Modelon Q2 2023: Financial review

In the second quarter of 2023, Modelon achieved Net revenues of SEK21.1m (15.1), corresponding to a y/y growth rate of 40%. Sequentially, net revenues exhibited a growth of 17%. Our initial sales estimation stood at SEK19.2m, resulting in a deviation of 12% compared to the reported figure. Notably, the quarter witnessed significant achievements, marked by seven customer wins, indicating sustained interest across all targeted industries.

In Q2 2023, the company experienced solid software revenue growth, with a notable 36% increase compared to the same period in 2022. This growth was driven by a significant paid-up upsell win with a major automotive account in India, where the recurring license model is not yet widely accepted. Consequently, this contributed to a significantly higher growth rate in software revenue of 36% relative to the 8% expansion observed in ARR

Development is currently focused on the ongoing transition to a managed cloud service. Central to this development is the transformation of the delivery approach for Modelon Impact, transitioning from conventional on-premise installations to a managed cloud service model. Although this transition temporarily extended sales cycles and slowed ARR growth due to increased customer interactions, it is expected to lead to shorter sales cycles and expedited growth once completed.

Modelon sees a clear trend of increased lead generation from its marketing activities supported by testimonials. This suggests effective marketing strategies, with the potential to drive sales further as Impact evolves.

In the quarter, Modelon announced it has entered into two strategic partnerships. It has partnered the Japanese company: Toyota Tsusho Systems (TTS) to introduce Modelon Impact to the Japanese market. TTS is a global trading enterprise specialising in developing IT solutions and will serve as a reseller of Modelon Impact. This collaboration aims to enhance system simulation efficiency within Japanese engineering enterprises by harnessing Modelon Impact and TTS’s cloud infrastructure and consulting services.

Modelon has also added a distribution partner for the South Korean market. Tae Sung S&E is a technology-oriented company focusing on Computer-Aided engineering (CAE) software, consulting, and training. TSNE will distribute and support Modelon Impact on the cloud, offering seminars, training, and consultations in the local language. As demand grows, on-premises installations of Modelon Impact will also be supported by TSNE.

The partnerships between Modelon and these companies hold meaningful potential for Modelon’s business in respective markets:

In conclusion, these partnerships open doors for Modelon to establish a robust presence in the respective markets. By leveraging local expertise, distribution channels, credibility, and support services, Modelon can navigate challenges more effectively, expand its reach and increase its growth prospects.

IIn June 2023, Modelon released a significant update of Modelon Impact in alignment with the predetermined strategic roadmap. CEO Magnus Gäfvert emphasised that this latest iteration introduces many enhancements in performance and functionality tailored to diverse industry verticals.

Selected highlights of the update include:
• App-mode for deployment users
• Workspace sharing
• Parallel simulations and compilations
• Introduction of projects
• Add-in for Microsoft Excel
• Built-in workflows
• Automatic dependency handling
• New library versions

The release of Modelon Impact 2023.2 with new features and improvements suggests ongoing investment in product development to cater to evolving industry demands. This can contribute to customer retention and attract new clients. Notably, the update encompasses features strategically designed to bolster opportunities for upselling. Given the timing of this release during the summer season, we anticipate the extent of its scalability prospects will become more evident in the latter part of this year.

In the second quarter of 2023, Modelon achieved Net revenues of SEK21.1m (15.1), corresponding to a y/y growth rate of 40%. Sequentially, net revenues exhibited a growth of 17%. Our initial sales estimation stood at SEK19.2m, resulting in a deviation of 12% compared to the reported figure. The main reason for the deviation is explained by from non-recurring software sales of SEK2.8m. The software share of revenues remain strong, comprising 68% of net sales, up from 67% in the previous quarter but down from 70% in Q2 2022.

Total ARR experienced a slight sequential contraction in the quarter, interrupting the upward trend seen thus far. The ARR showed a y/y growth of 11% and a sequential decline of 2%. Management acknowledges that the ongoing shift towards the managed cloud service has contributed to elongated sales cycles. However, while this transition temporarily slows ARR growth, it is expected to lead to shorter sales cycles and accelerated growth once completed. Moreover, the annual growth rate for Modelon Impact was 27%, meaning that Impact’s share within the revenue mix is growing y/y, although this number contracted from last quarter’s 41%.

During the period spanning from Q4 2019 to Q4 2022, Modelon achieved an approximate increase in recurring revenues of 50%. This growth was accompanied by a concurrent expansion in its average full-time employed staff (FTEs), registering a rise of 16%. Consequently, the metric denoting recurring revenues per FTE witnessed an upswing of around 30%, from cSEK0.36m in 2019 to cSEK0.48m in 2022.

From 2021 to 2022, Modelon grew its total ARR from SEK39.8 to SEK44.7m, reflecting a growth of 12%. Concurrently, the company expanded its FTE count by an increment of 5 individuals, representing a 6% expansion. This culminated in a 6% increase in ARR per FTE on a y/y basis.

In the second quarter of 2023, Modelon’s Total Operating Expenditures (OPEX) reached SEK34.1m, reflecting a 4% y/y growth rate. This figure also showecased a 6% decline in comparison the preceding quarter’s SEK36.4m. Personnel costs showed a decreased during the quarter and accounted for SEK21.7m of the total OPEX figure.

Modelon's sustained commitment to enhancing software capabilities and broadening its product portfolio is evident through its substantial investments in research and development. However, the company has communicated its expectation that product sales and ARR will grow at faster pace than development costs. The company’s spending on development amounted to SEK12.4m in Q2 2023 This translates to a y/y decline of 13% and a sequential decline of 21%. This also means that the yearly run-rate for spending on development decreased to SEK58m in the quarter.

The reason for the contraction is due to a slow recruitment of certain open positions in the company. Modelon is a deep-tech company, meaning that they compete for top-talant with specific expertise. Thus, securing the right candidates with precise skills takes time.

In Q2 2023, Modelon’s development costs represented 87% in relation to software revenues, while the one-year normalised development costs amounted to 116% in relation to software revenues. The reason behind this positive development stems from the sizeable non-recurring software sales coupled with lower spending on development.

In terms of Cash flows, the company experienced a burn rate of -SEK12.2m, and the total cash flow amounted to -SEK19.9m (-10.1), resulting in a cash position of SEK90.4m at the end of the reporting period. This development is attributed to a reduction in deferred revenues and receivables, which produced a negative change in working capital of -SEK7.7m. Modelon indicates that this is due to slower customer payments owing to macroeconomic effects. However, Modelon’s impressive customer base comprises large enterprises, meaning that Modelon has no indications of bad debt.

Based on Modelon’s current burn rate and cash position, we are confident that Modelon will achieve profitability without requiring external financing.

We have revised our sales estimates based on the insights gained from Modelon’s Q2 2023 report. Due to anticipated longer sales cycles in the short term, we lower our sales estimates to account for a deceleration in ARR growth. Simultaneously, we expect a heightened revenue growth rate derived from the solution service. Consequently, we have slightly increased our estimates for the solution service by a few percentage points in the short term. Regarding expenditures, we have adjusted our projections downwards to reflect a slower growth in personnel cost, resulting in a improved EBIT margin

See below for our revised estimates:

As of closing on 23 August 2023, Modelon’s share price stood at SEK10.4, representing a notable 28% decline from 31 December 2022 and a 64% decline y/y. Modelon’s average daily trade volume has been low during 2023, with approximately 8,200 shares traded daily. The volume-weighted average price (VWAP) has been cSEK14, resulting in an average daily turnover of cSEK0.1m. The share’s overall performance has been depressing, experiencing a sharp -78% decline from its initial listing price of SEK44. We will discuss this topic further in the valuation section of this update

The median EV/sales multiples for Nordic SaaS companies for 2024e are 2.2x. Regarding EV/EBIT multiples, the median for Nordic SaaS companies for the same year is 19x. However, it is essential to note that an examination of solely unprofitable high-growth SaaS firms reveals a lower median EV/Sales multiple of 1.6x.

Publicly traded companies operating in the PLM market have the inverse arrangement between growth and margins to the Nordic SaaS. These companies are larger and grow more slowly, while their EBIT margins reflect the more mature state of their businesses. The PLM peer group trades at a median EV/sales multiples of 6.9x on 2024e (well above average SaaS companies that are smaller and less mature). Furthermore, they trade at a median EV/EBIT multiple of 21x for 2024e. The average growth rate for this peer group mirrors the overall growth rate in the S&A markets, of about 9% annually. It is worth mentioning, however, that S&A is only part of this peer group’s sales.

As of present, Modelon’s market capitalisation currently stands at SEK132m, with an implied enterprise value (EV) of SEK42m. Our forward-looking projections indicate expected sales of SEK113m for 2024e, corresponding to an EV/Sales multiple of 0.4x. Our analysis suggests that, for 2024e, industry peers are trading at a median EV/Sales multiple of 6.9x. Meanwhile, Nordic SaaS companies’ median EV/sales multiples for the same period stand at 2.2x. However, it is essential to note that an examination of solely unprofitable high-growth SaaS firms reveals a lower median EV/Sales multiple of 1.6x. In light of this, Modelon’s implied EV/Sales multiple of 0.4x for 2024e represents a substantial discount compared to both profitable and unprofitable Nordic SaaS peers and its industry peers.

We have revised our medium-term sales and cost estimates based on the insights gained from Modelon’s Q2 2023 report. While we anticipate a slower ARR growth in the short term, we have adjusted our projections for the solution service upwards by a few percent in the short term. Additionally,we have adjusted our OPEX projections downwards to account for slower growth in personell costs. While we have made these adjustments they have only a small effect on our valuation for the company.

Using a fundamental DCF framework, we have derived a fair value range for Modelon under three scenarios: base case (most likely), bear case (pessimistic), and bull case (optimistic). We have used a WACC of 10.5% for all scenarios. Our analysis suggests a fair value range of SEK11 – 121 while our base case stands at SEK46 (47).

We believe that the key drivers for an increased market value for Modelon are accelerating ARR growth and signs of near-term scalability. These are key metrics, and we anticipate the second half of this year to be particularly important. Following the launch we expect Modelon to showcase its ability to accelerate its ARR with improved margins, in line with its financial targets. We are thus excited about the coming quarterly reports, and we will continue to monitor Modelon's development closely and adjust our analysis accordingly.