Volvo XC90: another win for SEE

The evidence is stacking up that Seeing Machines has won Volvo in the teeth of opposition from its Swedish rival Smart Eye.

Read this article on the Volvo XC90 and note the way it describes how the DMS system will work. Congrats to Nick DiFiiore and his team on this one. All we need now is the RNS.

I believe the delay in announcing auto OEM contract news is due to their being re-scoped and enlarged by car manufacturers in the light of EU legislation that will mandate DMS in all new type cars from 2022.

Of course, fund managers have been getting the inside track on developments this week so I am optimistic we will get some big buys.

Still, rather than a soft-focus video, private investors also deserve to meet the management. Hey, SEE, how about organising a webinar and answering some tough questions from people who’ve invested their hard earned money over a number of years? Or better still, call another meeting in London.

Certainly, in his most recent interview the new CEO, Paul McGlone, seemed very confident. He can certainly talk the talk and it is my hope he will also walk the walk over the next 6 months. Time will tell.

The writer holds shares in Seeing Machines.

Silver lining in a cloud of investor misery?

Following today’s news that Seeing Machines is having a deeply discounted  conditional placing and subscription to raise £27.5m, the management of the company seems to have lost both the goodwill and trust of many private investors. 

Indeed, the fact SEE couldn’t get even get a placing with existing institutional investors away at 5p tells you a lot.

It’s quite frankly shocking that the company had to offer shares at 3p in order to raise cash and follows a long series of fleet and train related mishaps that Chris Grayling would be proud of.

The only silver lining I can see is that with the expected OEM wins still to be announced it becomes a sitting duck for an opportunistic bid. My sources tell me that last year, after numerous ‘discussions’, it came close to being snapped up by Bosch for around 17p. Well, I dare say, it is still available at a knock-down price.

Anyone want a to buy a company with great tech but poor management? 10p? Anyone? 7.5p?

UPDATE

For those investors despairing tonight, I’ve some hope. Ironically it comes from house broker Cenkos who put out a note today. Analyst Jean-Marc Bunce clearly cares about his reputation and though he lowered the price target to 9p, Bunce can’t help but admit on page 15:

“Strategic value is significant – 39p at 8% discount rate

To demonstrate the significant value in the increasingly visible future cash flows from Seeing Machines’ automotive license fees, we note that a large organisation with a market average Beta of 1 would have an equity cost of capital of 8%. At an 8% cost of capital our valuation for Seeing Machines rises to 39p and we note the weighted average cost of capital for a large corporate would likely be even lower through debt financing.”

In fact, the more times I read this note the more I get the sense that it is setting out a case for SEE being sold at a particular price. We’ll see.

The writer holds stock in SEE.

Is it time to React?

React Group is a tiny AIM-listed company that has a chequered history and recently decided to concentrate on specialist cleaning. It is also a sub penny stock. So far, so bad.

The good news is that star fund manager David Newton has a chunky 15.74% holding and the company’s management has been strengthened with the addition of a Non-Executive Director Michael Joyce, former CFO at InterQuest.

Joyce and his wife have recently bought stock in the company (management of SEE, please note) which has helped spark this week’s increase in the share price.

Mark Braund has also been brought in as an operational and strategic advisor. He is a former CEO of InterQuest and also ex-CEO of Redstone Connect.

I briefly held this stock about 3 years ago when Adam Reynolds (the cash shell king) was a holder. He has since moved on and I feel that with a clearer strategy the company is now gearing up for a period of accelerated growth.

It made a loss for the year ended 30 September of £1.93m but the net cash outflow from operations was far less at £625k, with turnover up 25% at £3.3m. If the business continues on its current growth trajectory it could easily multi-bag from here.

At this stage it has be regarded as a fairly speculative investment and is certainly not one to sink your pension pot into. Yet, it is certainly worthy of further investigation.

At the time of writing its share price was 0.27p.

The writer holds stock in React.

Seeing Machines wins strategic FCA contract estimated at US$200m

Seeing Machines has won the contract to supply US carmaker Fiat Chrysler (FCA) with its Fovio chip Driver Monitoring System, as predicted here months ago.

Ostensibly it is a US$6m contract (for Jeep or Ram, I believe) but as we all know the value is likely to end up far higher as DMS is swiftly rolled out across all its various car marques and models.

My estimate for the eventual worth of this deal is nearer to the hundreds of millions of US dollars. FCA produces 4m cars a year. Within 3 years I expect the Fovio chip to be in approximately 50% of them, say 2m cars. At US$20 a pop (volume discount from US$30) that is at least $40m a year. EVERY YEAR from 2022!

As the lifetime of a model is 5 years, my belief is that this strategic contract should end up being worth at least US$200m.

Clearly FCA couldn’t afford to let Ford with its F-150 pick-up outcompete in the premium DMS arena. They just had to have it.

I feel a twinge of sympathy for Smart Eye who at one stage hoped to win FCA. Indeed, as i believe the Tier 1 is Aptiv Seeing Machines are rubbing salt into its wounds — it is the equivalent of your partner running off with your worst enemy.

Unfortunately, Smart Eye don’t have an automotive grade chip, although they are trying to develop one. Unfortunately for them, Seeing Machines has already passed the finishing line where the US premium auto OEMs are concerned. After all it has now bagged FCA, Ford and GM.

In addition the next race has nearly been won in Europe where it will win VW to add to BMW and Mercedes and I don’t expect the result to be any different in Japan (Toyota and Honda are coming I believe).

This latest win brings an eventual bid for Seeing Machines much, much closer. So far as DMS is concerned SEE really is the next Mobileye. Indeed, I imagine the calculations I’ve roughed out will be replicated by many chip companies.

The writer holds stock in Seeing Machines.

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.

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.

Panmure puts 28p price target on Seeing Machines’ auto division

In a note published on September 18th Sanjay Jha, an analyst at independent broker Panmure Gordon, reiterated his ‘Buy’ recommendation and placed a 28p price target on Seeing Machines.

The price target is lower than the 30p target he had in June but is still a remarkable endorsement by an independent analyst of the company’s domination of the global market for automative driver monitoring systems given all that has recently taken place in fleet.

In the note Jha  concluded: “We welcome the rationalisation of the Fleet business which has been a major distraction to the much larger opportunity in the Automotive sector, which saw the share price peak at 14p. Our investment case has been based almost entirely on the upside from the Automotive opportunity and continue to assume that the Fleet business has no value. Seeing Machines is in the pole position to capture at least half of the Driver Monitoring System (DMS) market with competition effectively limited to one other player (Smart Eye). With design wins with five OEMs and many more to come, we foresee a growing royalty revenue stream for many years to come.“

Endorsing the recent appointment of Jack Boyer to Chairman and the appointment of Ryan Murphy as COO, Jha commented: “These are the first steps in what we hope is a major overhaul of the Board and the executive team.”

Jha forecasts sales of A$37.6m for the 2019 financial year, rising to A$50.5m in 2020. “We estimate cash deficit of cA$5m by FY20, which arguably can be covered in debt markets. However, we also believe that the management can cut costs further particularly in Fleet engineering.”

Pointedly, he appears to have a dig at the information flow and forecasts coming out of Seeing Machines: “We note that the management expects revenues in FY19 to be approximately in line with FY18. We believe they should stop giving guidance until they have a good handle over internal information systems. In the last month, we have had two different versions of Guardian units delivered and expected to be delivered. Our forecasts, for what it’s worth, is based on Guardian data provided by the CEO today and our expectations for the Automotive sector.”

More auto wins

I’m personally confident that Seeing Machines will soon announce some huge auto wins: Toyota, FCA and Volvo. Other OEMs that I believe will fall to Seeing Machines include: Mazda, Honda, Subaru and Audi.

Indeed, in a previous note (published 19th June) Jha confirmed: “We believe that Smart Eye has been launched in first generation models of BMW, Audi and Jaguar Land Rover. At the time, Seeing Machines wasn’t allowed to bid for BMW and Audi as they were tied with Takata’s commitment to GM. However, we understand that Seeing Machines have now displaced Smart Eye in second generation BMW and we expect they will replace Smart Eye on future Audi models too. As we have highlighted previously, Seeing Machines has more robust licensing model with two offerings: Software and System on Chip (SoC), the latter allowing OEMs to deploy DMS across models more quickly and efficiently. Smart Eye doesn’t have its own silicon expertise and is heavily reliant on Aptiv to win platforms.”

The writer holds stock in Seeing Machines.