Seeing Machines wins A$21m Japanese auto contract

Seeing Machines has won its first Japanese car manufacturer, rumoured to be Honda, in a deal initially worth A$21m (US$14.6m). The cars will go into production in 2025.

The actual headline figure for the win is highly conservative and is likely to end up many times bigger as the car manufacturer rolls out the technology across an ever-increasing number of models. This is what happened with BMW, Ford and Mercedes and I’m confident it will repeat here. 

Japan turns to Seeing Machines

The really important learning from this win is that SEE has finally cracked Japan, after years of hard work. Marc Bunce, an analyst at broker Cenkos, says: “We believe today’s win is a first step into the Japanese market and that the cost and performance advantages of Seeing Machines software and embedded systems approach, will enable it to win further business with Japanese OEMs.”

Hence, this will prove to be the first of many contracts with Japanese car companies that will confirm Seeing Machines position as the global leader in driver/occupant monitoring (DMS/OMS).

SEE already has a confirmed (conservative) auto pipeline of US$240m, although in all likelihood it is likely to be double that. As Bunce explains: “The ‘cumulative initial lifetime value’ of these award wins now up to A$345m/US$240m which we believe is predominantly based on conservative minimum production commitments for initial vehicle models. However, with actual production volumes usually much greater than minimum commitments, and the technology already being seen on models beyond the initial award win, we believe the likely lifetime value of these awards is already considerably larger.”

Global leadership

It’s now clear, as predicted here 4 years ago, that Seeing Machines is set to take over 75% of the global DMS market. Ironically, it seems that the market has de-rated its main rival Smart Eye based on this assumption without re-rating Seeing Machines. It is a position that, while frustrating to those holding the share, can’t last much longer.

Seeing Machines very dominance is the reason I don’t believe it will be allowed to remain independent much longer. With every auto contract won the importance of Seeing Machines to Qualcomm’s ambitions in the auto market become more obvious. Given that Qualcomm was keen to swoop on Arriver I expect the time is approaching when Christiano Amon will again reach for his wallet to try and secure the global leader in DMS/OMS.

Qualcomm CEO Cristiano Amon let the cat out of the bag in a recent interview, in which he discussed Qualcomm’s diversification strategy. He confirmed, after boasting of its US$16bn auto revenue pipeline and talking about the Arriver purchase: “Clearly M&A is going to be part of Qualcomm as we accelerate those non-handset businesses.”

With SEE’s auto-win rate increasing the prospect of an actual A$1bn pipeline isn’t very far away. If you also include revenues from its fast-expanding Fleet and Aviation divisions, Seeing Machines is a must-have for a chip company that wants to diversify its revenue stream.

SEE is almost totally de-risked, with earning visibility becoming clearer every month. The future cashflows from auto, fleet and aviation are going to be huge. Moreover, with the continuing investment in its intellectual property to ensure its systems remain far ahead of any rival, it has created a strong moat to fight off any would-be competitors for the foreseeable future.

Takeover target

By the end of its current financial year, all this should be clear to even the most sceptical investor but to savvy industry players, such as Cristiano Amon, it must be obvious now. Amon doesn’t strike me as the kind of man who would ever allow a competitor to eat his lunch – as Magna can bear witness.

Only Alphabet, Apple or Amazon would have the financial muscle to separate Qualcomm from its intended target. I’d add in Tesla as a wild card. Elon Musk loves pulling surprises and Tesla needs a decent DMS. Instead of blowing tens of billions creating an in-house solution he might just wake up one morning and decide to buy SEE.

Blue sky valuation?

As to valuation? Well, I’d value Seeing Machines’ Auto division at US$5bn minimum, Fleet about the same. Aviation isn’t as advanced but it’s a huge market that it is developing, so say US$2bn. In total, its intrinsic value is approximately US$10-12bn today.

Alternatively, If someone has the nous to offer 50p a share and SEE accept, well done. In 2 years they could probably float the company for 5x to 10x that. 

Some will doubtless say I’m talking nonsense. But the same naysayers said that 4 years ago when I predicted Seeing Machines would grab a 75% share of the global DMS market.

The writer holds stock in Seeing Machines

Growing broker coverage for Seeing Machines

Seeing Machines is picking up more broker coverage from quality analysts as it nears an inflection point from growing license fee income from autos and trucks. Berenberg today issued an initiation note with a ‘Buy’ recommendation and a price target of 12p, while Peel Hunt has also tipped SEE. 

Berenberg 12p target

While Berenberg’s price target is quite conservative, the arguments and conclusions contained within the note were reassuring as they confirmed that:

  • Seeing Machines has the “best-in-class DMS technology among peers”.
  • Aftermarket (Fleet) product is a hidden gem. “Guardian…is considered a top product by customers such as Shell, Caterpillar and National Express, who say it has significantly reduced their traffic accidents and cut their transport insurance premiums.”
  • Stellar growth from auto license fees is a near certainty. “As we expect royalty revenues to more than double yoy from 2022E up until 2025E (c113% CAGR), we see an inflection point for the OEM business and for SEE. To top it off, all the revenue projected up until 2024 has already been awarded (ie as long as the cars are manufactured, SEE will hit these revenue forecasts).” 

This extract from the Berenberg note is worth quoting at length:

OEM business (c60% of 2025E sales) at an inflection point: SEE receives royalty revenue each time a car using its DMS technology is produced. We expect this revenue to more than double every year from 2022E to 2025E (c113% CAGR) based mostly on contracts already awarded. This is, however, assuming just a 33% win rate for SEE and a c25% drop in per-car royalty revenue over 2022-25E. Our channel checks provide a high level of confidence that the group has unparalleled DMS technology, with capabilities to power other smart car features as well (eg occupant monitoring), which along with the regulatory tailwinds mandating DMS should bring about an inflection point for the group’s OEM business. In a blue-sky scenario where SEE has a higher win rate (60% by 2025E) and maintains pricing power (by releasing more features), we see c65%/95% upside to our 2025E group base-case top-line/gross profit estimates. With SEE winning 46% of recent bids, the blue-sky scenario is within reach.”

Note that in its base case for 2025, Berenberg has sales at A$137m and gross profit at A$84m.

In the blue-sky case, Berenberg has sales at A$225m and gross profit at A$163m.

Personally, I expect upward revisions to this very soon as my base case is 70%.

Peel Hunt tips Seeing Machines

Separately, Peel Hunt analysts in their regular ‘Tech: Bits & Bytes’ note recommended Seeing Machines as “a pick-and-shovel play for the smartification of transport”.  

They added: “Seeing Machines is finally starting to see non-NRE OEM revenue’s come through. As the OEM engagements evolve, ARM-like high margin royalty revenue streams should unlock for Seeing Machines.”

Seeing Machines now has broker coverage from Stifel (house), Cenkos, Panmure Gordon and Berenberg, while it is clear that Peel Hunt is clearly following the story closely. As Seeing Machines picks up more auto contracts and grows fleet, not to mention Aviation (and possibly starts to move into other markets, such as marine), I believe this will re-rate. 

Yes, SEE is well down with market jitters. Yet, I’m more convinced than ever that Seeing Machines is likely to be the subject of a bid within the next few months. There is no need for it to show a profit as the coming revenues and profits are clearly coming as license fees ramp up.

Ukraine

As to Ukraine, I think there is scope for negotiation that will reduce tension provided the US and NATO stop trying to bully Russia in its own backyard, using Ukraine as a stick (though that stick got a bit smaller yesterday). Tariq Ali has written great analysis in the New Left Review that puts the recent moves in perspective – though you won’t see him being interviewed on any mainstream media news outlet in the UK.

I’m certainly concerned about a proper stock market crash later this year, as inflation concerns give way to deflation and the growing realisation that only debt is holding the wider stock market up. So Seeing Machines, my advice is to get the deal done by June.

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.

Seeing Machines wins BMW contract worth between US$125m to US$250m

I’m convinced that Seeing Machines has recently been awarded a contract worth more than US$25m a year by BMW to supply its driver monitoring system in its cars, some of which should be available for sale by 2020.

From discussions with auto industry contacts, I believe the contract is for many forthcoming models (several million cars) and the DMS is likely to eventually end up being standard issue within the instrument cluster of all BMW cars. Given that BMW sells roughly 2.3m cars a year and that Seeing Machines would get approximately US$30 a car, that makes a potential annual income of US$57m a year by 2020, rounded down to US$50m.

Given that in the auto industry the lifetime of a model lasts for roughly 5 years, the lifetime value of this contract should be at least US$125m, though it could be as much as US$250m.

When this news is officially announced I’d expect broker upgrades to be the order of the day.  FinnCap currently has an estimate for full year revenues of A$141m for 2020 and Canaccord Genuity has an estimate of A$128.5m — of which only A$24m is from auto!

Aptiv

There has been no official announcement of the contract win aside from an announcement by Aptiv on page 9 of this document that I take as confirmation. 

When questioned, Aptiv were unwilling to discuss any details, saying: “…unfortunately we have nothing incremental approved to share beyond what’s in the document.”

Given the scale of BMW’s operations, the BMW contract may be shared with at least one other Tier 1 but no others that I’ve contacted are keen to confirm or deny involvement.

BMW itself remained rather coy. Asked how it plans to solve the problem of driver disengagement and the associated issue of ensuring the driver is alert and ready to take back control from the car, whether it would use a driver monitoring system and who would supply it, a spokesman said: “So far we have only announced that interior cameras will play a role ensuring the vaild point you mention. Details on functions and suppliers have not yet been announced. We have to ask for a little more patience.”

Seeing Machines was contacted but declined to comment.

Winning BMW so soon after it won a huge contract with Mercedes last year truly cements Seeing Machines’ Fovio driver monitoring system as the leading DMS in the auto industry. The premium choice for premium auto manufacturers.

Note that General Motors Cadillac already features Seeing Machines Fovio DMS.

Not only is Seeing Machines working hand in glove with Autoliv and Bosch, but I believe its DMS is now being used by LG (Mercedes), Aptiv and probably others that I don’t know about.

Driven by regulatory changes many other car OEMs are going to be tendering for DMS systems and Seeing Machines is set to be the industry standard. A standard that i’m consistently told no other company can yet match.

Thus, I’m confident that Fovio is likely to be chosen by many other global OEMs as they gear up new, increasingly semi-autonomous, vehicles for production over the next year.

Valuation

By my reckoning the automotive side of Seeing Machines must already be worth £1bn and with every new win is only increasing in value.

Moreover, there’s a strong case for arguing the rest of the business (Fleet, Aviation, Rail and Off-road)  is worth another £1bn.

Given the success of Seeing Machines in winning large contracts and the increasing momentum of M&A activity in the auto industry I believe it’s only a matter of time before a bid is forthcoming from an industry player. Let’s hope the price soon reflects the value of the business.

The writer holds stock in Seeing Machines

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.

Seeing a CES bonanza for Fovio

This year’s CES show in Las Vegas has demonstrated strong interest in driver monitoring systems (DMS), from automotive manufacturers and their Tier 1 suppliers. All good news for Seeing Machines’ Fovio division, which is fast becoming the dominant supplier of driver monitoring systems to guard against driver fatigue and distraction.

It was at CES in 2015 that Seeing Machines first showed its driver monitoring car technology with Jaguar. In addition, Seeing Machines has confirmed that Bosch, Takata and Volkswagen are showcasing Fovio tech at this year’s CES.

  • Bosch’s vehicle demonstrates new intelligent driver interaction capabilities enabled by Fovio
  • Volkswagen demonstrates a vehicle cockpit concept with integrated Fovio DMS
  • Takata demonstrates steering-wheel integrated DMS

I think it is only a matter of time before many other OEMs and Tier 1 suppliers are linked with Seeing Machines as the auto industry introduces advanced semi-autonomous vehicles, then fully autonomous vehicles.

As Mike McAuliffe, ceo of Fovio has noted: “We’re seeing a groundswell of demand in the industry for our Driver Monitoring technology.”

Tesla, Jaguar, Land Rover and Porsche are all marques that I personally think are likely to adopt its technology. For instance, Elon Musk would be in ‘ludicrous’ mode if he didn’t appreciate what Seeing Machines DMS could do to enhance safety features in his cars.

Ludicrous valuation

What is undeniably ludicrous is that this stock languishes at a market cap of £45m when it is about to crack not only the auto market with Fovio but the fleet market with its Guardian product. (Caterpillar liked its driver monitoring product for the mining industry so much it bought the whole operation in return for an upfront payment and ongoing license and royalty stream for Seeing Machines).

Seeing Machines now has only to lie back and wait for the money to roll in from the Caterpillar sales team. Similarly, holders of this stock who hold it for a couple more years should make a stellar return.

According to projections from Lorne Daniels, a well respected analyst at house broker FinnCap, Seeing Machines will deliver sales of Aussie Dollars 141m (£84m) in 2019 with pre-tax profits of A$22m (£13m). I expect this figure to be revised sharply upwards along with his target price of 12p by the end of this year.

Any lingering doubts about the take up Seeing Machines offering in the fleet space were certainly dispelled with its tie up with Mix-Telematics, a global telematics provider in late December.

Following its fundraise this month, I’m convinced Seeing Machines is set to rise steadily.

However, don’t take my word for it. Do your own research and then make your own mind up.

The writer holds stock in Seeing Machines

Seeing Machines develops hardware chip

Seeing Machines’ announcement today that it has launched its first generation ‘Fovio’ embedded hardware chip has sent the share price flying. The reason being it appears strengthen its technical leadership in transport tech for fatigue and distraction monitoring while also broadening its reach, towards a diverse range of Artificial Intelligence and ‘Internet of Things’ applications.

Lorne Daniel, analyst at house broker FinnCap, commented: “The latter is new, and hints at an even broader market than previously supposed. Current contracted OEM vehicle deliveries (assumed to mean GM 2017 CT6 Cadillac with SuperCruise) are on track to launch in 2017 as software; however, the FOVIO chips are likely to be used in the second generation rollout to the entire GM range as agreed in the follow-on OEM contract. Embedding the software in a chip reduces the cost and time to market for OEMs and their tier-1 suppliers, facilitating mass market rollout since driver distraction is becoming a critical issue for the industry.”

There has been no update on its automotive spin-out, although technical progress clearly continues. Ken Kroeger, chief executive officer of Seeing Machines, commented in the RNS: “I am delighted to announce the introduction of our FOVIO DMS Chip which, as a World first, further cements Seeing Machines’ position as global leader in the Driver Monitoring industry. The FOVIO Chip will greatly reduce the cost of DMS deployment, helping to accelerate not just our growth but mass market uptake of DMS technology in general. This product will become the key offering of FOVIO, our new stand-alone automotive business that is currently being structured and staffed.” 

One assumes that any hard negotiations taking place with potential investors in the auto spin-off should be made easier by this announcement. Certainly, it can only make SEE a more attractive target for any cash-rich company wishing to dominate this space.

With all the talk about Apple buying McLaren recently, one wonders if this company is on its radar? Certainly, See’s market cap is too small given its leadership in the DMS space.

Q&A with Ken Kroeger

Below is a brief Q&A that Ken Kroeger, chief executive officer of Seeing Machines replied to late today (Australian time). Unlike a robot he still has to sleep – still, I am sure SEE are working on that.

1) Why was the news announced now, 2 weeks before the results? Is it to strengthen the hand of SEE in negotiations with the spin-off partners for Fovio and telemetric partners re. Guardian?

We demonstrated the chip to the first tier-1 this week and our Nomad felt that the market should be informed at the same time considering the quantum of the investment that has been made in the design, development and first runs of samples, which is now in the millions of dollars as it’s been two years of work from a sizeable team.

   

2) How does this news affect the auto spin-off? I’d assumed that a chip manufacturer/designer such as Intel or Arm might be a possible investor – does it make that more or less likely now?

The chip has been in development for two years. The semiconductor companies are all interested in our business and would all like us to migrate to their silicon in order to drive sales of their offering. We have a current silicon strategy working with an unnamed major partner that delivers not only the required hardware performance, but also the margins that are essential to the long term success of the auto business. The technical team has been built specifically around this particular silicon technology so a change would require additional investment.

3) How would you describe the significance of this move?

It’s an amazing step when you think about the fact that until two years ago everything we had ever sold ran on a very expensive computer and that everything ran on the Windows platform. Here we are today, running higher performing software on a device that we can sell for a tenth of the cost of that older processor and still have healthy margins in the business.

   

 4) Do you have any information on how much cheaper it will make the cost of DMS deployment?

We can say that if it was available for the first generation OEM automotive product, it would deliver a greater than 15% saving to the end price of the system. A significant number when you’re buying things such as millions of cars.

My Conclusion

As it’s well known that the growing ambitions of this company require more funding I’m very keen to hear more about how this development plays into Seeing Machines’ overall strategy.

Its results presentation will be on October 3rd, which should be a very interesting day.

The writer holds stock in Seeing Machines

   

Analyst very positive on Seeing Machines

As the UK was voting to leave the EU I was speaking with Lorne Daniel, the analyst at house broker FinnCap who covers Seeing Machines.

It was Lorne who first opened my eyes to the enormous potential of this AIM-listed company.

Like me, he’s very much looking forward to the automotive spin-off, expected to raise up to US$50m, perhaps in two tranches. Interestingly, he feels confident that SEE will maintain a high stake, around 75% in the initial funding round, perhaps dropping to around 50% in the second round.

This is what he said: “In the initial round, I was thinking Seeing Machines would have 75% and the investors will have about 25%. Then it would drop to around 50% for the second round.  Nothing has been confirmed yet but that was my thinking.

“I guess we will find out but as I understand it they need around US$50m. So, however that comes in, (for example, $25m and then $25m), I would be disappointed if they didn’t value their own IP at US$50m plus. I think it is worth, far more than that by any sort of calculation.”

“But to be fair, these initial investors are likely to be industry giants taking a big stake and they will want their cut. That’s fine.

“The template is Mobileye which has a US$8bn valuation on the US market with revenue of just US$240m. If Seeing Machines’ automotive spin off gets anywhere near that rating nobody will worry what that initial valuation was.”

Now my belief is that GM Ventures is the cornerstone investor and that VS Industries is investor number two. I don’t know who the third might be but I’m hoping it may be Intel. 

We shouldn’t have to wait too much longer to find out, given that Seeing Machines announced that lead investor had signed a term sheet on May 16. 

Fleet

Not only is SEE getting 15% of the growing royalty stream and monthly revenues  from sales of its product by Caterpillar, but it involves virtually no cost. Moreover, as soon as a telematics deal gets announced, and we already have MOUs, this will have forecasts upgraded substantially. This is turn should lead to a significant price rise and a further re-rerating. 

It’s significant that Seeing Machines is now leveraging insurers and telematics companies to roll out its technology in a cost-effective way. 

As it starts to grow you can also expect momentum traders and larger funds to start getting interested in the company, which would drive the price up further.

Of course, all this supposes that things go smoothly, which is never the case in business. 

Price target

Lorne Daniel currently has a price target of 12p on SEE and I’d expect that to rise following either the launch of the auto-spin-off or a significant fleet contract. 

Takeover

I’d be concerned that as the company is so undervalued, particularly given the limited downside and the virtually unlimited upside, an attempt to take it over on the cheap can’t be ruled out. This could be a direct competitor, or possibly a partner on the telematics front, or even Mobileye whose technology offering would be significantly enhanced.

In fact, I could reel off half a dozen companies that might logically seek strategic advantage by buying SEE.

However, the auto spin-off (by providing independent valuation of its IP far in excess of its current market value) will make this eventuality less likely. Certainly, any company then wishing to takeover Seeing Machines will have to pay a significant sum. I personally don’t think US$1bn would be an unrealistic sum to expect at that stage.

As the auto spin-off is very likely to be completed this side of Christmas (key management should definitely be in place by then), I’m prepared to stick my neck out and say that within 18 months I expect SEE to have a valuation of between 50-75p. That’s quite a rise from 3.25p at the time of writing.

Of course, you should always do your own research before investing.

The writer holds stock in Seeing Machines.

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.