Honey, I shrunk the revenues

For me, the most interesting development arising from Seeing Machines’ results last week was house broker Cenkos lowering its share price target from 19p to 15p.

That arguably could provide ‘independent’ justification of Seeing Machines value if a low-ball bid comes in. Understand, I don’t consider Cenkos to be independent myself but in many takeovers the house broker target price is used to support a bid.

I hope I’m wrong but the pattern of communications from Seeing Machines over the course of many months, together with the slow mo correction of problems with fleet looks like carelessness at best.

Smoke and mirrors

On the face of it, the new price target from house broker Cenkos is predicated largely on the basis of lower fleet revenues in the 2019 financial year, bringing down overall revenues and gross profit for Seeing Machines.

So how credible is that fleet revenue estimate?

Cenkos has estimated fleet revenues for 2019 will be only A$14.1m vs. the figure of A$49.1m, which it had forecast as recently as August 3rd.

However, I’m having difficulty working out how such a low figure is even possible given the number of units Fleet has out in the field.

By my calculations in this financial year (2019) Fleet should have recurring revenues from the existing 10,000 fleet units installed up to the end of the 2018 financial year (circa A$17m) plus revenues from the 5,500 that were shipped at the start of 2019 financial year plus a further 4,000 that Cenkos state will be installed by the end of the 2019 financial year.

Seeing Machines itself stated in the RNS announcing its full year results this week: “Total cumulative contracted Fleet (Guardian) revenue of A$82 million as at 30 June 2018. A$50 million revenue yet to be recognised over a three-year period.”

[When I divide $50m by 3 I get £16.6m – what do you get Mr Accountant?]

Well I contacted Seeing Machines via email and this was their reply:

  • “The Cenkos analyst provides his independent view on the Company.

 

  • Guardian revenue is recognised as follows:
    • Total connected Guardian units is 10,000.
    • TCV is based on total cumulative contract value since Guardian was launched.
    • Contract sizes vary.
    • Revenue is recognised firstly when hardware sales are recognised and secondly, once the unit is connected into the vehicle, monthly recurring revenue is generated.
    • Each fleet varies in contract size and it takes varying amounts of time to connect each vehicle in a fleet to Guardian.

 

  • TCV was published as A$82 million. A$50 million of that revenue will be recognised over 3 years – ie by end of FY2021.”

Diversion

Of course, while we’re all pondering about fleet revenues are we possibly missing something? Yes: Seeing Machines is going to be acquired because it’s the leading global DMS and BdMS supplier.

Any potential acquirer probably wants Fleet ‘smoothly transitioned’ (as Cenkos put it in a note on19th September) to a licence model. The beauty of the strategy, the sheer genius, is that it has made Seeing Machines more attractive as a target by both moving the business on and conveniently reducing its short term value.

A potential bidder, let’s call it company ‘B’ for now, can either take advantage of the reduction in SEE’s price while the sale is on or SEE will go it alone and use the extra engineering resource from fleet to help service the multiple auto OEM contracts that are on the way.

And make no mistake those contracts will have to be announced soon. FCA and Toyota are huge wins that finally cement the industry view that Seeing Machines is the Mobileye of DMS.

The window for a cheap sale will have run out within a few months.

Can you hear that clock ticking?

The writer holds stock in Seeing Machines

Seeing Machines wins Apple for Back-up Driver Monitoring

According to my sources Seeing Machines will be supplying its new Backup-driver Monitoring System (Guardian BdMS) to Apple and is very likely to win GM Cruise, possibly Waymo also.

In the typically low key fashion in which Seeing Machines delivers good news to the market the announcement was put out more like a product release than an RNS. Hidden away in the third paragraph it stated: “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.”

This is outstandingly good news for the AIM-listed minnow and means Silicon Valley has followed global car manufacturers (GM, BMW, Mercedes and Ford) in recognising Seeing Machines’ driver monitoring technology as best in class.

Apple, in typical fashion, has not replied to any of my emails on this subject but its secrecy in such matters relating to Apple Car is well known.

As stated in my previous blog post, I still expect wins with FCA and Toyota to be announced in due course.

The writer holds stock in Seeing Machines.

Seeing Machines: it’s all about timing

I was slightly surprised at the timing of the revenue warning this week from Seeing Machines, as it has been clear for some time that Fleet has not being doing as well as expected with delays to Gen 2 and no news of business via Mix Telematics. 

It was a point that was succinctly made in the note from John-Marc Bunce, analyst at house broker Cenkos, when he wrote: “The news released yesterday regarding the fleet business is clearly disappointing, especially considering the issues with the Gen2 were first raised in May 2018”.

Given that Fleet (and Rail) have been perennial disappointments there will be a lot of pressure on Chief Executive Ken Kroeger to sacrifice someone. This might go some way to assuaging the anger of investors who’ve seen paper profits evaporate.

Yet, for me, it’s the timing of this announcement that’s of paramount importance. For by smashing the share price down It conveniently clears the way for a low ball bidder to come in and look like a white knight to investors.

I know that such a bid won’t immediately deliver anywhere near the full value that resides in this business – given the importance of its DMS technology to increasingly autonomous cars.

Still, many long-suffering shareholders would probably jump at the opportunity to sell at a very decent profit. Moreover, it ought to ignite a bidding war.

New contract wins

In any case, let me confirm that it is my belief that Seeing Machines:

1) Is set to win auto contracts with Toyota and FCA (news on the former is overdue).

2) Will be supplying its technology to one or more of these companies: Apple, Waymo and GM Cruise. (They’ll want more advanced systems than the non eye-tracking ones used by Uber, I’m sure).

3) Will see its tech used by Canadian Pacific Railway.

The writer 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.

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.