Cadillac extension gives Seeing Machines US$10m boost

News from Motor Authority that Cadillac is rolling out Super Cruise across its entire range of Cadillacs from the end of 2020 is very positive for Seeing Machines, as the system incorporates its Driver Monitoring System (DMS).

Cadillac

Global sales for Cadillac were 356,00 in 2017 and at approximately US$10 a car (only software being used not the chip, apparently), Seeing Machines can look forward to initial revenues with milestone payments of up to US$10m. Thereafter, annually it is likely to be less unless GM moves to a Gen 2 chip or extends the DMS to its entire range of cars.

The Super Cruise system, which enables safe hands-free semi-autonomous driving, was only this week voted the 2019 Technology of the year by Autoblog.

This extension across the entire Cadillac range is certainly materially important, so I’d expect a full RNS at some point. Personally, I think its the first stage in what eventually will be a roll-out across all GM cars. For, just as every car now has seat-belts, DMS is going to be mandated as an essential system around the world to prevent accidents from driver fatigue and inattention.

I’m also expecting confirmation, whether from news articles or RNS announcements, of several other huge auto OEM wins over the next few months.

Fleet

It’s also very encouraging to learn that First Bus, one of the UK’s leading bus operators, to deploy Guardian to numerous bus services across the UK & Ireland.

In the blog post on the Seeing Machines website (why not via an RNS?) the company revealed: “Following an extended evaluation of at the Reading RailAir coach service, running from Reading train station to Heathrow Airport, First Bus has decided to rollout the technology further across their fleet.

“Phase one of the agreement is the fit-out of Guardian to a number of services in the UK and Ireland and has begun with Glasgow Buchanan Street Bus Station to Glasgow Airport. The installation across the region will comprise a mix of retrofit to existing coaches and new builds with Guardian pre-installed. This phase is expected to cover more than 70 buses and coaches and to be completed in early 2019.”

Broker notes

I look forward to Cenkos, and yes even Canaccord Genuity, soon producing updated estimates for this year and well beyond. This is because I believe projected revenue growth over the next 3 years, led by auto, will amaze many. Moreover, contracted revenues should grow exponentially this year, led by further deals with auto manufacturers who are keen to incorporate Seeing Machines Fovio driver monitoring technology into their cars.

The writer holds stock in Seeing Machines.

Waymo good news to come

I’m convinced Waymo has chosen to use Seeing Machines Backup Driver Monitoring System (BdMS). (As predicted by “The notorious blogger” a few months ago).

This follows hints on social media, great reporting from US journalist Amir Efrati at The Information about the incorporation of a BdMS in Waymo ‘driverless’ vehicles and the reluctance of Waymo to refute suggestions that it is using Seeing Machines’ eye-tracking technology.

Oh, and let’s not forget an RNS issued by Seeing Machines on September 11th announcing its first BdMS win, which stated other customers were on the way.

Here’s the sentence from that RNS: “Seeing Machines has signed an agreement with one customer and is in advanced discussions with a number of companies at the forefront of autonomous vehicle development.”

In addition, I’m expecting much more positive contract news on the OEM front in the first quarter of 2019. Plus I’m looking forward to the launch of the Byton M-Byte SUV featuring the Fovio chip in late 2019 in China (US and Europe in 2020). What a great looking car it is.

Funding concerns

Now the share price is in the doldrums and fears of a dilutive fundraise are part of the reason.

Re. funding concerns, I think Seeing Machines will probably need more cash to service this growing demand by the end of June 2019 at the latest.

Note that Jean-Marc Bunce, analyst at house broker Cenkos, stated in a note published on September 19th that there was no immediate cash requirement and that SEE had a “clear cash runway through FY19.”

Still, he did add: “Our model indicates a cash requirement of A$15-20m in FY20, based on these projections.”

My own thinking is that when more OEMs officially come on board, cash requirements to fund that work will be needed sooner, more likely by April 2019.

I don’t see this as a negative, provided there is little or no dilution to existing shareholders. Indeed, Seeing Machines has to grab as much OEM land as possible next year.

I believe it will succeed in the doing the latter.

Funding options

Personally, I don’t think existing institutional investors will be keen to support yet another annual fundraise before more auto OEM contracts are announced. An alternative would be to trawl round new investors but why dilute existing investors with such an unimaginative move?

A CAT-style deal for fleet, with a chunky up-front payment (say A$30-50m) would be a better option.

Alternatively, a very imaginative option might be to raise some debt via a convertible bond. I noted that the new CFO, Luke Oxenham has experience of raising cash via bond issuance. Moreover, with big company experience I’m hoping he will be willing to consider big company actions.

Logically, there must have been a reason this sentence was included in the official RNS: “Luke has substantial experience of integrating business planning, business performance and capital modelling and of accessing various sources of capital from the debt and equity markets.”

Tesla used convertibles in 2014 to raise US$2bn. Twitter also recently used it to raise US$1bn according to Reuters.

So Luke, how about this? A 5-year convertible bond with a conversion price of 8p at around 6%–7% interest. (Okay, I admit the idea came from someone much smarter than me.) I’d prefer a 20p conversion price!

The writer holds stock in Seeing Machines.

Level 4 is dead, long live Seeing Machines

Here’s the latest piece of analysis from Colin Barnden, Lead Analyst at Semicast Research on Seeing Machines, Driver Monitoring Systems (DMS) and the auto industry.

“EuroNCAP has moved to 2022*. This is why contracts aren’t being announced, as OEMs and T1s have more time to do evaluations (see Hansen Report). Ironically, the delay takes away the ‘Takata penalty’ hanging over Seeing Machines. Had 2020 stood for camera DMS, pretty much every OEM would have had to go with SmartEye, other Tier 2s or the in-house Japanese Tier 1s. The first half of 2019 is likely to be busy for OEM direct wins, ready for 2022.

Level 4 is dead for mass market vehicles. The trend I see is ‘less autonomy, more DMS’ (L2/3 with DMS). That suggests to me the technically best DMS. The key part of Fovio is the hardware accelerators for real-time vision analysis (and to lower power consumption). ‘Hardware agnostic’ is a trade-off not a free ride. The significance of the 1.3 bn kms RNS in the summer is also now clear. Artificial Intelligence/Machine Learning is all about quantity of data. I see Seeing Machines even put live updates of the total on their website. This is smart.

OEMs are acutely aware of regulatory and political threats. Dieselgate was a disaster and emissions in general has been handled poorly. Now the political threat is number of road deaths (hence Vision Zero) and that issue is also being dumped on OEMs’ doormats. Waymo and robo-taxis are an existential threat, OEMs have got to find a way to reduce fatalities fast and win political points. They won’t mess up twice and DMS is the obvious way to proceed. Again that suggests technical excellence over anything. If they are smart, OEMs will ‘front run’ the politics and put DMS into everything as fast as they possibly can. There could be a huge ramp from 2023-2025. Again, a fast ramp up supports longer evaluation times and careful decisions for T1s and T2s.

That’s as far as market analysis can go. What matters now is the actual decisions OEMs make. My role is to make an argument but it is up to everyone to make their own individual decisions about how they think things will play out. No one has a crystal ball.”

*’Europe on the Move’ announced Advanced Distraction Recognition (camera-based DMS) from September 2023. EuroNCAP 5* requirements are looking like they will move to demand camera DMS about a year before.

Chris Menon holds Seeing Machines stock.

Eserve Global: a bargain share powered by Mastercard

I’ve found what I think could be a bargain share, Eserve Global (AIM: ESG). It’s price has fallen approximately 90% over the past couple of years, it’s unloved, currently loss-making and therefore ignored by most private investors. Thus, it has a ‘sucker stock’ rating from Stockopedia.

So far, so bad.

The good news is that FinnCap’s Lorne Daniel, an analyst who actually deserves that title, believes it is worth multiples of its current price. Okay, he is with the house broker but I genuinely value his views. Moreover, he tends to have a conservative bias on valuations, which means when he gets excited about the prospects for a stock I tend to take note.

In his latest note he puts a 20p price target on the stock, which is currently only 5.95p.

The main reason for investing is simply that  the Homesend joint venture, of which Eserve holds 35.69% (to Mastercard’s 64.31%) is set to become a major platform for cross-border transactions by global banks.

Cross-border payments is a  huge market and Lorne believes the HomeSend platform is applicable to around a tenth of it, making it a US$22 trillion market.

If HomeSend captures only a small fraction of that, commission payments to eserve will run into tens of millions of pounds. Logically, Mastercard won’t want to have a minority holder in the JV and will buy Eserve Global out.

This is clearly what Lorne believes, as stated in a note published on 27 September, 2018: “Success and significant earnings are now imminent, and we expect that Mastercard, a $220bn market cap global financial services giant, will be keen to secure the operation in totality.”

How much is Mastercard likely to pay? Well, Lorne Daniel states: “Mastercard shares currently trade on a P/E of 20.7x its forecast 2021 earnings. We expect HomeSend to deliver $45m of earnings in that year; worth $930m to Mastercard at present. It is entirely conceivable that Mastercard would value eServGlobal’s 35.7% stake at over $300m (£230m).”

Eserve also has its Paymobile operations valued at around £10m, which are possibly going to be sold before too long.

I’ve therefore taken a small position into what I believe could be a profitable investment over the next  6-12 months.

Of course, it’s not without risks. Mastercard could decide to be miserly about the takeout price, or it could take longer than expected to build up the transaction volumes via banks on the HomeSend platform. Yet, Mastercard appears fully committed to marketing this platform.

Nevertheless, I’d advise anyone thinking of investing to do some research. I can and do make mistakes, especially about the quality of management. Still, the Executive Chairman, John Conoley came across very well in an excellent interview with PI World.

The writer holds stock in Eserve Global.

Semicast Research on Seeing Machines

I recently wrote to Colin Barnden, Lead Analyst at Semicast Research, asking him about a tweet he sent on October 7th, in which he wrote:

Consider…Denso abandons DN-DSM for trucks to license manufacture of best-in-class Guardian from @seeingmachines. Exits relationship with FotoNation & signs non-compete agreement with SM for DMS, this clears Toyota to appoint Denso/SM to supply Fovio DMS for all cars & pickups.”

I’d assumed he was referring to auto and Toyota primarily but he wished to clarify at length this and other matters on which he disagrees with what I’ve written.

Therefore, in the interests of making Safestocks a forum for genuine debate to the benefit of all investors, I’ve included his comments in full.

Colin Barnden

“You have a number of different issues mixed up, both here and recently. I’ll have a go at unpicking some of it.

Firstly, the tweet was about Guardian and Denso, not auto and Toyota. SM have decided to abandon anything to do with contract manufacture and are heading for an IP-only business model. The problem with Guardian is the price/volume vortex – which is where Tesla are stuck. There is nothing wrong with Gen2 per se and SM have sensibly decided they cannot pour any more money or resources into manufacture and distribution. Dumb would have been to raise say £250M and try to become a global aftermarket company (suicide…and as an investor you’d have been wiped out). Smart is to let someone else with the necessary expertise make Gen2 and SM use the data and take the monthly SaaS revenues. No point reinventing the wheel.

There’s realistically three companies I see who are established aftermarket truck equipment suppliers that Guardian would make sense to go to: Bosch, Conti and Denso. Of those, Denso has already developed a competing product (DN-DSM) so it follows they see the value and are probably most interested. Take DN-DSM and FN out of the picture and Guardian is good to go. The point being if you make those relationship changes, it might open the door to an automotive agreement with Toyota too. That is just speculation (hence the word “Consider…”) and a Toyota deal is at the end of this long chain of events. However Guardian could bring Denso closer to SM (I believe Bosch is working with OEM2 and Conti with OEM3) so there are strategic benefits for both SM and Denso to look into this. Time will tell of course.

Where Sanjay at Panmure gets “no value” for Guardian from is a complete mystery to me. I believe the CAT deal was worth about US$17.5M [CAT vehicles in operation ~3 million units]. For truck/coach/bus it is probably more like 500 million vehicles in operation, so what is the value of a licensing deal for Guardian to say Denso to access that market? US$25-50M??? Maybe much, much, more could be on the table, so it looks to me like a significant cash injection is on the way in the short term. You can’t forecast it and it is a binary outcome (either yes or no) so can’t put in a financial report. SM is an IP company, there are other players better suited to Guardian manufacture and marketing for aftermarket and all that has happened in recent weeks is a change in the go-to-market strategy.

Guardian is also the data gathering platform. In August it was over 1.3 billion kms of naturalistic driving data. The rate of gathering is unknown but it is clearly more than 100 million kms a month and in a world of AI and ML the company with the most data wins. Always. That data is captured in the form of video clips which are sent via 3G/4G to the R&D team (Mike Lenne, Tim Edwards et al.) who are doing analysis and further development of the algorithms. If you read the placing documents from last year you will see one of the areas that SM was going to spend a lot of the money on was advanced scientific research equipment. What you have then is the video clips showing areas for new research (edge cases), the scientific equipment to understand what happens to humans in those circumstances and the results fed back into improvements in the algorithms to improve fatigue and distraction detection further.

It would be great to think that you can skip the scientific research bit and all that is needed is ML and enough compute power on a GPU to do everything perfectly (a la the Nvidia pitch) but that just leaves a solution consuming huge amounts of power and kicking out lots of heat (which is roughly where Affectiva are). There is no short cut to the research, science and sheer hard graft to understand human fatigue and distraction and get the best performance/power consumption trade-off. This work is hard, laborious and necessary. Guardian is the feedback path from the test bed (humans operating in real world trucks) to the R&D/science lab (Mike, Tim and team). To be frank, this is some of the smartest joined-up product development I have ever seen, all pulled together under the leadership of Paul Angelatos and Ken. The staff totally deserve their share awards in my view, the strategic thinking and foresight is extraordinary.

On to auto…from a tech perspective, automotive is not a contest. You just can’t compete with an FPGA solution with either an MCU or GPU for DMS. For vision processing you need hardware acceleration to do it in real time, and Fovio can do that. Add in the 1.3 billion kms of data from Guardian and you have a platform that is untouchable. And it is and OEMS know that. DMS is a crowded market and competition for SM extends well beyond SE (Aisin Seiki, Can Controls, Clarion, Eyesight, FotoNation, Idemia, Mitsubishi, Omron, Panasonic AIS, Pioneer). With Fovio FPGA and 1.3 bn kms of data, the competitive position really comes down to SM vs. all others. It is not yet clear if OEMs want high performance or low price but that will become known over the next 6-9 months as the DWs are announced following the RFQs in March/April. Due process takes time. Also I completely disagree with comments that SM have DWs that they have not announced in the form of an RNS. I do however believe there may be OEMs that have given a verbal nomination and the legal agreements are being worked on. That takes time to work through, there are many decisions to be made for a new vehicle model and it is a complex process which really does take months.

What I have learnt from my experience as an analyst is the company making the most progress is always the one making the least noise (why tell anyone ANYTHING if you are ahead?). Mobileye is probably the best known example for you, but others where this was true are Qualcomm, Broadcom, Marvell. As an analyst researching those companies in the early days, you just hit a brick wall. Apple is the same -ARM staffers sometimes refer to them as ‘the folks at Cupertino’ –  so too Xilinx and Nvidia (guess which has more silicon revenues in production vehicles). SM realistically only need to work with 15-20 OEMs for worldwide coverage, and probably the top ten is enough (everyone else will follow the decisions made by the leaders). So really the lack of information flow coming out of SM I see as evidence of their competitive leadership, which is blatantly obvious when put alongside using FPGA for the silicon solution and the 1.3 bn kms RNS. This is the perspective that almost 25 years of experience gets you.

So my view is unchanged…a super smart company adapting its strategy (Guardian) to husband its financial resources and looking very well placed to take a leadership position in automotive when DMS takes off around 2021. Can’t see the BoD going for a takeover before then, unless someone like Apple or Waymo comes knocking with an unbelievable offer… which is a scenario we have talked about previously.”

Chris Menon holds stock in Seeing Machines.

Seeing Machines will win FCA

I firmly believe Seeing Machines is set to make it 3 out of 3 in the US, when it adds Fiat Chrysler Automobiles (FCA) to its existing customers, General Motors and Ford.

I know this runs counter to the views of the SmartEye analyst Viktor Westman but I’m confident Veoneer with Seeing Machines will be the preferred choice for FCA. My reasoning is simple: FCA is already a key customer of Veoneer and Seeing Machines has not only a superior DMS system but a very close working relationship with Veoneer.

If you were FCA would you choose a DMS system that is inferior to that of your main US rivals?

Japan

Meanwhile, over in Japan, it seems that Seeing Machines has made great progress in cracking that market. Toyota by all accounts is in the bag. Moreover, Seeing Machines is exhibiting its DMS with Japanese Tier 1, Nexty Electronics (that is part owned by Toyota) at the 1st Automotive World exhibition in Nagoya, Japan this week.

Takeover endgame in progress for Seeing Machines

 

I’ve been following the LSE board and I’d like to confirm that I’m as disappointed by the share price fall in Seeing Machines as any other long term holder. I’ve not sold out and would have expected the share price to be much higher by now.

Still, the good news is that I still believe SEE is the world’s best DMS supplier and will be snapped up very soon. Let me explain 5 reasons why:

1) The actions of the company. It doesn’t appear to have made any reasonable effort to mitigate the share price fall. Why would any management allow such a fall when it would have been easy to release positive news on contracts/prospects for the coming year?

2) Canaccord Genuity hasn’t released a broker note since January and then kept on reiterating 21p as its target price. However, in July it removed these reiterations. I wonder “Why?”.  By any logic a detailed note is overdue (and I hope it won’t be released to merely rubber stamp a low-ball takeover price). Anything below 30p would  be criminal in my personal view.

3) Silence from management. I’ve previously found that when the company goes silent on me it is for a good reason. It could be a fundraise but I think the recent bonus to the founders/staff is more likely a golden pat on the back before it is sold. Moreover, if a fundraise was being planned I’d have expected a raft of positive news.

4) I can think of at least 2 Tier 1s that absolutely need Seeing Machines Fovio technology for their businesses. Sources have also previously stated that chip companies will bid for SEE on any move.

5) There have been rumours of share price manipulation by market makers to force the price down. I don’t know the truth of this but AIM is the Wild West of investing, so I’d expect that there is no smoke without fire. Of course selling by Miton won’t have helped. Still, there must have been buying by others so I’d urge Seeing Machines to update its list of top 10 investors on its website.

Would Seeing Machines care to comment on this “press speculation”? If not, I think that might be a deafening silence under the present circumstances.

The writer holds Seeing Machines stock.

Seeing Machines is worth US$10, even £10, but not 10p

At the Automated Vehicles Symposium (AVS) held in San Francisco last week, one presentation made was by the National Transportation Safety Board (NTSB), about the first Tesla crash involving Autopilot. The NTSB said that “steering wheel torque is a poor surrogate measure” for driver attention. In a tweet highlighting the presentation, Colin Barnden, Lead Analyst at Semicast Research commented: “This only really leaves camera-based DMS to fulfil driver engagement function.”. In a subsequent tweet Colin also identified a possible scenario where Waymo buys Seeing Machines, maybe even in a 12-18 month timeframe, for US$10 billion.

Here’s Colin’s reply in full to my asking about his thinking behind these tweets and the jaw dropping valuation.

Colin Barnden

The NTSB presentation at AVS. That’s a game changer. If you are a transport executive and you value your freedom, you don’t ignore NTSB recommendations. This even applies to anyone with the first name Elon too.

Level 3 is starting to gain traction so Waymo are looking like they have called the handover problem incorrectly and L3 is possible after all. Time will tell on this. L2/L3 is where the volume will be in my view, at least for the next decade.

Robo-taxis may get investor and press attention, but the volume will be in the mass market. Seeing Machines is the classic ‘pick and shovel’ play, the tech can go almost anywhere in transport applications that humans and machines interact. It certainly isn’t obsolete.

Price… who knows? Could be higher, depends how desperate the bidding war gets (see Sky as a good example). Remember what I wrote to you last week “I can see ten bucks a share persuading the Board to sell up soon, or even ten pounds, but not pennies. That would be stupid, and they (the Board of Directors) aren’t”. [This refers to us discussing privately the likelihood of Seeing Machines’ management accepting a low-ball bid in the next few months].

The current market cap simply reflects that the market is clueless to what SM has achieved. The company isn’t clueless, the executive management are whip smart. The market is coming to them (and Smart Eye too) it just needs patience. Maybe even as little as 12-18 months.”

You can follow Colin at @semicast_res

You can follow me, Chris Menon, at @Penforjustice

The author holds shares in Seeing Machines

Understanding management priorities on price

I’ve been wrestling with the issue of divergent interests between management and shareholders of a public company. How can the stock price of a great business be very undervalued and management be unconcerned? (Successive fundraisings that dilute long term holders are a sign of that, for example).

I didn’t have the smarts to work it out but fortunately I know a man who does. Benjamin Graham, the father of value investing, worked this out 50 years ago in his book “The Intelligent Investor”.

I’ll quote him at length below, where he cuts the Gordian knot:

Benjamin Graham

“Why is it that insiders may have no interest of their own in following policies designed to provide an adequate dividend return and an adequate average market price? It is strange how little this point is understood. Insiders do not depend on dividends and market quotations to establish the practical value of their holdings. The value to them is measured by what they can do with the business when and if they want to do it. If they need a higher dividend to establish this value, they can raise the dividend. If the value is to be established by selling the business to some other company, or by recapitalising it, or by withdrawing unneeded cash assets, or by dissolving it as a holding concern, they can do any of these things at a time appropriate to themselves.

“Insiders never suffer loss from an unduly low market price which it is in their power to correct. If by any chance they should want to sell, they can and will always correct the situation first. In the meantime they may benefit from the opportunity to acquire more shares at a bargain level, or to pay gift (and prospective estate) taxes on a small valuation, or to save heavy surtaxes on larger dividend payments, which for them (sic) would mean only transferring money from one place where they control it into another.”

Battle of the Titans?

In response to my latest blog post, Colin Barnden, Lead Analyst at Semicast Research, wrote to me explaining why he thinks Fovio is of strategic importance to both Apple and Alphabet. Indeed, his analysis reinforces my feeling that the two may soon battle it out to acquire Seeing Machines — regardless of any initial low-ball bid in the 25p-30p range from another party that kicks off a bidding war. 

I’ve reproduced his comments in full below so you get the benefit of his insights:

Colin Barnden

“Do you hear the thud? That’s the sound of the penny dropping in Silicon Valley that autonomous driving is not easy peasy after all. Witness no robo taxi development stories since March, after the Uber crash. As you report today, witness also the speed of conventional OEMs starting to adopt camera-based DMS. This is a technology which I have repeatedly been told by people at Silicon Valley based tech companies is “at best an interim solution and at worst already obsolete”. Elon might think something like that, but a steady stream of auto OEMs seem to want to work with Seeing Machines anyhow. My view is that every auto OEM will have announced their plans for camera-based DMS by the end of this year, with most implementing the technology for production from 2021 to 2023.

Apple have been trying to get into automotive for several years. Project Titan never really got off the ground, but CarPlay has been well received. For Alphabet, they have to hedge their position that Level 3 is redundant and have already moved to Level 4. There are many articles discussing this, here is one: https://www.wired.com/2017/01/human-problem-blocking-path-self-driving-cars/

I totally disagree with that view and Level 3 is very much possible, but it needs advanced DMS and sufficient human factors research to understand what humans do in the seconds and minutes following handing over driving to machine intelligence. Seeing Machines are underway with this work, led by Mike Lenné and the CAN Drive project. As Tesla have found – and Cadillac proven – you cannot even do Level 2 safely without camera DMS and the recent EC legislation calls for mandatory advanced distraction DMS (camera-based) even for Level 0. Other regions will follow in my view.

Both Apple and Alphabet need it, ideally so the other doesn’t have the technology. Whoever wins gets a minimum 3-5 year lead on the other (automotive qualification alone is 3 years – and Fovio is automotive qualified). Remember Zuck bought WhatsApp for $19 billion so Facebook had a potential rival under control. Conventional metrics for valuing a company won’t apply, this would be a straight Battle of the Titans. I’ll be watching.”

The writer holds stock in Seeing Machines.