I.A.R Systems

Fourth consecutive double-digit (34%) adj. EBIT beat to our forecast. Q1 organic sales growth was 14% YOY (we expected 12% YOY), where the main source of strength was EMEA (+29% organic YOY as IAR is showing success on new large multi-year enterprise deals with its repackaged offering), with 11% YOY growth in deferred revenues setting up net sales 1% above our forecast. IAR Embedded Workbench remains the anchor where IAR's suite solves developers' productivity pain points. Strong organic growth, 97% gross margin, cost savings and improved efficiency (net sales/employee up 18% YOY) translated in a 190% adj. EBIT drop-through, and 161% adj. EBIT growth YOY led to adj. EBIT 34% above our forecast (28.6% margin, up 16.4%-points YOY). 61% cash conversion (17.5% FCF margin) resulted in net cash of SEK144m at end-Q1. Since August 2023, IAR has bought back shares for SEK36m (utilising ~21% of its mandate) and we note that it has a renewed buyback mandate for 10% of the shares outstanding.

2024–2025e adj. EBIT raised by 11–7%, of which 7–2%-points is underlying based and 4–5%-points from FX tailwinds. We have also calibrated our tax assumptions based on tax-loss carry-forwards from Secure Thingz, which has resulted in us raising our adj. FCF by 25–10% for 2024–2025e. We have taken what we believe to be a conservative view but note IAR see no signs of slowdown in 2024, with incremental growth potential from new product launches.

Fair value raised to SEK170–240, corresponding to a 2024e EV/EBIT of 15–22x. We see IAR making progress to become a platform business, having cleaned up its balance sheet as well as: its profitable growth and solid net cash position (12% of its current market cap), offering prospects of generous capital allocations and even bolt-on M&A; the defensive qualities of c50% of revenues being recurring; the optionality in embedded security, RISC-V; and the ambition to expand its embedded systems market.

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Best regards

Joachim Gunell | DNB Markets | Equity Research Sweden

Phone: +46 731435281
Email: joachim.gunell@dnb.se

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