The Pretenders are dead, long live the King of DMS

At yesterday’s Capital Markets Day for Seeing Machines it was standing room only, as Colin Barden an independent analyst at Semicast Research presented the news that investors in Seeing Machines have long waited to hear: though the coronation has been delayed, it will be the King of DMS.

It was hard news for rivals but, in one slide, Barnden presented his projections for the market shares come 2022. He estimates 40-45% for Seeing Machines, followed by 15-20% for Mitsubishi Electric. All other rivals are left lagging far, far behind, with Smart Eye in particular estimated at 5-7%.

That said, I saw no evidence of complacency from the Seeing Machines staff, quite the reverse. McGlone, in particular, came across as a man determined to deliver profitable growth. He certainly doesn’t look like the sort of guy who will let a rival eat his lunch.

Paul McGlone, CEO, Seeing Machines

Paul McGlone, CEO, Seeing Machines

The growing interest in its DMS technology was clear from the host of analysts I met at the event: Sanjay Jha of Panmure Gordon, Lorne Daniel at FinnCap, Caspar Trenchard at Canaccord Genuity and even one from Steifel (there may well have been others). I’m sure the house broker Cenkos was represented but house analyst Jean-Marc Bunce was the invisible man on this occasion.

Fleet

Probably, a wise decision on Bunce’s part as I’ve been trying to find out why he’s taken such a conservative stance on fleet. In his note dated 23rd September he states on page 1: “We believe the guidance for 27-30k connections at the end of FY20 is conservative and underpinned by a strong pipeline.”

Yet on page 4, he contradicts this, becoming ultra conservative, when he writes: “….our Fleet connection forecasts are based on connections below the guidance of 27-30k”.

I wondered why he decided to do this and also upon what number of fleet connections he actually based his projected revenue figure of A$20.9m? By my calculations to arrive at A$20.9m he must have used less than 18,000 installations, which does appear excessively low.

Yesterday the new CEO, Paul McGlone was in combative mood as he faced down attempts to extract projections on the number of Fleet sales for 2020, sticking to guidance of 27-30k. He even declined to provide a current figure. I assume this is because Seeing Machines hopes to upgrade at the interims and doesn’t want to spoil the surprise. Personally, I don’t particularly like surprises even to the upside.

The reduction in the unit cost of Gen 2 Guardian by 21% announced yesterday must surely drive increased uptake from fleets as will the increasing number of distributors and deals with insurers.

Mike Lenne, the Human Factors expert who heads up Fleet does appear to be its secret weapon when it comes to persuading Fleets to use their technology to improve safety. HIs calm, analytical approach should pay dividends and puts Seeing Machines in a league of its own.

It was the first time I’ve met Tim Edwards, one of the original brains behind the technology along with fellow co-founder of the company Sebastien Rougeaux. Edwards comes across as a very modest man, particularly for a genius who jointly developed this life-saving technology.

Aviation

While CEO McGlone and Pat Nolan, who heads up Aviation, were chided slightly for building up expectations re. an aviation licensing deal with CAE and L3 Harris, I got the impression such a deal is at most a 2-3 months away. We’ll see I guess. The great news is that end users (such as Alaska Airlines) are now requesting that manufacturers of full flight simulators now have eye-tracking from Seeing Machines.

Auto

As for Nick DiFiore, who heads up Auto, I’m expecting him to deliver a lot. Volvo for one, VW for another pretty soon. Followed by Japanese OEMs. Oem decision-making has been the main reason for delays up to this point but See does appear remarkably well positioned with Xilinx to grab market share from Nvidia and Mobileye. The fact that Fovio can identify an incapacitated driver makes it a shoo-in for Volvo and parent Geely may well have decided it needs it too.

The US market really needs to hear this in its own accent and so it was good to be told by Paul McGlone that it will be getting a US broker. I do hope it is Morgan Stanley. I’ve long wished to read/hear Adam Jonas extol the virtues of Seeing Machines.

Overall then, while I would have liked more opportunity and time for detailed questions, I feel that further patience will be handsomely rewarded here. Of course, every investor should do their own research.

The writer holds stock in Seeing Machines.

SEE: when will you deliver for investors?

I’ve tried being subtle, not that it suits me. Still the question now needs to be asked, when will Seeing Machines start delivering, instead of taking from its investors?

I’m concerned that the management of Seeing Machines has long forgotten that it runs the company not for itself but for its investors. This was brought home to me by a quick look at the latest Annual Report.

A case in point is the huge payment that Ex-CEO Ken Kroeger received last year: A$654K (£347K), revealed on page 47. That’s great pay considering the share price plummeted 75%. Admittedly, AIM CEOs are well known for paying themselves well regardless of performance, but (as a shareholder) I find this instance especially outrageous.

Nor does it end there, as staff recently received huge share bonuses for work over the same period. Clearly, management aren’t sharing the pain with us long-term investors.

I’d hoped that new CEO Paul McGlone would chart a new path but I don’t see it yet. Here are 3 issues I personally have:

  • There still seems to be no discernible PR strategy in place. For example, SEE has a fancy US PR firm that don’t seem able to generate mass coverage for what is an easy sell to editors; car tech that saves lives. As a case in point, when I tried to get some simple answers to some obvious questions about their RNS on Alaska Airlines recently they failed to deliver. Am I being singled out for special treatment or are all journalists treated so poorly?
  • Lack of transparency for shares awards to the CEO; why have no targets been set and communicated via RNS? This is how SEE do it. This is how another AIM company, Parity did it. Take a look at page 17 of Seeing Machines’ annual report to learn about a remuneration policy with no policy.
  • Lack of disclosure re. relationships with partners. For example, what is going on with Mix Telematics and why aren’t we being told? It’s been years since a contract was signed and we still have yet to see it bear any fruit. Hiding behind NDAs just looks weak.

I hope next week at the Capital Markets Day the management under new CEO Paul McGlone will adjust course and address longstanding investor concerns about the lack of transparency and poor news flow. After all, investing should work for the many, not the few.

This isn’t meant to knock the staff of Seeing Machines or its technology. I have the highest respect for the brilliant technology coming out of this company and the dedication of the majority of its staff to delivering life-saving technology to the masses. I just want more transparency and better execution from management.

The writer holds stock in Seeing Machines.

DMS requirement to become law in EU

I can now confirm that the new European Union ‘General Safety Regulation’ rules are set to enter into force in January/February 2020, then start applying 30 months later.

The process, I’ve been told by an EU spokesperson, is as follows:

  1. The Council of the EU decides to adopt by accepting the European Parliament’s (EP) amendments to the Commission Proposal (8th November)
  2. Then the act is signed by the President of the EP and the General Secretary of the Council in the week beginning 25th November.
  3. Within a month it gets published in the Official Journal of the EU.  The act in this case provides that it enters into force (obtains legal existence) 20 days after publication in the OJ.

The act also provides for a 30-month transitional period for most provisions, which means it will only start to apply 30 months after entry into force.

Note: the exact date(s) will be known only once the act has been published in the OJ as all deadlines depend on that date.

2020 the year of DMS

Enough of EU procedures: the good news is that from 2020 there will be a legal requirement for all completely new car models to have systems to monitor drivers for drowsiness and also distraction by June 2022, while even refreshed models will have to comply by 2024.

Euro NCAP, which has traditionally set car safety standards well beyond legislative requirements, is pushing equally hard for advanced driver monitoring. It is developing test and assessment protocols that will be introduced at the beginning of 2021. Moreover, requirements to measure driver distraction and fatigue/drowsiness will be built into Euro NCAP’s 5 star safety ratings from 2022.

Thatcham Research, is also working with Euro NCAP to develop testing protocols to ensure future cars have effective driver monitoring systems.

While these regulations and standards are intended to be ‘technology neutral’, it is now obvious that the only technology that can effectively meet these requirements is camera-based DMS.

This is very positive news for Seeing Machines, in particular, and I’m expecting some big auto contracts to be announced soon.

The writer still holds SEE stock!

CAT-style Aviation licence deal is coming

The announcement by Seeing Machines that it is collaborating with Alaska Airlines is significant as it underlines its intention to extract value from its leadership position in this niche of the Aviation market.

In a note issued today by house broker Cenkos, analyst John-Marc Bunce reiterated Seeing Machines’ determination to sign a CAT-style license agreement with two major aviation simulator manufacturers.

Bunce wrote: “With Seeing Machines many years ahead of its nearest rival in this sector, it is looking like the company could be in a strong negotiating position in discussions with the two major simulator manufacturers for a license. We believe a successful outcome could include an upfront payment as well as a value driven or recurring royalty element.”

It doesn’t require too much detective work to find out who these two are likely to be but, as I don’t want to prejudice any final negotiation or comms plan, I’ll avoid speculating publicly for the time being.

Such a deal should certainly bring forward breakeven and act as a catalyst for a significant re-rating. This is before the announcement of further auto OEM auto wins in Europe — never mind Japan.

The writer holds stock in Seeing Machines

Time to re-rate SEE 2.0

Seeing Machines’ (AIM: SEE) full year results indicated strongly that the issues that affected its fleet division are fixed and I expect news flow over the next few months to drive a significant re-rating.

In a note issued yesterday, house broker Cenkos upgraded its price target to 12p. Analyst John-Marc Bunce explained: ‘We believe the turnaround in fleet will drive the company to profitability in under 2 years with the cash runway looking sufficient even before accounting  for licensing deals or financing against recurring revenues.”

This was reiterated in a webcast from CEO Paul McGlone today in which he assured investors: “Fleet is fixed and starting to perform”. He added that there were no plans for a dilutive equity fundraise in his 3-year plan. Moreover, an aviation licence deal (expected to happen before year end) would effectively mean the company is funded to profitability.

Fortunately, the new CEO seems to have pressed the reset button and confirmed that over the past 6 months he has made significant changes: “The business is now focused on profitable revenue, we don’t chase strategic business.”

Cenkos has pencilled in a conservative (how I dislike that word) A$47.5m revenue figure for the full year to June 2020, with a pre-tax loss of A$35.9m. Thereafter losses fall in 2021 to A$10.6m and SEE reaches profitability in 2022 (A$47.5m).

I think these estimates will be revised over the course of the coming year, bringing forward breakeven by at least a year.

After so many years of disappointment and failure to deliver against financial targets I think this will be a transformational year for Seeing Machines. It will hinge on these 3 things happening:

  1. Acceleration in the installation of Guardian in fleets and cheaper units produced in H2.
  2. More auto OEM contract wins.
  3. Aviation licence deal by the year end.

 

Positives

Fortunately, signs look good for all three.

  1. Fleet growth should accelerate further this year as Cenkos confirms: “We believe the guidance for 27k-30k connections at the end of FY2020 is conservative and underpinned by a strong pipeline.” Moreover, the unit costs of Guardian are due to come down significantly from the the second half of this financial year, driving more profit. In addition, McGlone today revealed that SEE is expecting solid growth in the US market.
  2. I’m expecting two existing US customers to extend their existing contracts and Seeing Machines to win two more OEMs in Europe very soon. This is aside from continued progress in Asia over the course of this financial year.
  3. We now know (after the webcast) that Aviation licence deals are coming soon. That will improve the bottom line without involving significant risks and costs.

Lest we forget, there is also a bigger game afoot, as Bunce pointed out in his note:

“… one could argue that Seeing Machines has greater strategic value than Mobileye has as we highlight the ever-increasing importance for reliable face, eye and emotion tracking in the real world for many applications beyond automotive and transportation; from retail, medical, personal robots and personal computing devices. This value would be seen not just but major chip and software platform providers like Intel, but also the world’s tech giants.”

I’d advise all investors to do their own research and the above is my opinion only.

The writer holds stock in Seeing Machines.

10 questions to Seeing Machines

I’m expecting Seeing Machines to provide positive news and an upgrade for its 2020 financial year when it releases its full year results for 2019 on 23rd September.

However, this is no time for complacency, especially given the errors of the past under the previous management. In particular, questions have been raised about its operational costs and whether it has sufficient cashflow to avoid another raise. I hope we’ve entered a new chapter but we’ll soon know.

Unfortunately, for a few months now Seeing Machines has refused to engage with me and answer my questions. Fine.

However, it would be a shame if hard questions aren’t asked and answered by management when these results come out. To aid that transparency, here are 10 that I hope investors will be asking when the results are published.

1. Analyst Sanjay Jha at Panmure Gordon has previously stated, in a note dated 5th June, 2019 that Seeing Machines isn’t funded to breakeven. “We continue to believe the funds raised in April are not going to last 18 months as the company continues to pursue opportunities in 4 different sectors (Automotive, Fleet, Aviation, Off-road).” When do you now anticipate breakeven and will you need to raise again before then?

2. Regarding operational costs: how many people are now employed by SEE? Did operational costs increase in 2019 and by how much? How much are operational costs planned to increase in the current financial year (2020)?

3. Are you actively seeking to renegotiate the Rail contract with Progress Rail? If so, when do you expect it will be concluded?

4. Given you don’t have the cash to develop automotive, are you actively seeking a CAT-style licence deal for aviation? Do you expect it will be concluded before the calendar year end?

5. Is the monthly growth in fleet revenues sufficient to avoid any further fundraise? Can you quantify this growth?

6. Why has the relationship with Mix Telematics failed to produce much revenue? Is this likely to change in this financial year? How and why?

7. What is the number of Guardian installations you  expect to have in place by June 30, 2020. What is the monthly installation rate? Can you confirm that these are generating cash immediately? What’s the lag?

8. Re. Auto, are you now gunning for the low, mid and high end auto market?

9. Is it the case that if a budget OEM needs a cheap DMS you can provide a DMS chip with less functionality at a reduced price?

10. Are you actively working with Japanese OEMs. Have they finalised exactly how they want DMS to work? (Eg. Integrated into ADAS).

I’m far from infallible and I’m sure investors may have additional questions. Good luck to all holders!

 

The writer holds stock in Seeing Machines.

 

Long live the King of the DMS

In a recent note from Redeye, its analyst commented that whoever wins VW or Toyota in the second half of the year will be ‘King of DMS’. He seems to think it may be Smart Eye, whereas I’m convinced it will be Seeing Machines that wins both.

I also believe Smart Eye will soon suffer the embarrassment of Volvo choosing Seeing Machines for its 2021 flagship XC90’s DMS.

Certainly, after a successful fundraise Smart Eye looks ‘strong and stable’ but as the British electorate knows only too well, the truth will out. Propaganda eventually has to give way to reality. That time has arrived for Theresa May and will very shortly arrive for Smart Eye. Tick tock.

Enough of analogies, Smart Eye even as number 2 will have its share of the cake that SEE doesn’t want. China is a big market and I wish it well there. I just hope Chinese consumers don’t take a ride in Byton’s M-Byte when it launches later this year — it features SEE’s superior DMS.

I also believe that the BMW X5 and Audi A8 will revert to Seeing Machines – for as the Beatle song Drive My Car, could have said:  ‘Using a DMS at up to 37mph is all very fine, but I can show you a better time’.

In the auto world premium means ‘the best’. In a very competitive market Audi and BMW can’t afford to look like chumps v. Mercedes when it comes to safety. That is why auto OEMs are telling, yes telling, Tier 1s to use Seeing Machines technology.

Some will naturally dispute what I’m saying. Still, let those with ears to hear, hear.

The writer holds stock 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.

eServGlobal: M&A thoughts

FinnCap, the house broker for eServGlobal, has published a note highlighting the accelerating pace of M&A activity in the payments industry and its implications for the AIM-listed minnow.

There have been 3 big mergers so far this year in the payments industry:

  •   Fiserv’s acquisition of payments processor First Data for $22bn;
  •   Visa’s acquisition of Earthport for £200m; and
  •   Worldpay acquisition of FIS for $43bn.

In addition, after missing out in the Earthport auction, Mastercard has bought Transfast. This prompted EservGlobal to issue an RNS today in which it stated: “Transfast is a network partner of HomeSend, offering reach and connectivity principally into Africa and Latin America, together with foreign exchange and ancillary services. Network relationships are a critical element of HomeSend’s services and HomeSend continues to grow these partnerships through several regional network partners, such as Transfast, together with HomeSend’s own direct connections, to deliver across multiple markets and channels.”

FinnCap Director of Research Lorne Daniel explained: “After missing out in the Earthport auction, Mastercard has bought Transfast. We see this as augmenting not replacing HomeSend. The Transfast acquisition will augment Mastercard’s well-defined and established strategy to dominate global payments with a range of solutions. Purchasing one of the technologies underlying Mastercard Send gives greater control, adding capacity as well as reach.”

Daniel noted: “We continue to expect Mastercard to seek full control (from its current 64.31%) of HomeSend, which it continues to flag as a key platform to dominate international Account-to-Account and Business-to-Business transfers. Indeed, the recent surge in M&A activity in the segment should hasten that move.”

Daniel currently has a target price of 20p on the share.

The writer holds stock in eServGlobal.

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.