DNB Markets: Rips the band-aid off SaaS shift

IAR’s long-awaited launch of its SaaS offering is set to dent its sales growth and dampen profitability, but we believe this business model change should improve its earnings quality long-term and accelerates the growth profile. During this three- to five-year shift, we expect its defensive recurring revenues, its strong balance sheet, and share buybacks to cushion share price volatility. We have cut our 2025–2026e adj. EPS by 22–41%, but raised our fair value to SEK160–265 (160–240).

New strategy rips the band-aid on long-awaited SaaS transition. We are positive on IAR Systems’ updated three- to five-year strategy, which focuses on: 1) expanding its addressable markets (address more advanced MCUs and also MPUs, which represent a ~65% additional whitespace market opportunity); 2) widening the market reach by targeting focus verticals (higher degree of certifications and regulations) in automotive and industrial automation, and expanding its channel through distributors and partners; and 3) expanding the customer share of wallet through its new subscription offering, allowing access to its entire toolchain in a modern development environment, with the potential to add usage-based revenue parameters (charge for build capacity, etc.).

2025–2026e adj. EPS cut by 22–41%, to factor in the SaaS transition, with: 1) a 2% sales CAGR in 2024–2028e; 2) SaaS revenues representing 60% of 2028e net sales; and 3) an earnings trough for 2027e. Our estimates could prove too conservative, but we prefer to take a prudent stance. For its seasonally important Q4 2024, we expect net sales of SEK119m (-6% organic YOY) on broad-based QOQ improvements facing a tough YOY comparable and adj. EBIT of SEK23m (19.6% margin, -5.8%-points YOY). We expect IAR Systems to propose a DPS of SEK2.00 (+33% YOY).

Fair value raised to SEK160–265 (160–240), where the low-end is based on a 2025e EV/EBIT of 20x (SaaS shift-pressured earnings) and the high-end on a DCF that captures IAR Systems’ targeted ‘rule of 40’ financials beyond 2028–2030e (20%+ sales growth at a 20%+ EBIT margin). On a perpetual-licence basis, the shares would be trading at a 2025e EV/EBIT of ~11x.

Best regards,

Joachim Gunell | DNB Markets | Equity Research

DNB Bank ASA, Filial Sverige

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