Seeing Machines is next Mobileye

Yesterday’s news that the EU is to mandate Driver Monitoring Systems (DMS) by 2020 confirms my view that Seeing Machines is set to be the next Mobileye. (Something that respected FinnCap analyst Lorne Daniel first told us years ago).

People are waiting for Euro NCAP to specify that camera-based systems are its preferred option for DMS but I’m confident that this will be the case. (They’ve been ahead of the curve all along).

I’m particularly confident because Semicast’s Lead Analyst Colin Barnden recently explained to me that there are 4 types of DMS:

1. Steering angle sensor (coffee cup)

2. Embedded capacitive touch sensor (steering wheel)

3. Time-of-flight (likely DOA)

4. Camera-based (Seeing Machines, Smart Eye etc.)

This was his conclusion: “The first two are very cheap but not particularly reliable.  ToF fits in between and is unlikely to meet any OEMs needs. Camera-based is what I believe Euro NCAP will specify.”

Of course, the decision hasn’t been announced yet by Euro NCAP.

Market opportunity

While we await confirmation, there is also clearly a debate about the size of the market opportunity for Seeing Machines following the announcement.

At one extreme, ABI Research previously stated 65m by 2020.

At the other end, John-Marc Bunce, analyst at house broker Cenkos yesterday doubled his estimate saying: “Our long-term forecasts for Seeing Machines previously envisaged 4m vehicles globally in the financial year ended June 2022 rising to 15m by 2027 and we believe this EU mandate could easily double our expectations.”

Now Colin Barnden on May 16 (before the EU announcement) estimated 20m units by 2021. Today I asked him for his latest view. Here it is. (What follows below is all him, unedited by me).

“I await further details from Euro NCAP before changing the forecast, so a worldwide market for camera-based DMS of about 20 million units in 2021 still stands. That includes just passenger cars and light trucks, so there will be further volume in busses, coaches and heavy trucks too.

The broad effect of yesterday’s announcement is to move all of Europe to “Level 2” on the SAE automation taxonomy as of 1 September 2022, with both longitudinal and lateral correction provided by autonomous emergency braking (AEB) and lane keep assistance systems (LKAS). This is a step change in vehicle safety and the EC is to be applauded for its decisiveness. I expect the EC would have been influenced in its decision making by recent events in the US, with some members of the tech community moving too fast and breaking things, in their efforts to be first to deploy “Level 5” driverless vehicles. In comparison, the EC has gone for the simple and sensible approach of just making humans drivers into better drivers, by mandating systems which are proven, easy to understand and cost effective for immediate mass-market deployment.

Mobileye

I note your post about Mobileye earlier this week. If you were to take a market size of 20 million units for camera-based DMS and apply your other estimates, you would have a revenue for Seeing Machines just in automotive of about USD 375 million in 2021. If you compare that to Mobileye’s revenues of about USD 360 million for 2016 then some interesting conclusions can be drawn. If your reader’s are interested, the full Mobileye 20-F filed with the US SEC can be viewed at:

https://www.sec.gov/Archives/edgar/data/1607310/000157104917001997/t1700397_20f.htm

The part of the Seeing Machines business model which seems to me to be completely overlooked by the market is the recurring revenues provided by the Safety-as-a-Service (SaaS) component of the Guardian business unit.  It won’t take much for SM’s revenues and profits to pass those of Mobileye on a three-to-four year horizon in my opinion. Mobileye were of course bought by Intel in 2017 for USD 15.3 billion.”

EU mandates DMS for 2020

As part of a move to make European roads safer the EU today recommended making driver monitoring systems mandatory for new cars. It’s a momentous decision that is great news for Seeing Machines, causing its share price to shoot up today and Cenkos to upgrade its price target from 10p to 16p.

I asked Colin Barnden Lead Analyst at Semicast Research for his reaction and this is it:

Colin Barnden: So the paint is still wet from the announcements today, but I can draw some basic conclusions.

The EC has today announced the WHEN for a series of automotive systems to become mandatory, a list which includes distracted & drowsiness driver monitoring systems (DMS). My reading of the timeline is as follows:

  • 1 September 2020 for Type Approval (the certification process for new models, facelifts, major changes etc.).
  • 1 September 2022 for all other new cars, irrespective of Type Approval.

That is a two year phase-in period, and from today to the beginning of September 2022 gives a little over four years. That is a sensible timeframe over which to introduce a new technology like DMS.

The EC appears to have left the WHAT of a DMS to be defined by Euro NCAP and I expect the specifics of DMS requirements to follow in short order. This doesn’t guarantee that camera-based DMS will be mandated, nor specified by Euro NCAP. However looking at some of the other systems on the list (AEB, LKAS, ISA, EDR) these are all electronic systems so it would not follow that a mechanical (and very poor) DMS would be specified, even more so for a primary safety feature. Also the entire focus of this regulatory announcement is road safety. I regard AEB, ISA and LKAS as systems needed to compensate for distracted and drowsy drivers, so the obvious way to improve road safety is not so much to correct speed and steering errors, but to keep hands on the wheel, eyes on the road and minds on the task [of driving]. The very best DMS is the obvious way to do that and that points to a camera-based system, from the likes of Seeing Machines for example.

There are two excellent articles I would suggest as backgrounders for your readers for DMS:

http://www.thedrive.com/tech/20843/elon-musk-reportedly-rejected-driver-monitoring-for-tesla-autopilot-but-why

https://www.eetimes.com/document.asp?doc_id=1333236

If I were to also speculate on the WHERE; my view is that Japan will go next for mandatory DMS, probably followed by South Korea. Also, OEMs in the US are on a voluntary agreement (not mandated by NHTSA) to introduce AEB by 2022. I would speculate that they would be highly likely to add DMS on the same timeline.

The key is now what Euro NCAP announce.

Chris Menon: What exactly is the difference between ‘Type Approval’ cars and other new cars?

Colin Barnden: Okay. So, as an example, take the VW T-ROC. It was just launched and would have gone through Type Approval probably late last year. Type Approval is a bit like a new car MOT, someone looks over it and says: “Yes it has seat belts, yes, it has airbags, yes, it has brakes etc.” If it meets all the legislation in place at the time it gets… ‘Type Approval’. Provided no changes are made to the car it maintains Type Approval and no more need be done. Sometimes this can last for four or five years until the model is refreshed. However, from 1 September 2022, new T-ROCs would need to have DMS added, not for Type Approval (which it already has) but to be legal for sale.

Now take a next generation Golf going for Type Approval on 2 September 2020. The list will have another entry “yes, it has DMS” and you get Type Approval. If it doesn’t have DMS, it doesn’t get Type Approval and cannot be sold in the EU.

So on 1 September 2020, only cars going through Type Approval will have to have DMS (or a bit before most likely). By 1 September 2022, it will be in 100% of new cars sold in the EU. This is how the phase-in is managed.

Seeing Machines set to win 75% of global DMS market

Multiple industry sources are telling me that Seeing Machines’ Fovio technology is so advanced compared to rival systems that it is set to dominate the global auto market for DMS.

This market is growing fast and last year was estimated by ABI Research to be around 65m cars a year by 2020. Although I personally think this figure is now likely to prove an underestimate, given the fact that a driver monitoring system is becoming a standard feature in forthcoming car models. This trend is being driven (I love my puns) by increasing autonomy in cars, higher safety standards and legislation to reduce road deaths caused by driver inattention and drowsiness.

By my calculations, just using the 65m figure for 2020: Fovio will have at least 75% of that. As Seeing Machines (SEE) gets approximately US$25 for each car that uses its Fovio chip it should obtain annual revenues from autos of US$1.2bn.

How can I be so sure of this 75%+ figure?

Ford, Volvo and Audi

Admittedly, it is an estimate. But based on research.

I’m being told that Fovio will soon be contracted to Ford, Volvo and Audi. (That’s in addition to General Motors, Mercedes and BMW). Moreover, those same sources are telling me that by the end of this calendar year Toyota will definitely be committed to using it and, most likely, Honda.

Don’t expect absolute confirmation immediately. When they are eventually announced these contracts will be released as nameless wins, contracts for ‘premium’, ‘mass market’ country-specific OEMs. Seeing Machines will also have to be very conservative about the revenues forecast.

For those who know Seeing Machines as a perennial disappointment, a ‘jam-tomorrow’ stock, I urge them to look again at its growing dominance in the global automotive sector. This dominance in DMS now rivals that of Mobileye in external auto vision.

Fund Manager

If you don’t believe a dumb ‘ol journalist, maybe a super smart fund manager may make you look again at Seeing Machines?

Max Ward, Manager of The Independent Investment Trust, recently took a 4.46% stake in SEE. I wanted to know why and he kindly furnished me with the answer: “What attracted me to the business is the scale of the potential in the automotive division together with the evidence of clear market leadership in the DMS field.”

Previously, SEE successfully flew beneath the radar.  This was partly helped by its not having a PR agency in London, the harsh non-disclosure terms prevalent in the auto industry and the fact it was an AIM-listed minnow.

Fortunately, all that hasn’t prevented the global auto industry rushing to knock on its doors as increasing automation and safety concerns have led to tightening regulation, making its Fovio technology a vital ‘must have’ feature in future car models.

Now, at last, Seeing Machines is about to have the spotlight focused directly upon it. For dominance in global DMS makes it a very attractive strategic acquisition for big industry players.

Takeover time

Just as Mobileye was snapped up by Intel for US$15.3bn, Seeing Machines is likely to be bought fairly soon.

Indeed, I believe numerous companies now have Seeing Machines in their sights as a target this year. Who will pull the trigger first, I wonder? Names that have been mentioned to me recently include: Intel, Nvidia, Xilinx, Autoliv and Bosch.

Let the takeover battle begin.

The writer holds stock in Seeing Machines.

Seeing Machines compared to Mobileye

I recently asked Colin Barnden, Lead Analyst at Semicast Research for his views on Seeing Machines. I’ve reproduced my original questions and his reply in full, as his insights are worthy of a wider audience and deserve to be accurately reported.

Chris Menon: I’m very keen to find out what you think might be the likely valuation of Seeing Machines in the event of a takeover, if you’d care to speculate. Can it be likened to Mobileye in terms of its dominance of DMS? I’m also eager to know if you think there is much real competition? From what I hear Smarteye is a very distant second and its technology is in no way of comparable quality or reliability.

Colin Barnden: “I’m a market analyst not a financial analyst so the issues of valuation are out of my areas of expertise. That said, I don’t think there is a single financial analyst who could accurately value Seeing Machines (SM) as the company is active in so many markets and at so many points in the supply chain. SM also seem to be creating markets as they go along, which is highly cash intensive and has a long “time-to-money”. However get the strategy right and the rewards can be extraordinary. See Google, Facebook and Netflix as examples.

Mobileye is probably a good comparison to SM. Yes there is plenty of serious competition in DMS but what I see tends to happen in IP markets is that one company dominates and then everyone else is competing for what’s left. For example Mobileye has something like 65% of the automotive front camera market, with Xilinx the clear number 2. Which Tier 2 becomes number 1 for DMS depends largely on whether price or features matters most to OEMs.

I suspect it will be features…here is a document I have been reading that I believe pre-announces changes to vehicle legislation [for automotive] for the EU, to be made on May 16: https://www.governmenteuropa.eu/important-year-vehicle-safety-europe/84888/

My reading of it is that DMS becomes mandatory for all cars in Europe from 2020 and with a focus on both drowsy driving and distraction. That suggests camera-based DMS eye-gaze tracking for distraction and PERCLOS (PERcentage CLOSure) eyelid measurement for drowsiness. This is really complex to do well and not many Tier 2s can. The mention of an event data recorder also suggests a Tier 1 might go for a more complex DMS in order to save cost on the DMS/EDR combination. I also read into the announcement that alcohol impairment detection is likely to be a future feature for DMS.

I don’t cover trucks but the legislation there tends to front-run that for automotive by a few years. I really would not be surprised if DMS was made mandatory in Europe for all trucks and buses too, and to my knowledge SM is in a party of one for aftermarket fleet systems (with Guardian).

I’ll be watching on May 16  to see what the EU formally announces. If they mandate everything listed in that article, that would be a step change in road safety. In my view DMS will be the story of the 2020s, with autonomous driving not likely in any meaningful volume until the 2030s.”