DNB Markets: Establishing ‘RO40’ credentials

In its fourth consecutive 30%+ EBIT beat quarter, IAR took yet another step to establish ‘deep tech’ leadership ‘rule of 40’ credentials. We believe IAR is in its best operating shape in the six years we have covered it. We have raised our fair value to SEK170–240 (150–220).

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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