IAR Systems Group AB Q3 Another strong report Analyst: Johan Broström +46 70 428 31 74 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 10/22/14 75 75 70 70 65 65 60 60 55 55 50 50 45 45 40 40 35 35 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 350 25% 300 20% 250 15% 200 150 10% 100 5% 50 0 0% 2010 2011 2012 2013 2014E 2015E Sales (MSEK) EBIT margin Adjusted EBIT-margin (excl. capitalised development exp.) Source: Remium Nordic (SEK million) 2012 2013 2014E 2015E 2016E Share price (SEK) 68.25 Sales 230.1 236.2 261.5 304.8 340.8 12 month high/low 41.0/75.0 EBIT 35.2 41.3 54.2 67.2 69.9 No. of shares outstanding (m) 12.6 Pre-tax profit 35.1 41.4 54.7 67.8 70.6 No. of shares diluted (m) 12.6 EPS, diluted (SEK) 1.12 2.40 3.37 4.02 4.19 Market Cap. (MSEK) 862.0 DPS (SEK) 2.00 5.00 3.00 3.50 3.75 Net debt(+)/asset(-) (MSEK) -57.2 Enterprise value (MSEK) 804.8 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 1.7 2.0 3.1 2.6 2.3 Bloomberg: IARB:SS EV/EBIT 10.9 10.9 14.9 11.8 11.1 Listing: Nasdaq OMX Stockholm Small Cap P/E 33.3 17.7 20.2 17.0 16.3 Company web: www.iar.com 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.
Better sales and margin IAR Systems reported third-quarter sales more than 18% higher than in the same period 2013. 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 2013. 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: Q3 2014 IAR Systems: Q3 2014 (SEK million) Actual Remium Diff Sales 64.9 63.4 2.4% Gross profit 61.0 60.0 1.7% EBITDA 18.4 17.6 4.5% EBIT 15.6 14.8 5.4% Cap. Dev. Expenses* 3.0 4.3-30.2% 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 2015. 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 2016. 2 IAR Systems 2014-10-24
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 2014-10-24 3
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) 250 200 150 100 50 0 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 2013-2015E Enea 58.5 951.3 462.2 98.9 21.4% 4.79 1.8 8.2 12.2 6.4% FormPipe 5.8 288.3 356.2 41.5 11.6% 0.54 0.8 6.6 10.7 10.0% IFS 220.5 5,462.2 3,115.0 422.0 13.5% 12.40 1.7 12.4 17.8 6.6% Micro Systemation 15.4 276.2 170.0 27.9 16.4% 1.26 1.4 8.5 12.2 11.2% Readsoft* 56.5 1,729.1 855.0 70.8 8.3% 1.73 1.9 23.4 32.6 6.0% Seamless 21.8 913.6 331.8-17.9-5.4% -0.36 2.1-38.6-59.8 43.4% Vitec Software 133.0 771.2 566.9 87.2 15.4% 10.62 1.6 10.4 12.5 19.3% Total 10,392.0 5,857.1 730.3 12.5% 1.7 13.4 17.4 9.3% Median 13.5% 1.7 9.4 12.4 10.0% IAR (Est. Remium) 68.3 858.4 302.4 65.5 21.6% 3.92 2.7 12.5 17.4 14.6% Source: FactSet, Remium Nordic Aggregated P/E ratios exclude negative numbers 4 IAR Systems 2014-10-24
Financial performance INCOME STATEMENT, SEK million 2011 2012 2013 2014E 2015E 2016E Sales 200 230 230 262 305 341 EBIT DA 29 42 51 65 80 85 Depreciation & amortisation -5-7 -9-11 -13-14 EBIT 24 35 41 54 67 70 Net financials 0 0 0 1 1 1 Pre-tax profit 24 35 41 55 68 71 Extraordinary items 0 0 0 0 0 0 T axes 3-22 -12-12 -17-18 Net profit (continuing operations) 27 13 30 43 51 53 BALANCE SHEET, SEK million Other fixed assets 219 220 229 233 232 226 Net property plant and equipment 6 6 6 7 9 10 Receivables 44 43 49 49 57 64 Cash & cash equivalents 37 52 82 58 74 91 = T otal assets 309 324 370 352 377 396 Equity 241 254 295 273 286 295 Interest bearing debt 2 2 2 2 2 2 Non-interest bearing liabilities 66 68 72 77 88 98 = T otal liabilities 68 70 75 79 91 101 CASH FLOW, SEK million + Pre-tax profit 24 35 41 55 68 71 + Depreciation 5 7 9 11 13 14 - T axes 0-5 -7-4 -4 0 - Other items 9 3 3 0 0 0 Cash Earnings 38 40 47 62 77 85 - Increase in Net Working Capital 5-1 -6 2 3 3 = Cash flow from operations 43 38 41 64 80 88 - Investments -27-18 -19-24 -26-28 - Other items 0 0 0 0 0 0 = Free Cash Flow 16 20 22 40 54 60 +/- Change in debt and other items -40-1 -1 0 0 0 +/- New issues/buybacks 1 12 35 0 0 0 - Paid dividend 0-11 -23-63 -38-44 Change in cash -24 19 33-23 16 16 IAR Systems 2014-10-24 5
Key figures and valuation KEY FIGURES 2011 2012 2013 2014E 2015E 2016E M-cap 320 433 531 862 862 862 Net debt -35-49 -79-56 -72-88 Enterprise value 286 384 451 806 790 774 Valuation Multiples EV/Sales 1.4 1.7 2.0 3.1 2.6 2.3 EV/EBIT DA 9.7 9.2 8.9 12.4 9.9 9.2 EV/EBIT 11.9 10.9 10.9 14.9 11.8 11.1 EV/Operating Free Cash Flow* 18.2 19.0 21.0 20.5 14.8 13.0 P/E 11.9 33.3 17.7 20.2 17.0 16.3 P/E excl. goodwill 11.9 33.3 17.7 20.2 17.0 16.3 P/B 1.3 1.7 1.8 3.2 3.0 2.9 P/Sales 1.6 1.9 2.3 3.3 2.8 2.5 P/FCF 20.3 21.4 24.6 21.7 16.0 14.4 Per Share Measures Share price, year-end or current 29.0 38.1 43.0 68.3 68.3 68.3 No. of shares outstanding, year-end (m) 11.1 11.4 12.3 12.6 12.6 12.6 EPS 2.44 1.17 2.59 3.40 4.03 4.19 Free Cash Flow per share 1.43 1.78 1.75 3.14 4.28 4.74 Capital employed per share 22.00 22.54 24.10 21.79 22.81 23.50 Book value per share 21.82 20.52 23.68 21.57 22.60 23.29 Dividend per share 1.00 2.00 5.00 3.00 3.50 3.75 Dividend payout ratio, % 41 172 193 88 87 90 Dividend yield, % 3.4 5.2 11.6 4.4 5.1 5.5 Performance indicators, % Sales growth (%) 12.6 14.8 0.0 13.6 16.5 11.8 EBITDA margin (%) 14.7 18.2 22.0 24.8 26.2 24.7 EBIT margin (%) 12.0 15.3 17.9 20.7 22.0 20.5 EPS growth (%) 126-52 122 31 18 4 ROE 6 5 11 15 18 18 ROCE 5.7 14.1 14.9 18.9 23.9 23.9 Financial ratios Capex/sales, % 13.4 7.9 8.3 9.3 8.6 8.1 Net debt/ebitda (1.2) (1.2) (1.6) (0.9) (0.9) (1.0) Equity ratio 0.8 0.8 0.8 0.8 0.8 0.7 *) OFCF = FCF less Net Financial Items plus Tax on Net Financial Items 6 IAR Systems 2013-10-24
Quarterly performance IAR - Quarterly Profit and Loss 2012 2013 2014E (SEK million) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3A Q4E Net sales 58 56.4 56.2 59.5 57.7 56.1 54.9 61.5 62.0 62.7 64.9 71.9 Goods for resale -7.3-5.3-5.3-5.4-4.5-2.2-4.3-3.5-3.4-2.6-3.9-4.5 Gross profit 50.7 51.1 50.9 54.1 53.2 53.9 56.6 58.0 58.6 60.1 61.0 67.4 Other external expenses -10-12.6-10.5-11.4-10.7-10.2-8.1-10.3-10.7-9.5-10.3-12.4 Personnel costs -31.4-29.7-28.4-31 -32.1-34.0-28.6-35.1-34.2-35.4-32.3-37.6 EBITDA 9.3 8.8 12 11.7 10.4 9.7 17.9 12.6 13.7 15.2 18.4 17.5 Depreciation of tangible assets -0.5-0.5-0.6-0.7-0.7-0.5-0.4-0.6-0.5-0.5-0.7-0.7 Amortization of intangible assets -0.8-1 -1.3-1.2-1.6-1.5-2.1-1.9-1.8-2.0-2.1-2.2 EBIT 8 7.3 10.1 9.8 8.1 7.7 15.4 10.1 11.4 12.7 15.6 14.5 Financial income 0 0.4 0 0.4 0.1 0.1 0.0 0.2 0.3 0.2 0.0 0.1 Financial expenses -0.4 0-0.4-0.1-0.1 0.0-0.2 0.0-0.1 0.0 0.0 0.0 Pre-tax profit 7.6 7.7 9.7 10.1 8.1 7.8 15.2 10.3 11.6 12.9 15.6 14.6 Taxes -2.3-3 -1.2-15.6-2.1-1.8-4.2-3.4-3.1-3.2-2.2-3.7 Net profit 5.3 4.7 8.5-5.5 6.0 6.0 11.0 6.9 8.5 9.7 13.4 11.0 EPS (continuing operations) 0.48 0.42 0.75-0.48 0.53 0.53 0.96 0.58 0.69 0.77 1.06 0.87 EPS (continuing operations, diluted) 0.48 0.39 0.69-0.44 0.49 0.49 0.89 0.54 0.67 0.77 1.06 0.87 EPS, basic 0.48 0.42 0.75-0.48 0.53 0.53 0.96 0.58 0.69 0.77 1.06 0.87 EPS, diluted 0.48 0.39 0.69-0.44 0.49 0.49 0.89 0.54 0.67 0.77 1.06 0.87 Number of shares at end of period, million 11.05 11.35 11.36 11.36 11.39 11.39 11.72 12.34 12.53 12.58 12.63 12.63 Diluted number of shares, million 11.05 12.37 12.37 12.37 12.37 12.37 12.71 12.71 12.71 12.63 12.63 12.63 Average number of shares, million 11.05 11.15 11.19 11.36 11.36 11.39 11.40 11.91 12.34 12.55 12.51 12.63 Diluted average number of shares, million 11.05 12.17 12.2 12.37 12.37 12.37 12.39 12.68 12.71 12.60 12.63 12.63 Source: Company data, Remium Nordic Owners IAR Systems - Ownership (September 30, 2013) A-shares B-shares Capital, % Votes, % Stefan Skarin company 100,000 321,000 3.3 9.8 Catella funds 0 993,187 7.9 7.3 SHB Funds 0 960,790 7.6 7.1 Second Swedish National Pension Fund 0 922,530 7.3 6.8 Ribbskottet AB 0 750,000 5.9 5.5 Martin Bjäringer 0 600,000 4.7 4.4 Fidelity funds 0 533,192 4.2 3.9 Carl Rosvall company 0 486,640 3.9 3.6 Lannebo funds 0 445,953 3.5 3.3 Avanza Pension Försäkring AB 0 419,346 3.3 3.1 Other 0 6,099,423 48.3 45.1 Total 100,000 12,532,061 100.0 100.0 Source: SIS Ägarservice There have been only minor changes among the ten largest shareholders since the end of the second quarter. IAR Systems 2014-10-24 7
Disclaimer Disclaimer- Important Information This document is compiled by Remium Nordic AB ( Remium ) for general distribution and is not intended to constitute advice. This type of review is normally updated every quarter. The content is based on information from publicly available sources which are deemed reliable. However, Remium cannot guarantee the accuracy and completeness of the content or the forecasts provided. This document may not be distributed to physical or legal persons who are citizens of or domiciled in a country where such distribution is prohibited by applicable law or regulation. The information contained herein should not be construed as a solicitation or recommendation to enter into any transaction. The information is not geared to individual recipients knowledge and experience of investments, financial situation or investment objectives. The information is therefore not a personal recommendation or investment advice. Investors are urged to read additional relevant material and consult a financial advisor before making investment decisions. Remium disclaims all liability for direct or indirect damage which may be based on this review. Investments in financial instruments are associated with financial risk. Investments may increase or decrease in value or become entirely worthless. That an investment has historically had a good performance is no guarantee of future performance. Remium has established internal rules (policies and procedures) for ethical guidelines and to identify, monitor and manage conflicts of interest. These aim to prevent and preclude conflicts of interest between the research department and other departments within the company and are based on restrictions (Chinese walls) in communications between different departments. Remium has also established internal rules for when trading may take place in a financial instrument that is the subject of investment research. The views, recommendations and target prices in this analysis are based on one or more valuation methods. One common valuation method is cash flow analysis, in which future cash flows are discounted to their present value. Remium s analysts may also make use of different types of valuation multiples such as P/E and/or EV/EBIT, often related to comparable stocks. In some cases, a comparison may even be made between the asset value and the company's market value. Remium indicates a target price for most of the analysed companies. This is based on the analyst s perception of how the share should be valued today. Remium is a market leader in several business services relating to the stock exchange s small and medium sized companies, within Introduce, liquidity guarantees and certified advisor, and may perform analysis on behalf of and against payment from the companies that are tracked with, inter alia, the review research product. Remium has received or will receive remuneration for the performance of financial business services from the company in the analysis. The remuneration is agreed in advance and is not dependent on the content of the analysis. The principal analyst currently owns no shares in the company or related instruments. Remium is authorised to conduct securities operations and is regulated by the Swedish Financial Supervisory Authority (Finansinspektionen). 8 Remium Nordic AB Kungsgatan 12-14 111 35 STOCKHOLM, Sweden Tel. +46 8 454 32 00 Fax: +46 8 454 32 01 info@remium.com