Seeing Machines delivering on long-term strategy

In an exclusive interview with Seeing Machines interim Chief Executive Ken Kroeger, he has confirmed that the company remains on track to hit its first half financial targets and is making no adjustments to its full year figures.

Following the departure of former chief executive Mike McAuliffe, who had only been in place a few months, private investors have been concerned as to whether there was likely to be any strategic change of direction. Happily, as Ken Kroeger confirmed: “The strategy that we’re executing is exactly the same one that we were executing when he arrived. Moreover, the executive team that is delivering that strategy remains the same.”

It’s a point that was well made by Lorne Daniel, analyst at house broker FinnCap a week ago, when he wrote: “We know that the second tier of management in this business is particularly strong and will continue to follow the strategy and deliver on the milestones as expected.”

The business certainly seems to be making steady progress across fleet, auto and aviation and Kroeger stressed the efforts of the executive team in having built them up. “These are businesses that didn’t even exist a few year ago and Paul Angelatos (Fleet), Nick Di Fiore (automotive) and Pat Nolan (Aviation) have done a great job in creating and building these markets for Seeing Machines.”

Auto industry

Not only is Seeing Machines working with GM to deliver driver monitoring systems for its cars (most notably the Cadillac CT6 whose Supercruise system uses it), but on October 30, 2017 its Fovio Driver Monitoring System was chosen by a premium German OEM (who I believe to be Mercedes).

Kroeger wouldn’t comment on who the German OEM is but did confirm: “It is extensively pushing the boundaries in driver monitoring, taking it to a whole new level. That is underway. That is a real state of the art delivery, very technically challenging but it sets a completely new performance standard for DMS.”

Given recent bulletin board discussions as to the respective merits of Seeing Machines technology vs. SmartEye, Kroeger was happy to explain: “We have the best technology, there is no doubt about that at all. SmartEye has an okay technology, which is cheaper…we’re much better positioned to take the premium car models that are interested in performance, who need this to work because it is a safety critical feature. For models that are being rolled out where it is nice to have comfort features in the car, which only require rudimentary head and eye-tracking, SmartEye is a viable option.

He added: “Right now we definitely have a leadership position from a technical perspective. That is very much respected by the auto OEMs.”

In addition, I’m optimistic that other OEMs will select Seeing Machines DMS technology, doubtless driven by the NCAP requirement for any car model wishing to have a 5 star safety rating from 2020 to have a DMS in place.

In Japan strong market opportunities are being helped by the effort of Kevin Tanaka working out of the West Coast in the US. Also Kroeger confirmed: “There is a very strong alignment with Xilinx in Japan, who are doing a lot of our on the ground marketing for us. It is definitely getting well received by the Japanese.”

Fleet

While a comprehensive Fleet update is due this week that should provide much awaited news on further wins, Kroeger did reveal that the Guardian 2.0 device will start shipping by the end of March. The upgraded system is significantly cheaper to manufacture, smaller and easier to install, which should also help increase penetration rates.

Takeover

Given the much higher profile of Seeing Machines since the launch of the Cadillac CT6 and the most recent CES show, where it was showcased by both Bosch and Autoliv speculation is increasing daily over whether it is being tracked for takeover, whether by a Tier 1, a telematics company, or even Google or Apple.

Asked about this Kroeger coyly replied: “There is always interest. We would never say ‘no’ to a conversation but we also recognise that there will a time when the time is right to return the best value to shareholders. We’re very cautious about the conversations we do have and, if we were to contemplate selling the company, we would have to find somebody who valued the entire organisation to obtain the full value for it.”

When pressed further about Google, Apple or Amazon seeing the long term value in Seeing Machines technology, which has applications far beyond transport alone, given it can enable robots to see and perhaps eventually even empathise with humans, Ken Kroeger commented: “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. The Tier 1s sell to the OEMs but some of the Tier 2s which sell to the Tier 1s are exceptionally diverse. They might be building stuff for automotive, stuff for aviation and stuff for medical devices, stuff for consumer electronics. They might not just be an automotive-centric supplier. They are really hard to find and pinpoint but they are out there because they are always talking to us.

Of the partners that Seeing Machines currently has some are definite possibles. “Or, it could be someone who sells image processors and wants to start packaging it with software already on it on a smart camera or smart sensor,” teased Kroeger.

Despite being a world leader in DMS tech, a key plank in the forthcoming generation of semi-autonomous cars and increasingly being considered in trains, planes, trams and buses, it’s current share price languishes at approximately 5.5p. This valuation anomaly cannot last much longer, especially as with the recent fundraise it has been largely de-risked as an investment provided sales continues.

Ironically, such a deeply discounted valuation could well be the catalyst for an opportunistic bid from a cash-rich global player before the year end.

The writer holds stock in Seeing Machines.

Is Seeing Machines a takeover target?

Seeing Machines interims yesterday were slightly disappointing in so far as Fleet sales have yet to take off, although they are progressing.

I’m not going to rehash the numbers here, except to say that with nearly A$40m in cash it isn’t in any immediate danger of needing a fundraise to fund the further development of Fovio.

My hope is that the V2 version of Guardian which apparently costs around US$625 vs US$1000, together with Mix Telematics’ product incorporating the integrated SEE system should boost Fleet sales. I anticipate both will be ready within 3-6 months.

Still, I could be wrong about the timeframes and therein lies the risk. Although the spending on Fovio is capable of being scaled back SEE is trying to grab OEM automotive market share in the hottest sector of the automotive market. The funding to cover this is intended to come from Fleet and Mining sales.

Only if Fleet doesn’t scale up and make a substantial contribution, might SEE require a further fundraise before it reaches profitability — unless it chose to scale back spending on Fovio.

That said, I don’t expect this will happen. I believe that an imminent deal with Progress Rail, along the lines of the it struck with Caterpillar should provide short term funding to avoid even the slight risk that they might need to raise more money further down the line, before it becomes profitable.

That a deal with Progress is close at hand was confirmed in the interim statement yesterday, when SEE stated: “The company is in final negotiation stage for a global agreement with Progress Rail. We expect an agreement to be in place during 2017.”

Lorne Daniels

Analyst Lorne Daniels, in a note issued yesterday from house broker finnCap, reduced his sales estimates for Financial Year (FY) 2017 to A$13.4m with a pre-tax loss of A$33m, with estimated sales of A$52m for FY2018 and a pre-tax loss of A$17.3m. Only in FY 2019 is SEE forecast to deliver a pre-tax profit of A$2.8m on sales of A$117.8m.

I’d urge caution on the numbers as there are a lot of unknowns, but the direction of travel is clear.

More importantly, I think investors need to appreciate the bigger picture here, as Lorne Daniels eloquently stated:

“The struggle with Fleet sales is disappointing but solvable and should not detract from the overall focus on the goal Seeing Machines is working towards. While new competitors like Tobii, SmartEye and EyeTech are seeking entry to the market, Seeing Machines remains well ahead in terms of product development, routes to market, experience and proof of success in the field; already deployed in thousands of mining vehicles where its rivals can point to no real-world use at all. Seeing Machines is deliberately investing heavily to capitalise on its leadership by deploying its cheap and easy to adopt SiP solution. This will entrench its market leadership across a wide range of operator monitoring markets but primarily that huge automotive market.”

Nevertheless, as SEE’s share price languishes at a pitiful 3.5p, despite all the progress made in a variety of end markets, the company is easy prey for a speculative offer.

Indeed, given the recent purchase of Mobileye for $15bn by Intel, you have to wonder how long it will be before one of the big players (perhaps Google, Apple?) will make Seeing Machines an offer they can’t refuse.

Lorne Daniel estimates that applying the 42x sales multiple (on which the Intel bid for Mobileye was based) to Seeing Machines’ 2017 sales forecast provides a valuation of A$563m (£353m) or 24p a share.

I’m sure that would satisfy many private investors frustrated at the current share price. And yet…apply that to the projected sales for only one year later in 2018 and you end up with A$2184m (£1,370m) or 92p a share.

In my view, a little more patience is required while realising that investing isn’t risk free.

The writer holds stock in Seeing Machines.