported by experts in our Services team, will strengthen our position in energy solutions and help customers find faster and better ways to solve the energy supply challenges of the future.
The value of a simulation depends on the customer’s ability to understand and draw conclusions from it. Often a simulation model is set up by one expert but it is needed in many different engineering departments. Therefore, post-processing of simulation results is a focus area for R&D investments in Modelon Impact. While we continually enhance the analysis capabilities of our own product, we note that many customers have their favorite tools that they have used for years together with other applications. We have therefore launched an Excel Add-In with which users can set up, simulate, optimize, and analyze their Modelon Impact experiments directly in Excel. I believe that flexibility and openness to complementary third-party and in-house tools is the right strategy and a path we will continue to explore.
Modelon Impact is primarily sold as a cloud service, offering efficient onboarding, quick scaling of capacity, and fast access to new product features and enhancements. Our hosted cloud solution is designed for the highest level of information integrity, and our product plans prioritize further investments in cybersecurity. The Modelon Impact cloud service replaces the desktop version, which is still used by some customers. The migration of these customers started during the quarter and is expected to continue until all desk-top customers have transitioned to the cloud. As a complement to the hosted cloud service, we offer a self-managed solution for customers that run Modelon Impact on their own private cloud. I see that we have processes and competence to deliver to these customers, in parallel with running our hosted cloud solution.

Customer focus
I have started meeting customers to learn more about their businesses and requirements. Their feedback about Modelon is positive. It is encouraging to hear that we are enabling companies in several industries to reduce development times and find better technical solutions. I look forward to the upcoming Modelon Innovate event October 10-11 in Copenhagen, which will be an excellent opportunity for customers to share their experiences and ideas. I will personally use the event to establish contact with as many customers as possible, to learn more about their challenges, and to get input for Modelon’s future success.

Outlook
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, August 21, 2024

Investor presentation
Modelon invites investors to a presentation of the Q2 interim report at 12.00pm CET on August 21, 2024. CEO Jan Häglund and CFO Jonas Eborn will present the Q2 earnings in a webcast.

The complete Q2 interim report is attached to this press release and is also made available on the company webpage: http://www.modelon.com/investor-relations/#FinancialReports.