Softening macro has squeezed IT software spend and organic growth at IAR Systems and its peers. Short-term, we expect muted earnings momentum, but are optimistic for its SaaS launch in 2025e and note subscriptions represented 11% of net sales in 9M 2024, growing by 176% YOY. Having lowered our estimates, we reiterate our SEK160–240 fair value as we roll our valuation base to 2025e and see support from, among other things, further buybacks and recent insider activity.
Q3 was light, with 1% organic sales growth YOY (we expected 11%) as recurring revenues (~50% of sales) showed healthy 10% organic growth YOY, largely offset by -7% organic growth in upfront licences amid softening end-markets and a tough YOY comparable. Despite ~50% higher capitalisation of R&D than in recent quarters, the adj. drop through was 30% in Q3 versus 100%+ in previous quarters, which led to adj. EBIT 6% below our forecast (28.1% margin, down 0.1%-point YOY). 36% cash conversion (10.2% FCF margin) resulted in net cash of SEK115m at end-Q3; while IAR Systems has bought back shares worth SEK76m since Q3 2023 it has only utilised 7% of its current buyback mandate.
We have cut our 2024e adj. EBIT by 11%, 2025e by 6% and 2026e by 3% to factor in positive FX, the soft Q3 results and Q4 outlook. We await greater clarity on IAR Systems' SaaS launch in 2025e, although we expect an optical headwind to net sales growth, pressuring profitability. However, investors to ultimately appreciate the transition medium-term from: 1) more predictable (less lumpy = de-risked growth), recurring and ultimately profitable revenue streams; and 2) enabling faster customer expansion and user adoption by lowering the upfront cost of deployment.
SEK160–240 fair value reiterated corresponding to a 2025e EV/EBIT of 15–23x. We like IAR Systems' progress to becoming a platform business, profitable growth and solid adj. net cash position (10% of its 2024e market cap), offering prospects of generous capital allocations; the defensive qualities of c50% of revenues being recurring; the optionality in RISC-V; and the ambition to expand its embedded systems market.
Best regards
Joachim Gunell | DNB Markets | Equity Research Sweden
Phone: +46 731435281
Email: joachim.gunell@dnb.se
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