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.

Toyota or bid announcement?

The good news for investors in Seeing Machines is that I’m hearing from multiple sources that Seeing Machines is set to win a contract with Toyota next.

Apparently, it’s the only driver monitoring system (DMS) that is being specified in multiple Tier 1 bids – as was the case with the big BMW win recently. If true – and I see no reason to doubt my sources’ information – it just goes to further reinforce the global domination of Seeing Machines’ Fovio DMS in the auto industry.

Bid coming?

For that reason, I’m not surprised that there are now 10 market makers for the company on the London Stock Exchange, up from 4 a year ago. Most recently, Berenberg have started broking them. The better news is that I think this German bank may be acquiring shares for a company that plans to bid for Seeing Machines.

I could be wrong about that last assumption: Berenberg may be buying for a German fund. Nevertheless, various sources are warning of an imminent low ball bid – somewhere around 25p-30p a share for Seeing Machines. 

Some of my sources believe it is a Tier 1 auto supplier, others discount that theory. Interestingly, when asked about this in a previous interview back in March, Ken Kroeger did tease: “I agree it is either someone like that who can see the full value or a really diverse Tier 2 or Tier 1, as opposed to the OEM.”

While traders might be impressed by that figure, anyone with any knowledge of the auto industry and even an average understanding of Seeing Machines proven technological global dominance in driver monitoring systems shouldn’t be.

If such a bid should materialise I’ve been told by multiple sources that certain chip manufacturers (Intel/Nvidia, Xilinx and Qualcomm) would most likely be prepared to offer a lot more than a measly 30p. So I fully expect a competitive bidding situation to materialise if the rumour turns out to be fact.

Seeing Machines house brokers haven’t issued any upgrades in a long while. Still, based purely on old figures from Canaccord Genuity’s Caspar Trenchard note of Jan 9, (which excludes any figures for the huge Ford win as well as the big BMW win) it must be worth at least 59p a share. That is 30 times forecast revenues for 2019 of A$79.5m = 59p a share.

You could even argue that SEE should be on a higher multiple, such as the 42 times revenue multiple that Intel paid for Mobileye when it went for US$15.3bn. That would equate to roughly 83p a share for Seeing Machines. (This obviously ignores any value for Fleet, Rail and the Caterpillar business).

Yet, the strategic importance of Seeing Machines to the future of transport (never mind vision for robotics) will have been noted far and wide. In such a situation, I’ve been told that the chip companies are often prepared to pay up without months of haggling over the odd US$1bn. It’s small change to them when global domination is at stake.

Even Apple and Alphabet (parent of Waymo) can surely see the sense in DMS, so for what is petty cash for them they could also come in.

The writer holds shares in Seeing Machines.

A$50m Ford win for Seeing Machines

It’s great news that Seeing Machines, working with its Tier 1 partner Autoliv, has won a A$50m contract to supply its Fovio DMS system to Ford. Even better is that it’s on its new chip.

Once again my sources have been proven to be correct. Avid readers will note that in a previous blog, entitled: ‘Seeing Machines set to win 75% of the global DMS market’ the Ford win was predicted.

Back then, on 16th March, I wrote: “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.”

The document containing this latest OEM win was published as part of Autoliv’s Investor Day presentation and is here: (Note that Veoneer is Autoliv’s active safety division that will soon be spun-off).

The clues are on page 13 and 17, in which it is revealed that in Q2 2018 Veoneer won a contract with a major global North American OEM for a DMS.

A spokesperson from Autoliv told Safestocks: “We cannot confirm the OEM name, but I can confirm that we will be working with our partner Seeing Machines for this contract.”

That the North American OEM is Ford is beyond argument. Seeing Machines already works with General Motors, Ford is also an important client of Autoliv. Moreover, when questioned Ford did not deny the contract win had taken place. A spokesman said: “Unfortunately, all I can tell you is that we do not discuss our contractual  arrangements with our suppliers.”

The writer holds shares in Seeing Machines.

Euro NCAP agrees camera-based DMS crucial to prevent driver distraction

Last week I spoke with Richard Schram, Technical Manager at Euro NCAP. For those backing camera-based DMS systems he provided a very positive update on the organisation’s plans.

He agreed that the problem of driver distraction could not be solved without cameras but he doesn’t think it is feasible to mandate that by 2021 (for 2020 the coffee cup DMS is what will be pushed for, as it’s easily achievable). By 2022 he expects EURO NCAP to be incentivising the introduction of AEB linked to camera-based DMS. Moreover, Schram agrees that: “by 2024 camera-based DMS will be part of most European passenger cars”.

Given the 3-year lead times for the introduction of technology into cars, it’s clear why the more safety-conscious car manufacturers are moving swiftly to integrate camera-based DMS systems into future car models.

I asked Colin Barnden, Lead Analyst at Semicast Research, to put Schram’s comments into context and he said that it “clearly confirms that Euro NCAP and the EU are in alignment”.

The he went on to explain how:

  • “Drowsiness and attention detection (DDR-DAD) – coffee cup : mandate introduction from 1 September 2021 to 1 September 2023. Euro NCAP 5 star rating starts with these systems in 2020.
  • Distraction detection (DRD-ADR) : mandate introduction from 1 September 2023 to 1 September 2025. The importance of the comment, “[in] 2024 camera-based DMS will be part of most European passenger cars” cannot be overstated and confirms my understanding that distraction detection systems will only be camera based. This will apply also to vans, coaches, buses and trucks – a total of between 20-25 million vehicles per year in my estimation (and that is just the EU28).”

Barnden added: “As previously mentioned the adoption rate for camera-based DMS will be dictated by the rollout plans of the OEMs and they are well ahead of the advisory bodies (Euro NCAP, Consumer Reports) and the legislative bodies (the EC, NHTSA) already. My attention has moved from Europe to where’s next.”

His opinion is that Japan is next. “FotoNation, Seeing Machines and Smarteye are all making a concerted effort there and that is a clear signal of OEM interest. Development of mobility services (eg Waymo) are much more advanced in the US.”

Personally, I’m expecting Seeing Machines to clinch OEM a big contract with Toyota in the next few months (then Honda), as first mentioned in my blog article: Seeing Machines set to win 75% of global DMS market. In that article I also forecast that further progress in the US is close at hand.

I think the evidence is clear that Seeing Machines is set to be the next Mobileye.

The writer holds shares in Seeing Machines.

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.”