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1 IAR Systems Group AB Q3 Another strong report Analyst: Johan Broström Date: 24 October 2014 Continuing strong demand and currency effects, now positively impacting sales and earnings, contributed to another strong report that exceeded our projections all regions recorded new sales records in local currency. Q3 revenues increased by 18% and amounted to SEK 64.9 million, 2.4% above our forecast, and operating profit was SEK 15.6 million, some 5% better than forecast. Demand is still described as strong in all markets, and the company emphasises above all the positive trend in the American market after a reorganisation early this year. CEO Stefan Skarin, however, pointed out that there is considerable uncertainty and that visibility for the fourth quarter is limited. Despite the positive surprise in Q3, our forecasts for the fourth quarter take account of the uncertainty and we are trimming our projections for sales and operating profit by 1% and 3% respectively. However, with a strong Q3 in the bag the adjustment leads to slight hikes to the full-year forecasts. A more favourable currency situation than before means that we are upping our forecasts for operating profit in 2015 and 2016 by 6% and 5% respectively. Price for IAR Systems Group AB Class B (SE) in SEK as of 10/22/ sep 13 okt 13 nov 13 dec 13 jan 14 feb 14 mar 14 apr 14 maj 14 jun 14 jul 14 aug 14 sep 14 okt 14 IAR Systems Group AB Class B OMX Stockholm Small Cap (Rebased) Source: FactSet Sales and Margin % % % % 100 5% % E 2015E Sales (MSEK) EBIT margin Adjusted EBIT-margin (excl. capitalised development exp.) Source: Remium Nordic (SEK million) E 2015E 2016E Share price (SEK) Sales month high/low 41.0/75.0 EBIT No. of shares outstanding (m) 12.6 Pre-tax profit No. of shares diluted (m) 12.6 EPS, diluted (SEK) Market Cap. (MSEK) DPS (SEK) Net debt(+)/asset(-) (MSEK) Enterprise value (MSEK) Sales growth 14.8% 2.7% 10.7% 16.5% 11.8% EPS growth -54.3% 115.1% 40.3% 19.4% 4.1% Chairman: Markus Gerdien EBIT-margin 15.3% 17.5% 20.7% 22.0% 20.5% CEO: Stefan Skarin RoE 5.3% 10.9% 15.0% 18.2% 18.2% CFO: Stefan Ström Reuters: IARb.ST EV/Sales Bloomberg: IARB:SS EV/EBIT Listing: Nasdaq OMX Stockholm Small Cap P/E Company web: Dividend yield 5.2% 11.6% 4.4% 5.1% 5.5% Source: Remium Nordic This document was prepared on behalf of the company analysed. Important information and disclaimer can be found on the last page of this document.

2 Better sales and margin IAR Systems reported third-quarter sales more than 18% higher than in the same period Operating profit reached SEK 15.6 million, only marginally better than the reported figure in 2013 but a full 37% better when adjusted for the net insurance income of SEK 4 million in the third quarter of Both sales and earnings were better than our estimates. Additionally, capitalised development costs were lower than expected, meaning the quality of profits was better. Table: Q IAR Systems: Q (SEK million) Actual Remium Diff Sales % Gross profit % EBITDA % EBIT % Cap. Dev. Expenses* % Source: Company report, Remium Nordic * Investments in intangible assets excluding acquired IP-rights and systems amounting to SEK 2.9 million Strong demand in all markets leading to good organic growth IAR Systems notes that demand is strong in all markets. For nine months, organic growth for the company's own products was 18% in Asia, 16% in Europe and 12% in America. This means that growth in Europe and America accelerated in the third quarter. IAR Systems particularly emphasises the positive trend in America, where the first quarter was adversely affected by a reorganisation. Compared to our projections, the gross margin was slightly lower than expected while overheads were in line, and the operating margin for the quarter reached 24% compared to the expected 23.4%. and positive currency effects should boost growth and margins in Q4 and 2015 During the year, negative currency effects that influenced performance in 2013 have gradually subsided and are now positively impacting sales and earnings. According to the company, currency effects contributed SEK 2.3 million more to operating profit than last year. The USD is currently over 10% more expensive than the average rate for Q4 2013, the EUR is 5% higher and the JPY is 3% higher. If exchange rates remain at these levels, the contribution to both growth and margins will be considerable for both Q4 and full-year Despite anticipated investments in expansion, we believe that the operating margin for IAR Systems will significantly exceed the target of 20% for 2015, and will remain above target in IAR Systems

3 The Internet of Things A new market opening up IAR Systems has announced a growth target of 10-15% per year. Our best estimate is that this target will largely align with growth in the addressable market. The market consists of companies all over the world, and in most industries that have the common denominator that their products contain some type of electronics. The IAR Systems development platform gives product-developer customers programmers of embedded systems an effective tool to program the functionality of their products. Major expansion of mobile communications networks around the world, combined with rapidly falling prices for electronics and the fast-increasing use of mobile internet services mean that global companies across multiple industries are seeing new business opportunities. The potential to equip everything from industrial machinery to consumer products with sensors that capture usage patterns, error messages, weather or even health condition at insignificant cost creates scope for entirely new business models and products. Society is about to be connected to the internet down to the smallest elements the internet of things (IoT). This market is still in its infancy, but the growth rate is predicted to be explosive. The IoT provides IAR Systems with entirely new possibilities because each little sensor must be programmed for the desired function. Today there are an estimated 450,000 developers worldwide programming embedded systems, mostly in "traditional" products such as cars, household appliances, control systems and medical equipment. These products are being developed in traditional programming languages like C and C++. The companies today poised to conquer the internet of things, however, have a different origin from developers; nine million people, if Oracle is to be believed, program internet applications in the Java programming language. It would be natural to assume that the development of the IoT will lead these two worlds the development of embedded systems and the development of internet applications to converge. The potential for IAR Systems becomes obvious if the existing market of nearly half a million developers of embedded systems is complemented with nine million Java programmers. A numerical example of 5% of Java programmers starting to use development platforms for embedded systems means that the market for IAR Systems would double. Since the company's products are also independent of the underlying electronics manufacturer (the main competitors to IAR Systems are namely processor manufacturers) it seems the company has a clear competitive advantage. The speculatively minded may also ask whether market growth could make IAR Systems an important strategic prize for global players. Oracle, which owns Java, or any other market player could well find reason to add IAR Systems products to their range and place a bid for the company. The addressable market for IAR Systems is fewer than a half million programmers of embedded systems but realisation of the internet of things opens the door to nine million Java programmers with the potential of a market many times greater for IAR Systems products IAR Systems could turn out to be a strategic prize and a potential acquisition target IAR Systems

4 IAR Systems stock is on top this year Like the rest of the stock exchange, the IAR Systems share has had lacklustre performance since this summer. Viewed over the past year, its performance is beaten only by acquired Readsoft. The share is traded at a premium to other software companies, but this may be explained by higher growth and margins. However, its peer group is a diverse range, making it hazardous to draw conclusions from the comparison. Chart: Share price performance, Swedish software companies 300 Share price (indexed) Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 IAR Enea Formpipe IFS MSAB Readsoft Seamless Vitec Source: FactSet, Remium Nordic Table: Key ratios and valuations, Swedish software companies Swedish Software - Valutation 2015E Price MCAP Sales EBIT EBIT EV/ Sales Growth (SEK) (SEK m) (SEK m) (SEK m) margin EPS EV/S EBIT P/E E Enea % % FormPipe % % IFS , , % % Micro Systemation % % Readsoft* , % % Seamless % % Vitec Software % % Total 10, , % % Median 13.5% % IAR (Est. Remium) % % Source: FactSet, Remium Nordic Aggregated P/E ratios exclude negative numbers 4 IAR Systems

5 Financial performance INCOME STATEMENT, SEK million E 2015E 2016E Sales EBIT DA Depreciation & amortisation EBIT Net financials Pre-tax profit Extraordinary items T axes Net profit (continuing operations) BALANCE SHEET, SEK million Other fixed assets Net property plant and equipment Receivables Cash & cash equivalents = T otal assets Equity Interest bearing debt Non-interest bearing liabilities = T otal liabilities CASH FLOW, SEK million + Pre-tax profit Depreciation T axes Other items Cash Earnings Increase in Net Working Capital = Cash flow from operations Investments Other items = Free Cash Flow /- Change in debt and other items /- New issues/buybacks Paid dividend Change in cash IAR Systems

6 Key figures and valuation KEY FIGURES E 2015E 2016E M-cap Net debt Enterprise value Valuation Multiples EV/Sales EV/EBIT DA EV/EBIT EV/Operating Free Cash Flow* P/E P/E excl. goodwill P/B P/Sales P/FCF Per Share Measures Share price, year-end or current No. of shares outstanding, year-end (m) EPS Free Cash Flow per share Capital employed per share Book value per share Dividend per share Dividend payout ratio, % Dividend yield, % Performance indicators, % Sales growth (%) EBITDA margin (%) EBIT margin (%) EPS growth (%) ROE ROCE Financial ratios Capex/sales, % Net debt/ebitda (1.2) (1.2) (1.6) (0.9) (0.9) (1.0) Equity ratio *) OFCF = FCF less Net Financial Items plus Tax on Net Financial Items 6 IAR Systems

7 Quarterly performance IAR - Quarterly Profit and Loss E (SEK million) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3A Q4E Net sales Goods for resale Gross profit Other external expenses Personnel costs EBITDA Depreciation of tangible assets Amortization of intangible assets EBIT Financial income Financial expenses Pre-tax profit Taxes Net profit EPS (continuing operations) EPS (continuing operations, diluted) EPS, basic EPS, diluted Number of shares at end of period, million Diluted number of shares, million Average number of shares, million Diluted average number of shares, million Source: Company data, Remium Nordic Owners IAR Systems - Ownership (September 30, 2013) A-shares B-shares Capital, % Votes, % Stefan Skarin company 100, , Catella funds 0 993, SHB Funds 0 960, Second Swedish National Pension Fund 0 922, Ribbskottet AB 0 750, Martin Bjäringer 0 600, Fidelity funds 0 533, Carl Rosvall company 0 486, Lannebo funds 0 445, Avanza Pension Försäkring AB 0 419, Other 0 6,099, Total 100,000 12,532, Source: SIS Ägarservice There have been only minor changes among the ten largest shareholders since the end of the second quarter. IAR Systems

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