Yesterday afternoon, Modelon announced updated financial targets, highlighting sustained ARR growth, positive free cash flow from 2026, and strong long-term profitability. These revisions reflect the company’s confidence in Modelon Impact’s momentum and the efficiency measures implemented in late 2024. Key updates include ARR growth above 20% (previously >35% in the medium term, set in Nov 2022), free cash flow turning positive from 2026 (previously targeted for the short term, within 1–3 years, and referring to operating rather than free cash flow), and a long-term (5+ years) operating profit margin above 20% (unchanged from Nov 2022).

The most notable takeaway, in our view, is the updated ARR growth target. The previous target, set at >35% in the medium term, was highly ambitious. The revised goal of achieving ARR growth above 20% year over year is more reasonable and helps set clearer short-term investor expectations. The shift from a target of positive operating cash flow by the end of 2025 to positive free cash flow from 2026 is not a significant change in relative terms, as Modelon’s free cash flow and operating cash flow are nearly identical. This is due to the company expensing all development costs as operating expenses, with no capitalisation.

While the targets remain ambitious, we believe they are achievable within the given time frames. If Modelon successfully meets all its targets, it would qualify as a Rule of 40 SaaS company—a milestone that could justify a significantly higher valuation. The Rule of 40 states that a software company’s combined revenue growth rate and profit margin should equal or exceed 40%.