DNB Markets - IAR Systems: Ripping off the sticking plaster

Although we do not expect results overnight, we believe IAR Systems is taking the steps needed to get moving in the right direction commercially and financially. We believe this will put it in a solid position to accelerate growth by ensuring high code quality in embedded software and to program secure devices for the internet of tomorrow. We reiterate our SEK130–220 fair value.

Back on organic growth path adjusting for multi-year agreements. IAR Systems reported Q4 sales of SEK92m (in line with our estimate), corresponding to 2% organic growth YOY including tough comparables from multi-year contracts. It saw encouraging traction for its Linux products and solid interest in functional safety products, while RISC-V continued to show early signs of a broader demand backdrop. Adjusting for multi-year contracts, IAR Systems was back to 11% organic growth YOY in 2021, signalling that comparables should improve this year. Q4 included one-ffs totalling SEK134m (SEK118m relating to its pre-announced impairment of intangibles and SEK16m for the departure of the CEO, which was more generous than we expected). Adj. EBIT beat our forecast by 5%, but more importantly we were glad to see FCF improve (26% FCF margin in Q4), which has previously been a concern.

Our 2022–2023e adj. EBIT is broadly unchanged, having fine-tuned for FX. We expect organic growth YOY to gradually accelerate over the coming quarters, taking full-year growth to 8%. With high drop through from its 97% gross margin, this implies ~40% EBIT growth YOY (of which ~20% stems from FX).

SEK130–220 fair value reiterated, corresponding to a 2022e EV/EBIT of 25x. As we see more signs that IAR Systems has reached a turning point in its negative 2-year earnings-revision trend, we believe investor perception could also change. It is still early days for the new management team, and it could take a few quarters to fully turn around IAR Systems' trajectory, but we are cautiously optimistic about the company's actions to address this directly by the sizeable impairment in Q4, shifted compensation models for the sales employees, new revenue models etc., which we believe marked the trough in financial and commercial momentum.

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Best regards 

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Joachim Gunell | DNB Markets | Equity Research

DNB Bank ASA, Filial Sverige
Visiting address: Regeringsgatan 59, Stockholm
Postal address: 105 88 Stockholm
E-mail: joachim.gunell@dnb.se | www.dnb.no