Tag Archives: Stifel

$16.5m license deal for Seeing Machines with slight delay for Gen 3 ramp

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Seeing Machines (AIM: SEE) surprised the market with a ‘good news-bad news’ RNS, that led to house broker Stifel reducing its price target to 13p, while still maintaining its ‘Buy’ recommendation.

The good news was that it has renewed its software license for its Guardian aftermarket product with Caterpillar. It appears that is has received a $16.5m upfront payment covering a period of 5 years.

Unfortunately, it was effectively overshadowed by the bad news; a statement that “cash EBITDA” was behind expectations, due to a slower transition to the Gen 3 product.

Stifel analyst Peter McNally doesn’t appear to be overly concerned by the Gen 3 delay, reducing revenue estimates by 7.1% and 6.0% for FY25/26. He also assumes a higher level of operating costs going forward resulting in his reported EBITDA estimates dropping from $14.3m in FY25E to $7.0m and cash EBITDA loss falling to $10.8m from $3.5m. With the benefit of the cash from Caterpillar, his FY25 gross cash estimate reduces by a smaller amount to $14.2m from $17.9m.

He wrote: 

“The cash EBITDA weakness has been due to a slower transition to Gen3 Aftermarket products, and we think this will have an effect on our forward estimates, which we adjust to reflect today. However, the company reiterates its guidance for FY25 cash flow run-rate breakeven and the payment from Caterpillar helps boost the company’s already healthy balance sheet.

As the company gets closer to cash flow breakeven, we think the shares will appeal to a much broader group of investors, which should have a beneficial effect on the share price.

Seeing Machines remains one of our top picks within the sector. The shares trade at 4.1x EV/Sales for FY24E or 3.4x for FY25E. The estimate changes result in a revised target price of 13p from 15p, but leave plenty of upside to the current price.”

My personal view

I was very pleased with the license deal, particularly as it enables SEE to sell into the on-road portion of the General Construction category. As the RNS stated: “The changes open up access for Seeing Machines to sell its Guardian solution for on-highway vehicles directly and through its distribution network to select customers in many market segments of the General Construction and other core industries.” 

I wonder if it might even open up the possibility of further licence deals with other manufacturers in the near future, covering vehicles ranging from asphalt pavers, backhoe loaders, cold planers, fork lifts and so on?

What was a mistake in my view was combining an RNS detailing a positive licence deal and one attempting to explain the slower sales of Gen 3. Indeed, I would have preferred the ‘cash EBITDA” issue to have been dealt with in a separate RNS as part of the Trading Update. 

Unfortunately, the way the information was presented effectively killed what was a very good news story without giving any real insight into the issues with Gen 3 uptake. It’s not the first time great news has been upstaged by something negative and it was a clumsy way to communicate to the market.

Regarding the ‘bad’ news, the RNS that was published this week posed more questions than it answered. The reasons for the slower transition to Gen 3 weren’t properly explained, so I expect management to soon clarify exactly what has caused the delay. I’d also like to know if it correct to assume a higher level of operating costs going forward.

That said, Gen 3 is a game changer once it gets going. And that isn’t like to be far off. One source, who prefers to remain nameless but is so accurate that I refer to him as Nostradamus, told me: “I’m expecting sales to ramp up around November/December.” 

Another source has indicated that getting final sign off from the regulatory authorities for the Aftermarket Gen 3 Guardian solution in situ was the delaying factor. (I guess we should be thankful that the EU’s GSR standards are so high). However, that has apparently been achieved recently, so I’m expecting announcements regarding that. 

But why wasn’t that communicated in the original RNS, which would have made clear that the slow Gen 3 uptake really is just a temporary issue that has effectively been resolved? Somehow there appears to have been a miscommunication that cost investors dearly.

Mercifully, for the impatient, auto is doing very well. Not only am I confident that SEE will hit 3m cars on the road by the end of this financial year but Colin Barnden, the renowned analyst at Semicast Research, confirmed the likely ramp on LinkedIn. “The assumption is just the BMW and VW programs will lead to DMS deliveries exceeding 1 million units per quarter within the next twelve months. After many years of delays and frustration, 2024 will be the year DMS deliveries finally exceed ten million units.”

Apparently, the mix in terms of auto vehicles in Q2 led to a slight miss on the profit front for auto but with volumes shooting up it’s of little concern going forward. So why mention it in the RNS? 

I’m still very keen on this stock but would really like a little more care taken in the way news flow is handled and the RNSs are put together. It appears a bit too amateurish for a company that is a global leader in an increasingly hot niche market.

The writer holds stock in Seeing Machines

Seeing Machines set to become cash flow positive in FY2025

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In an exclusive interview with Safestocks, Stifel technology analyst Peter McNally has confirmed that his view is that Seeing Machines does not require a fundraise and is set to become cashflow positive, on a monthly basis, in the 2025 financial year (FY2025).

Peter McNally, took over coverage of Seeing Machines at Stifel (house analyst) five months ago but he has known the company for a number of years. I think his insights will prove invaluable. I’m presenting my questions and Peter McNally’s answers in a Q&A format to preserve the integrity of his answers.

Q&A with Peter McNally

Q. Regarding the H1 2024 Trading Update & Quarterly KPIs, what was your view?

Firstly, the KPIs look good to me. They are the only company out there that is actually doing any normal KPIs and providing transparency. The cars on the road number at 1.5m is a great milestone to reach. We know it is just the beginning. The numbers themselves look very healthy, we’re not changing estimates or anything like that.

What we saw was that everything is in line. We wondered if the headline number of 5% growth was going to dissuade any folks. We tried to call out on our note that they are not making excuses for themselves by stating that the underlying growth is 28%, if you take out that Magna exclusivity licence. It is actually quite valid because that 28% growth is more around royalties, boxes, monitored connections and that license really is kind of a one-off.

That was 28% growth in the first half. Based on our estimates, to hit the full year numbers they have to move from US$26.5m in the first half to US$40m in the second half. That sounds like a big number but for them it is actually not. Typically, the company revenues are 40% first half weighted and 60% second half weighted — to get to our number assumes 61% weighting in the second half. That is pretty much in line with typical seasonality. You also have to keep in mind that you have some sales that were done of the Gen 3 Guardian product on the back of CES and, as regulatory deadlines approach, there will be demand for more services. 

Their existing launches are still ramping, so we think that is good news. If you were to do it on a like-for-like basis, it assumes the second half grows at 20% and they just did 28% in the first half. So we’re pretty comfortable with it.

Regarding the cash position, we’re also comfortable with that given that we expect a $14m increase in revenues in the second half while the costs are virtually the same. There is about $1m increase between this year’s costs and last year’s costs, and I am talking cash cost not just income statement costs. 

The cash costs for this business in FY2024 are, in my estimates, only about $1m more  than they are in 2023 but revenue rises by $7.9m. The company hasn’t cut its cost structure by much, it’s just that the revenues are coming through. That is what reduces the cash burn down to a very low level, along with $5.5m of receivables and inventory unwind in the second half. They are saying somewhere between $5-6m.

Q. So there is no reason for a raise this calendar year?

A. There is no reason for a raise at all, so far as I can see. Unless they wanted to. They are on track to be profitable next year. It’s not a shoo in, they’ve certainly got their work cut out for them. It all looks like it’s going to plan, so we’re not worried.

Q. When exactly do you expect Seeing Machines to be cash flow positive?

A. Our estimates assume that on an operational basis in FY2025 they will do operating cash flow of just over $21m but we think they will spend about that amount on capitalisation and hardware as well. We have a small net cash outflow of about US$1m for FY2025. However, on a monthly run-rate basis, they will become cash flow positive during fiscal 2025, but we haven’t put out the exact month.

Q. Is there a likelihood that they might want to make an acquisition? For instance, to add more features to their auto offering?

A. I would say that at the moment they are 100% focused on the business that they have at hand. That doesn’t mean that they are not opportunistic. If something were to come up I’m sure they would have a look at it. But I don’t think acquisitions are on the radar screen at the moment. Maybe they might be, further down the line. Could it be some form of geographical expansion, I think that’s possible. 

In terms of features they are in the driving seat. They are the one who is developing the features in the marketplace. I don’t think they need to buy in any features, I think they can develop them themselves. If there’s a short cut to development time that’s always a consideration, but I don’t think that’s in their mind at the moment.

Q. In terms of a US listing I hear a lot of chatter. However, if they do decide to go down that path isn’t it much further down the line, say 18 months to 2 years away?

A. There are many people who have suggested a US listing at some stage. Will they do it? I don’t know. I guess they could consider it but I think they have a lot of ground to cover before they would consider something like that. I think they are focused on making this business work right now rather than another listing.

Two years from now they might be in a very comfortable position, where the royalties are just rolling in. If they were to consider a US listing I think it is much further down the line.

The writer holds shares in Seeing Machines.

Will Seeing Machines’ likely Nasdaq listing elicit a bid?

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Rumours that Seeing Machines is planning a dual listing on Nasdaq gained further credibility with the attendance of CEO Paul McGlone at a recent shindig organised by house broker Stifel to promote that very idea to clients. The question is, might a dual listing be the catalyst for a bid?

It’s long been known that a dual listing on Nasdaq has been under consideration at the Aim-listed tech company for a number of years. At a previous investor meeting held online on 24th November 2021 Paul McGlone stated (in answer to the question: ‘Are there any plans to move to a US market?’): “It is in our plan, it’s only sensible that we talk about it. I do imagine that we will end up there but I want to see some additional momentum before we flick the switch on that particular transaction.”

With Seeing Machines coming to dominate interior monitoring with its class-leading DMS/OMS system, it appears that time is drawing close. Indeed, some argue that such a listing would be guaranteed to increase its US profile and enable it to secure more backing from US tech funds.

Stifel served as joint bookrunner on an $85 million dual-listing Nasdaq IPO for Renalytix AI back in July 2020. The price tripled shortly thereafter but has since come right back down. More successful was GW Pharma’s dual listing back in 2013, before it was eventually acquired.

Mobileye IPO

A more appropriate comparison is the Nasdaq IPO of Mobileye, floated for US$5.3bn in 2014, bought by Intel in 2017 for $15.3bn and now in the running for a potential $50bn spin-off IPO, backed by Morgan Stanley. 

Examining the prospectus for the original Mobileye IPO in 2014, indicates that Seeing Machines is set to be a superior business. Not only is it dominant in auto but also in fleet and aviation. Moreover, its robust technology has applications well beyond the transport sector. 

Expected date of dual listing

While it appears that no firm decision has been made by Seeing Machines regarding a precise date for a dual listing, I believe that the much-mooted plan is moving inexorably forward.

My sources indicate that (barring a market meltdown) it is most likely to happen around Spring 2023, by which time Seeing Machines is expected to have achieved several milestones that will have more US tech funds eager to jump in. These milestones include:

  • An order pipeline of $A1bn in auto;
  • A fleet operation that has proven it can scale, boosted by the third generation of its Guardian product, which will be easily incorporated into telematics products for trucks and buses;
  • The launch of a dedicated aftermarket division to sell its Guardian product to niche manufacturers of buses and trucks, with monitoring services sold to their customers; and
  • A licensing deal in the aviation sector.

I also believe that there is an outside possibility that increased momentum in auto and fleet, with Seeing Machines pretty much set to win every contract it contests, could bring forward the date.

Will QC gatecrash the party?

The question is, will the host of chip companies who want SEE’s IP wait until its value has been boosted by a Nasdaq dual-listing IPO before swooping? Moreover, will Qualcomm’s Christiano Amon risk another chip company, or one of the three Amigos (Amazon, Alphabet and Apple) eating his lunch? It doesn’t seem likely. The Arriver acquisition proved Qualcomm fights for want it wants. 

Given the crucial importance of Seeing Machines vision technology to Qualcomm’s Snapdragon Drive automotive stack it seems logical that he will act quickly, to forestall any rival acquiring this important strategic partner. 

Sector ripe for consolidation

The sector is certainly ripe for M&A deals. Even peripheral DMS players are starting to be bought. In fact, one took place late in 2021, with Lattice Semiconductor acquiring computer vision company Mirametrix. The latter has a rudimentary DMS and, according to unnamed sources, went for a ‘huge multiple’ in a private deal. You can see its offering here: https://ir.latticesemi.com/investor-overview/presentations

Note the slide detailing some of the consumer uses for its technology entitled ‘Consumer Challenges’ — it may ring a (door)bell for some investors. The wide range of markets in which SEE’s technology can be used, aside from its transport applications, is one reason it is an attractive target.

Smart Eye would probably love to be taken over as would Cipia. However, SEE is the demonstrable market leader and will be the one that all the major players covet. 

As ever, if you’ve found any value in this article please consider making a donation to a charity of your choice.

The writer holds shares in Seeing Machines.