DNB Markets - IAR Systems: First glimpse of security traction

Delving into the Q3 results, we note adj. EBIT grew 41% YOY (in line with our forecast), lending credence to our case that IAR is three quarters into a profitable growth turnaround. Although perpetual licence sales are not immune to weakening IT spend, we are encouraged that its long-awaited security offering is starting to ramp up, suggesting leverage to 10–15% organic sales growth ambitions. We reiterate our fair value of SEK140–250 on broadly unchanged 2023–2024 forecasts, on which IAR is trading at an EV/EBIT of 13–10x.

A look beyond the headline results revealed: 1) organic sales growth of 11% (we forecast 13%), with security (3% of net sales) being a positive surprise (0% in recent quarters); 2) licence-based and SUA grew 12% and 11% organic, respectively; 3) adj. EBIT of SEK27m (broadly in line with our forecast) adjusted for one-offs related to moving its production to Sweden, while it is now capitalising SEK2m lower development costs YOY; 4) FCF grew 53% YOY, with 125% cash conversion; and 5) the company is well capitalised, with a SEK131m net cash position.

2023–2024e adj. EBIT relatively unchanged (-1%), reflecting: 1) slightly softer new licence sales offset by increased security assumptions; 2) positive FX (+4%), offset by 3) lower capitalised development costs and D&A. IAR Systems' perpetual licence sales (57% of group sales) are not immune should IT spend slow in 2023e, although ~40% of net sales are based on support and update licences, which have historically proven resilient given the durability of design activity through downturns for customers to remain competitive.

Fair value of SEK140–250 reiterated, corresponding to a 2023e EV/EBIT of 14–26x. Over the coming quarters, we will monitor how IAR's end-to-end security platform will benefit from growing demand from developers to secure valuable IP from regulatory tailwinds such as the EU Cyber Resilience Act proposal, DCMS, ETSI, NIST, etc.

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