A quality Q2 beat reinforces our view that IAR Systems is gradually coming back to an accelerated profitable growth trajectory after a long negative EPS revisions trend. We do not believe IAR Systems is immune to weakening IT spending but highlight that its 2023 earnings should grow from base that is already ~30% below 2018 levels with positive commercial momentum from its new products exposed to high-growth megatrends, such as IoT, RISC-V and cybersecurity. We have raised our 2022-2023e EPS by 13% and our fair value to SEK140-250 (130-220).
Strong Q2 report any way we look at it. Organic sales growth accelerated to 14% (our estimate: 11%) driven mainly by an organic uptick in new license sales, which rose 25% YOY, and trends in Europe and Asia (up 19% YOY organic, respectively). With a 97.1% gross margin, tight opex control and less boost from capitalised development costs, this set up an EBIT margin of 18.2% (up 3.8%-points YOY, 2% above our estimate). We are encouraged that IAR's 'rule of 40' was finally back above 40%, after 12 quarters in the 0-30% range, while FCF rose 50%+ YOY. We are cautiously optimistic to its repackaged security offering, which appears to be gaining commercial momentum, where it has signed several deals in Q2 (including a US Federal department). Moreover, IAR's recently launched extension to Microsoft's VS Code (has 14m+ active users) should broaden user adoption considerably, we believe.
2022-2023e EPS raised by 13%, 3%-points of which we attribute to its strong Q2 performance (indicating accelerating operating momentum) and 10%-points to FX tailwinds. We now forecast 10% organic sales growth YOY for 2022e, considering IAR's 5% price increases (the first in six years) and a 20.9% adj. EBIT margin, which corresponds to 50%+ adj. EBIT growth in H2e.
Fair value raised to SEK140-250, based on a peers' multiples regression, IAR's historical valuation, and a DCF, corresponding to a 2023e EV/EBIT of 13-26x.
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Joachim Gunell | DNB Markets | Equity Research
DNB Bank ASA, Filial Sverige
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