IAR Systems Group AB Q2 Upside earnings surprise Analyst: Johan Broström +46 70 428 31 74 Date: 22 August 2014 Margins for IAR Systems were an upside surprise in Q2, pushing operating profit to SEK 12.7 million, or 65% higher than in Q2 2013, and above our forecast of SEK 9.6 million. Sales of SEK 62.7 million were in line with our forecast The better numbers can be attributed to a higher gross margin due to the continued phase-out of thirdparty products and lower overheads than expected Demand is described as strong in all markets, and organic growth is good in all markets including Americas, where growth in Q1 was hampered by lower sales of third-party products and organisational changes Currency effects, which have negatively affected growth and margins in the past last year, gave a weakly positive contribution, but given the current exchange rates the effect in the second half should be significant Expected positive currency impact in the second half and into 2015, plus lower overheads than previously forecast, mean that we are raising our outlook for operating profit for 2014 and 2015 by 11% and 3%, respectively Price for IAR Systems Group AB Class B (SE) in SEK as of 08/20/14 75 75 70 70 65 65 60 60 55 55 45 45 40 40 35 35 30 30 jul 13 aug 13 sep 13 okt 13 nov 13 dec 13 jan 14 feb 14 mar 14 apr 14 maj 14 jun 14 jul 14 aug 14 IAR Systems Group AB Class B OMX Stockholm Small Cap (Rebased) Source: FactSet Sales and Margin 3 25% 300 20% 2 15% 200 1 10% 100 5% 0 0% 2010 2011 2012 2013 2014E 2015E Sales (MSEK) EBIT margin Adjusted EBIT-margin (excl. capitalised development exp.) Source: Remium Nordic (SEK million) 2011 2012 2013 2014E 2015E Share price (SEK) 68.25 Sales 200.4 230.1 236.2 260.9 298.4 12 month high/low 35.3/75.0 EBIT 24.0 35.2 41.3 53.8 63.7 No. of shares outstanding (m) 12.6 Pre-tax profit 24.1 35.1 41.4 54.3 64.3 No. of shares diluted (m) 12.6 EPS, diluted (SEK) 2.44 1.12 2.40 3.20 3.81 Market Cap. (MSEK) 867.5 DPS (SEK) 1.00 2.00 5.00 3.00 3. Net debt(+)/asset(-) (MSEK) -39.4 Enterprise value (MSEK) 828.1 Sales growth 12.6% 14.8% 2.7% 10.4% 14.4% EPS growth 126.4% -54.3% 115.1% 33.4% 19.1% Chairman: Markus Gerdien EBIT-margin 12.0% 15.3% 17.5% 20.6% 21.3% CEO: Stefan Skarin RoE -4.5% 5.3% 10.9% 14.3% 17.5% CFO: Stefan Ström Reuters: IARb.ST EV/Sales 1.4 1.7 2.0 3.1 2.6 Bloomberg: IARB:SS EV/EBIT 11.9 10.9 10.9 14.9 12.4 Listing: Nasdaq OMX Stockholm Small Cap P/E 11.9 33.3 17.7 21.2 17.8 Company web: www.iar.com Dividend yield 3.4% 5.2% 11.6% 4.4% 5.1% 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.
Strong margins Q2 sales for IAR Systems were in line with our forecast, while earnings were significantly better: Table: Q2 2014 IAR Systems: Q2 2014 (SEK million) Actual Remium Diff Sales 62.7 62.9 0% Gross profit 60.1 59.1 2% EBITDA 15.2 12.2 24% EBIT 12.7 9.6 32% Cap. Dev. Expenses* 5.3 4.5 18% Source: Company report, Remium Nordic * Excluding acquired IP-rights amounting to SEK 6.6 million Strong demand in all markets leading to good organic growth IAR Systems notes that demand is strong in all markets. Development in the Americas region is now positive after the organisational changes implemented in Q1, which negatively affected sales. Furthermore, the trend towards a larger proportion of the company's own products smaller share of third-party sales has had a positive impact on the gross margin. We were surprised that overheads were lower than expected. Employee numbers decreased slightly in the second quarter as a result of efficiency measures, including in the sales organisation, and organisational changes in Americas. We do not anticipate further staff reductions, but expect employee numbers to rise slightly in the second half. However, this means that personnel costs for the second half will be slightly lower than in our previous forecast, which leads us to higher margin expectations. and positive currency effects should boost growth and margins in the second half and 2015 It was already apparent in the Q1 report that the negative currency effects, primarily depreciation of the JPY, which had a sharply negative impact on the company in 2013, had started to fade away. For Q2, the overall effect was slightly positive currency effects contributed 1% to sales growth. For the remainder of the year, however, the impact should be greater, with both the USD and EUR making a positive contribution and the negative impact of the JPY fading away. At current exchange rates, the contribution to growth for the full year is likely to be about 2%, with the same positive contribution in 2015. As most of the company's costs are made up of personnel expenses in Sweden, this will also have a positive impact on the margin. Even though we are factoring in expansion investments, we believe that IAR Systems will exceed its target of a 20% operating margin in both 2014 and 2015. 2 IAR Systems 2014-08-22
IAR Systems an entirely new company In recent years, IAR Systems has gone from faltering growth and earnings of around zero to a pure software company with stable growth and an operating margin of around 20%. Chart: Sales and operating margin (comparable units) 70 Sales and Margin 25% 60 20% 40 30 20 15% 10% 5% 0% -5% 10-10% 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2008 2009 2010 2011 2012 2013 2014 Sales, SEK million (LHS) Operating margin (RHS) Source: IAR Systems, Remium Nordic -15% Our assessment is that the focus going forward will be on growth rather than on further expansion of margins. The still ongoing digitisation of industries and, not least, the Internet of Things offer IAR Systems a good opportunity to exploit a growing market, so growth is now the company's key value driver. Despite the redemption programme last spring, the company has a net cash position of nearly SEK 40 million and its cash flow remains strong, giving the company the financial flexibility to take advantage of the opportunities offered. Sales growth organic and through acquisitionsshould be the focus going forward Strong performance on the stock market With the exception of Readsoft, which is currently under offer, IAR Systems is the strongest-performing listed software company over the past year, which means the valuation discount at the start of 2013 has now turned into a small premium. Its peer group is fairly diverse, partly because of widely differing growth and profitability numbers, and partly due to capitalisation of development costs that have different impacts, making sweeping comparisons precarious. In our view, however, IAR Systems is unique in its combination of rapid organic growth and top-class margins. IAR Systems 2014-08-22 3
Chart: Share price performance, Swedish software companies 230 Share price (indexed) 210 190 170 1 130 110 90 70 IAR Enea Formpipe IFS MSAB Readsoft Seamless Vitec Source: FactSet, Remium Nordic Table: Swedish software companies key figures and valuations 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 60.0 975.7 462.5 99.5 21.5% 4.83 1.8 8.4 12.4 6.4% FormPipe 6.1 305.9 365.1 45.0 12.3% 0.61 0.8 6.5 10.1 11.4% IFS 222.0 5,499.3 3,115.0 422.0 13.5% 12.40 1.7 12.5 17.9 6.6% Micro Systemation 15.2 272.7 170.0 27.9 16.4% 1.26 1.4 8.3 12.1 11.2% Readsoft 57.0 1,744.4 855.0 70.8 8.3% 1.73 2.0 23.6 32.9 6.0% Seamless 25.0 1,047.8 331.8-17.9-5.4% -0.36 2.5-46.1-68.6 43.4% Vitec Software 137.3 795.8 535.0 87.7 16.4% 10.93 1.7 10.6 12.6 15.9% Total 10,641.6 5,834.3 734.9 12.6% 1.7 13.7 17.3 9.1% Median 13.5% 1.7 9.5 12.5 11.2% IAR (Est. Remium) 68.0 852.4 298.4 63.7 21.3% 3.81 2.7 12.8 17.8 13.9% Source: FactSet, Remium Nordic Aggregated P/E ratios exclude negative numbers 4 IAR Systems 2014-08-22
Financial performance INCOME STATEMENT, SEK million 2010 2011 2012E 2013 2014E 2015E Sales 178 200 230 230 261 298 EBIT DA 16 29 42 51 65 76 Depreciation & amortisation -4-5 -7-9 -11-12 EBIT 12 24 35 41 54 64 Net financials 0 0 0 0 0 0 Pre-tax profit 12 24 35 41 54 64 Extraordinary items 0 0 0 0 0 0 T axes 0 3-22 -12-14 -16 Net profit (continuing operations) 12 27 13 30 40 48 BALANCE SHEET, SEK million Other fixed assets 662 219 220 229 231 231 Net property plant and equipment 6 6 6 6 7 8 Receivables 49 44 43 49 49 56 Cash & cash equivalents 25 37 52 82 58 70 = T otal assets 744 309 324 370 3 370 Equity 599 241 254 295 271 281 Interest bearing debt 12 2 2 2 2 2 Non-interest bearing liabilities 152 66 68 72 76 87 = T otal liabilities 146 68 70 75 79 89 CASH FLOW, SEK million + Pre-tax profit 12 24 35 41 54 64 + Depreciation 4 5 7 9 11 12 - T axes -1 0-5 -7-4 -3 - Other items -95 9 3 3 0 0 Cash Earnings -81 38 40 47 61 73 - Increase in Net Working Capital 100 5-1 -6 2 3 = Cash flow from operations 20 43 38 41 63 76 - Investments -21-27 -18-19 -24-26 - Other items 0 0 0 0 0 0 = Free Cash Flow -1 16 20 22 39 +/- Change in debt and other items 10-40 -1-1 0 0 +/- New issues/buybacks 0 1 12 35 0 0 - Paid dividend -14 0-11 -23-63 -38 Change in cash -6-24 19 33-24 12 IAR Systems 2014-08-22 5
Key figures and valuation INCOME STATEMENT, SEK million 2010 2011 2012E 2013 2014E 2015E Sales 178 200 230 230 261 298 EBIT DA 16 29 42 51 65 76 Depreciation & amortisation -4-5 -7-9 -11-12 EBIT 12 24 35 41 54 64 Net financials 0 0 0 0 1 1 Pre-tax profit 12 24 35 41 54 64 Extraordinary items 0 0 0 0 0 0 T axes 0 3-22 -12-14 -16 Net profit (continuing operations) 12 27 13 30 40 48 BALANCE SHEET, SEK million Other fixed assets 662 219 220 229 231 231 Net property plant and equipment 6 6 6 6 7 8 Receivables 49 44 43 49 49 56 Cash & cash equivalents 25 37 52 82 59 71 = T otal assets 744 309 324 370 3 370 Equity 599 241 254 295 271 281 Interest bearing debt 12 2 2 2 2 2 Non-interest bearing liabilities 152 66 68 72 76 87 = T otal liabilities 146 68 70 75 79 89 CASH FLOW, SEK million + Pre-tax profit 12 24 35 41 54 64 + Depreciation 4 5 7 9 11 12 - T axes -1 0-5 -7-4 -3 - Other items -95 9 3 3 0 0 Cash Earnings -81 38 40 47 62 73 - Increase in Net Working Capital 100 5-1 -6 2 3 = Cash flow from operations 20 43 38 41 64 76 - Investments -21-27 -18-19 -24-26 - Other items 0 0 0 0 0 0 = Free Cash Flow -1 16 20 22 40 +/- Change in debt and other items 10-40 -1-1 0 0 +/- New issues/buybacks 0 1 12 35 0 0 - Paid dividend -14 0-11 -23-63 -38 Change in cash -6-24 19 33-23 12 6 IAR Systems 2013-08-22
Quarterly performance IAR - Quarterly Profit and Loss 2012 2013 2014E (SEK million) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2A Q3E Q4E Net sales 58 56.4 56.2 59.5 57.7 56.1 54.9 61.5 62.0 62.7 63.4 72.8 Goods for resale -7.3-5.3-5.3-5.4-4.5-2.2-4.3-3.5-3.4-2.6-3.3-4.4 Gross profit.7 51.1.9 54.1 53.2 53.9 56.6 58.0 58.6 60.1 60.0 68.4 Other external expenses -10-12.6-10.5-11.4-10.7-10.2-8.1-10.3-10.7-9.5-9.8-12.4 Personnel costs -31.4-29.7-28.4-31 -32.1-34.0-28.6-35.1-34.2-35.4-32.1-37.3 EBITDA 9.3 8.8 12 11.7 10.4 9.7 17.9 12.6 13.7 15.2 17.6 18.0 Depreciation of tangible assets -0.5-0.5-0.6-0.7-0.7-0.5-0.4-0.6-0.5-0.5-0.6-0.6 Amortization of intangible assets -0.8-1 -1.3-1.2-1.6-1.5-2.1-1.9-1.8-2.0-2.2-2.5 EBIT 8 7.3 10.1 9.8 8.1 7.7 15.4 10.1 11.4 12.7 14.8 14.9 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 14.8 15.0 Taxes -2.3-3 -1.2-15.6-2.1-1.8-4.2-3.4-3.1-3.2-3.7-3.8 Net profit 5.3 4.7 8.5-5.5 6.0 6.0 11.0 6.9 8.5 9.7 11.1 11.2 Discontinued operations, net Profit for the period 5.3 4.7 8.5-5.5 6.0 6.0 11.0 6.9 8.5 9.7 11.1 11.2 EPS (continuing operations) 0.48 0.42 0.75-0.48 0.53 0.53 0.96 0.58 0.69 0.77 0.88 0.89 EPS (continuing operations, diluted) 0.48 0.39 0.69-0.44 0.49 0.49 0.89 0.54 0.67 0.77 0.88 0.88 EPS, basic 0.48 0.42 0.75-0.48 0.53 0.53 0.96 0.58 0.69 0.77 0.88 0.89 EPS, diluted 0.48 0.39 0.69-0.44 0.49 0.49 0.89 0.54 0.67 0.77 0.88 0.88 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 12.58 12.58 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 12.58 12.58 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 (June 31, 2013) A-shares B-shares Capital, % Votes, % Stefan Skarin company 100,000 321,000 3.3 9.8 Catella funds 0 1,014,919 8.1 7.5 Second Swedish National Pension Fund 0 922,530 7.3 6.8 SHB funds 0 864,818 6.9 6.4 Ribbskottet AB 0 7,000 6.0 5.6 Martin Bjäringer 0 600,000 4.8 4.5 Carl Rosvall company 0 486,640 3.9 3.6 Fidelity funds 0 484,136 3.8 3.6 Lannebo funds 0 445,953 3.5 3.3 Avanza Pension Försäkring AB 0 384,656 3.1 2.9 Other 0 6,201,909 49.3 46.0 Total 100,000 12,476,561 100.0 100.0 Source: SIS Ägarservice The biggest change in the second quarter was that Fidelity Funds joined the ten largest shareholders. IAR Systems 2014-08-22 7
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