Seeing Machines making progress

Seeing Machines produced a positive trading update today and I firmly believe that this company is very undervalued at its current price of 3.25p.

What was lacking was hard detail on contracts won in fleet and more detail on its share of the auto spin-off. Yet, if only half of the fleet trials convert and the auto spin-off goes ahead smoothly it should multi-bag by Christmas.

The company is making great strides, communication as to how well it is doing is increasing and I’m confident that positive news flow will drive the share price forward to reflect the growth in business.

Some of the following update is based on a very recent, exclusive interview with CEO Ken Kroeger. In it he was at pains to stress that he’s going to be making a big effort keeping investors informed about developments. For example, Seeing Machines is in the process of revamping its website and he explained: “What I am trying to do is create an ongoing, regular conversation with investors through our website. The Seeing Machines website will become the portal for investors and if they want to drill down into the companies they can.”

He’s slightly hamstrung by the fact that trials of such an innovative product take time to convert and confidentiality is an issue that often prevents disclosure.

I can see that the company is light years ahead of where it was only 3 years ago. It is now converting its computer vision based IP into commercial product and starting to promote these product brands/companies: CAT, Guardian, Auto, Nucoria etc.

Yet, that is probably of scant consolation for shareholders who have seen the share price sink over the past few months.

From my most recent conversation with him and today’s RNS, I’ve put together the following:

Caterpillar

As the update explains, here Seeing Machines is moving “from a low-volume, high-value hardware business to an annuity and licensing-based revenue, high volume, lower unit cost product business model. Aside from the A$21.85m one-off Caterpillar licence fee that will boost revenues for the current financial year, there should also be recurring and growing revenues from product and services. These amounted to US$420,000 from Jan-March 2016 and are expected to grow in the quarter from April-June 2016.

That said, excluding the one-off revenue for this financial year Seeing Machines expects “other sales and service revenue to be lower than the last full year.”

Fleet

This product became available to customers in September 2015, without a formal launch and minimal marketing. The salesforce, comprising mining experts, eventually had to be replaced by road transport experts.

Since then, it has formally launched an improved product (with front facing camera) at mining shows: 3 in the US and 2 in Australia under the ‘Guardian’ brand.

Following the launch of Guardian, it has built up a very solid pipeline of product assessments with potential customers, “over 30 around the world” according to Kroeger.

To give some idea of the volumes he’s talking about he added: “If we successfully converted all of those assessments we’d probably have somewhere around 120,000 – 150,000 vehicles in those fleets.” Moreover, some of them are apparently very big companies.

While he doesn’t expect a 100% conversion rate, he did reveal that these assessments are going “really well”. In addition, Caterpillar has also made its first fleet sale.

Kroeger also explained: “We are currently designing the second generation solution, again, with VSI and other external expertise. It will be lower cost and modular in design so that it can be sold as a complete stand-alone solution as it is now or it sold as a companion or add-on to an existing telematics solution by only using some of the module (camera, HMI, image processing and not the geo-positioning or telecommunications elements that could be present in an already-installed telematics service); again being lower cost as result.

“The logic in this approach is that we are working with large telematics companies to provide them an affordable technology that they can sell to their customers in high-volume at the lowest possible cost while still providing a direct to market, Guardian solution that is affordable to operators that require the complete technology solution due to not having a telematics solution in their vehicles or where the telematics solution is not compatible with ours. The telematics suppliers are seeing a lot of consolidation and are looking for means of differentiation. Our discussion with them are focused on turing them into  an additional, high volume, channel to market with their existing customers.”

For those seeking names, Kroeger added that he was currently working with 2 global telematics companies (“with over 1m connected trucks combined”) and that, if possible, he’d hope to provide more detail in the next Fleet update — which I expect to be in a couple of weeks.

Naturally, investors may be frustrated that he can’t put those names out immediately. Still, if he says it is happening you can be certain it is. What he can’t control is the marketing sensibilities of huge multinationals that prefer to be named at a time of their choosing.

There’s also been progress in Auto, Aerospace and Rail but I don’t have much to add to the RNS.

Understandably, the lack of detail is a frustration, made harder to bear by the downward moves in the share price. However, I’m very confident that continued patience on the part of investors will be amply rewarded over the next few months.

Of course, there is no substitute for your own research and investors should always take care not to invest more than they can afford to have tied up for a year.

The writer holds stock in Seeing Machines.

Seeing Machines accelerates product development

It appears that Seeing Machines (AIM: SEE) is making good progress in bringing its world-leading, eye-tracking technology products to a variety of transport markets.

Re. today’s news that one of the world’s leading contract manufacturers has taken a 12% stake in Seeing Machines, investing A$12.8m (£6.7m) for 129.7m shares at 5.2p, a 20% premium to the recent share price, finnCap analyst Lorne Daniel commented: “In our opinion, VSI, as well as providing as a source of finance, offers a low-cost development and manufacturing partner for the road-going and other devices.”

Following on my previous interview with Ken Kroeger, I also wanted to add some interesting snippets from last Friday’s interview that might be of interest to those investing (or thinking of investing) in the company.

Fleet

Seeing Machines has started designing the next generation fleet product (which it appears will be manufactured by VSI). It will not only be better than previous iteration (with a forward facing camera) but is expected to be about 40-45% cheaper.

In addition, Ken Kroeger revealed: “We are talking to 8 or 9 of the biggest telematics companies in the world now and getting quite a bit of interest from them.”

Asked whether the deal was going to be exclusive or non-exclusive, he replied: “It will be non-exclusive. I think we will have to offer some differentation; maybe it will be region by region. A lot of these companies have 400,000 – 500,000 units under management.”

As to the product Seeing Machines would offer them: “This next generation will remove all the things that the telematics companies have: they all have GPS, telecomms, power. So we are building more of a partner unit that will sit beside the telematics unit and only provide the services that it has to have as opposed to all the services inside. Again offering a lower cost product that will act as a companion to the telematics product.”

In terms of how this business model will operate, he explained: “I think where this is going, we will start looking at more channel type relationships, looking at our own business model almost like software as a service where they get a piece of hardware, pretty much like a mobile phone deal where you pay something for this low cost unit, it is installed and then we are scraping more of a monthly payment – parallel to the telematics model.”

Rail

Not only has a third trial just started on the railway side but Seeing Machines has also submitted a tender to the Transport Authority at a big US city for a safety solution for its commuter trains.

If successful, it will garner a lot of publicity and Ken believes: “It would really launch us into that rail space.”

Fortunately, the improved algorithms resulting from the auto development mean that SEE’s product doesn’t need a lot of re-engineering to be used for rail, thus reducing the cost and time of deploying it. As Kroeger explained: “It re-captures the faces now very quickly. The old mining technology, our previous set of algorithms, took 15-30 seconds to find and lock onto the face, whereas it now takes less than a second. So you can move away and come back without it losing its effectiveness.”

Indeed, its continually improving its algorithms, as Kroeger revealed: “One of the biggest changes inside the business is that there is this new science called Machine Learning. Instead of writing software to do something you write software that can learn as you feed it new information. So we started doing that about a year and a half ago.

“It was as part of a continual push to improve those algorithms, not only for performance but also in the automotive space you have to deliver them on cheaper and cheaper platforms. You have to continually drive your prices down, so in order to do that you go to cheaper and cheaper processing. You have to keep on improving them.”

I had been concerned whether Seeing Machines could maintain its technological lead in this area but it seems that it has the ability to maintain this ‘moat’ around its business.

Again, Kroeger enthused: “What makes us special, why it is so perfect for us is that there is no other company in the world where, literally we walk into the office in the morning and there are thousands of hours of video captured the day before of drivers. We take that information and it goes through a truthing process, where we have people looking at the video very very closely. They identify where people had a fatigue event and they can annotate that video to highlight key parts of the video. They can look at 1 minute before, 10 minutes before, 1 hour before and deep learning starts to look for tell-tale signs that are common across all users to develop a more predictive algorithm.”

The writer holds stock in Seeing Machines

Seeing Machines gunning for automotive market with spin-off

Seeing Machines (AIM:SEE), the Australian software company specialising in eye-tracking technology using innovative algorithms, looks set for a significant uplift in its share price with confirmation that it is launching a spin-off in the US dedicated to serving the automotive sector by the end of June.

The stated intention is that the company will follow the Mobileye trajectory and eventually IPO in the US, a prospect which is likely to have both institutions and shrewd investors clamouring for shares over the next few months.

Despite recently announcing a maiden interim profit, its share price had been held back by concerns that it would need to raise more funds in order to serve demand for its world-leading technology.

However, in an exclusive interview with Ken Kroeger, CEO of Seeing Machines, he revealed that the company is set to raise between US$50m to US$100m setting up a spin-off that will focus exclusively on the auto industry and develop a new hardware module.

This should produce 3 main benefits:

  1. It will take development costs out of the overall business.
  2. Enable Seeing Machines to move up the value chain by developing hardware (which will be manufactured by a third party). So, instead of getting $10 a car profit, it will be able to get between $25 to $35.
  3. Enable it to work with more Tier 1 suppliers and OEMs.

As part of this Seeing Machines has signed a memorandum of understanding with Takata, that officially ends its exclusivity deal with Takata.

The new company will be called ‘Fovio’ and is expected to be launched by the end of June this year.

Ken Kroeger, CEO of Seeing Machines explained: “It will be a separate, US-based company. It will have about 40 people and take about 35% of the cost out of the parent company. The US company will own 100% of the Australian subsidiary that would house around 40 employees. Seeing Machines, and the current shareholders  will not have to reach into their pockets and write a substantial cheque but will own a substantial portion of that business.”

When pressed as to what “substantial portion” meant, he explained that is how he had to refer to it.

He added: “That business would be completely set up to start its march towards an IPO on the US board, mirroring Mobileye’s journey. It would have a separate board, separate management and we are in the process of recruiting a CEO in the US.”

As to the backers, he revealed: “The investors are at the big end of town (sic), we already have term sheets and they range from automotive OEMs, through the silicon companies into some of the other strategic industrial partners that we want.”

The new module is expected to come to market in late 2018, early 2019.

Until then, Seeing Machines will be continue working with Takata on delivering its software, as Kroeger explained: “The good thing is that we continue working with Takata. It is a new agreement not a divorce, so in the interim we will keep on delivering with Takata.”

Seeing Machines and Takata will be working on another 15 models for the same OEM that it has been working with to deliver a model that will be go into production late this year to be on sale next year. In addition, it is working on another 3-4 requests for quotations expected to happen this year.

That OEM is rumoured to be General Motors and the model that will first use Seeing Machines driver monitoring software, as part of it Supercruise feature, is said to be the Cadillac CT6.

The writer owns shares in Seeing Machines

See and Tide float my investing boat

I’m hardly surprised that stock markets around the world have been tanking, indeed the surprise for me has been how long it has taken for people to realise that the global economy is in a very bad way. Moreover, things are likely to get a good deal worse as the US economy weakens.

This doesn’t mean I’m completely bearish about stocks: I favour some small caps. In an era of low GDP growth, innovative and well run small caps will still thrive. One of which, Crimson Tide (TIDE), has been re-rated slightly following good news but it has much further to go.

Another, Seeing Machines (SEE) has barely moved despite lots of evidence that it is making inroads into selling its eye-tracking technology into the Driver Monitoring Systems of automotive manufacturers, while conducting successful trials with fleet managers.

The price is stuck at around 5p and I guess it won’t start to move until official RNS news comes out  detailing launch dates of cars containing its technology and signed contracts with trucking and bus companies. I’m taking advantage of this stalled stock price to load up, as opportunities like this don’t come round too often in my experience.

With its technology proven by the likes of Caterpillar it isn’t a jam tomorrow stock but rather a caviar fairly soon one. We’ll see – perhaps I’ll end up eating my words?

One piece of information I haven’t seen elsewhere is that Miton hold around 4% of SEE. And fund manager Gervais Williams is still keen on the stock as he revealed in this article (P62 ‘From Tech Acorns
)

I hold both companies but do please conduct your own research before investing your hard-earned cash.

Seeing Machines driving forwards

AIM-listed Seeing Machines is making great inroads into its target markets, yet the year end figures alone don’t really give much indication of this. Hence the price at around 4.5p has remained static. However, at this level it appears undervalued.

For the year to June 30, 2015 revenues grew 20% to A$21.2m, although this Australian company produced a thumping loss: A$10.2m (approx £4.7m), which was significantly up on the previous year’s A$2.7m. Moreover, cash outflow rose to A$21.5m, offset by a fundraise of A$10.8m, leaving net cash of A$14.4m.

Still this loss has to be seen in the context of a growth company that is investing heavily in R&D, sales and marketing while making good progress in cracking markets for its innovative driver safety software products aimed at 6 key global markets.

These markets are:

  • truck and mining equipment
  • commercial haulage fleets of trucks
  • cars
  • rail
  • aviation and simulators
  • consumer electronics.

Mining

It has successfully cracked the truck and mining equipment market with an alliance with Caterpillar, the largest manufacturer of such vehicles. Post the year end it announced that it had signed a US$17.5m deal with Caterpillar whereby Caterpillar will take over responsibility for manufacturing, marketing and sales of its DSS off-road product. In addition, to this payment (US$9m of which Seeing Machines will receive by January 2016), it will also receive royalty fees for DSS hardware, software licensing, monitoring and analytics services.

This is quite an achievement given the state the global mining industry is in and shows that even in markets hit by macroeconomic turmoil, the benefits of its products are unquestionable and it can deliver growth.

Commercial fleets

Caterpillar will also distribute its ‘Fleet’ product, which was launched in April. Given that the company is estimated to have over 3m vehicles in this area it bodes well for future growth in this segment.

The fleet product is essentially a cheaper version of its caterpillar driver monitoring system designed specifically for trucks, busses and other commercial fleet vehicles. It provides drivers and supervisors with real-time notice of when a driver is either tired or distracted. It has already made its first order for 750 units in South Africa and has put in place distribution networks around the globe.

Cars

It’s perhaps the development in the car industry that are really going to grab headline over the next couple of years and hopefully increase its profile among the general public. Here it has been working with a Tier 1 automotive safety supplier Takata. Its first product in this market is likely to be launched at the Los Angeles Car Auto Show in November. It will be in the Chevvy Super Cruise from General Motors, which will be on sale in 2016.

In addition, it is working with a number of other auto-manufacturers on safety and entertainment systems so the prospects for further launches appear excellent.

The quality of its partnerships is also quite staggering for a ÂŁ45m small cap. In the area of aviation it is working with Boeing to develop a pilot monitoring system. One has been installed in a Boeing Flight Services 737 Flight Simulator at the Brisbane International Airport. They are also working with a subsidiary of Caterpillar, EMD to develop a train driver monitoring system. Lastly, in consumer electronics they are working with Samsung on televisions that can monitor audience reaction. Most companies would probably be viewed as a bright prospect working with these alone.

Analyst view

Lorne Daniel, analyst at house broker finnCap has forecast a small adjusted pre-tax profit of A$0.8m in 2016 on revenues of A$43.2m. Revenues are anticipated as falling slightly in 2017 to A$43.2m with an adjusted pre-tax loss of A$9.1m as the exceptional boost from the Caterpillar deal falls out of the figures. However, he sees the business taking off in 2018, forecasting sales of A$65.8m and an adjusted pre-tax profit of A$8.3m.

Despite the company investing almost £15m a year, it appears fully funded for profitability. Of course, given the scale of its ambition it is just possible that it could raise more to finance another ‘transformational’ partnership.

When I spoke with Lorne Daniel he was certainly very enthusiastic about the company. Indeed, in a note issued on September 22 he estimated the mid-term value of the company at ÂŁ480m based purely on a sum of the parts valuation on the prospects for the Caterpillar/DSS, OEM auto and fleet businesses.

I’ll quote his concluding paragraphs to explain how keen he is on the company. “This is not a blue sky valuation. There is little if any credible competition in its markets, and revenues are already flowing from them. There evidentially little risk in the CAT business; there is a strong pipeline for the automotive OEM opportunity; and straightforward execution risk in the commercial fleet business. We have ascribed no value at all to the rail, aviation or consumer electronics market opportunities at this stage.

Even discounting the above £480m valuation of a mature business by 75% for the risk and time needed to achieve these sales levels would suggest a £120m value or 12p per share target price at a minimum.”

It is hard not to agree that Seeing Machines is terribly undervalued, particularly if you look at the valuation of a peer called Mobileye. This US-listed, Israeli company develops vision-based advanced driver assistance systems providing warnings for collision prevention and mitigation. Its systems appear less impressive than Seeing Machines and fortunately non-competitive, although the company is already making solid profits and is valued at US$10bn.

Prospects

Seeing Machines’ technology is proven, as are the deal making skills of its management. Coupled with the realistic prospects for the future this seems as close to a multi-bagging one-way bet as you could wish for.

Of course, it may get taken out by a bigger company long before then. Market Eye certainly has the cash to do it and acting soon would mean paying a fraction of the price it would cost to buy this Aussie innovator in a couple of years.

Alternatively, given the progress this company is making in actually enabling computers to see and gauge human reactions, it would be no surprise if Google or Apple already have their eyes on Seeing Machines.

The writer holds shares in Seeing Machines.

You should always conduct your own research before investing.