 Auto industry woes affect Seeing Machines
Posted on 1st November 2024
While Seeing Machines’ FY24 results illustrated a year of significant progress, auto industry headwinds and a slower than expected ramp in Guardian Gen 3 sales have led to Stifel reducing its revenue estimates for FY25-26. This in turn has led to it reducing its DCF-based target price to 11.4p from 13p.
It’s certainly disappointing news for shareholders but Peter McNally, analyst at Stifel, commented in a detailed note issued on October 31st: “Despite delays we maintain our positive stance on the shares moderating our target price to 11.4p (13.0p) and see the company extending its leadership with proven implementation and deployment into an increasingly regulated market.”
Revenues for 2025 are now predicted to be US$73.1m with a pre-tax loss of $13.3m, while in 2026 revenues of $97.5m produced a pre-tax profit of $5m.
Material uncertainty
In the full Annual Report (on page 46), the auditor PWC also made a comment about ‘material uncertainty’, reflecting the cash outflow of $11.9m in the FY24 results. Personally, I believe they are only fulfilling their obligations to warn investors about potential risks (while also covering themselves), yet it is unsettling for green investors unused to the conservative ways of auditors.
Stifel’s McNally certainly didn’t appear unduly concerned, stating: “We note the auditor’s “material uncertainty” comment but see a path to breakeven given strong (although reduced) operational drivers and cash costs containment”.
He went on to explain his estimate changes and assumptions in detail: “We reduce FY25/26E revenue by 11%/17% assuming a slightly higher GM% of 64% (62%), driven by a slightly higher software mix resulting in a cash EBITDA loss of $14.9m ($10.8m) for FY25E but profit of $8.6m ($19.5m) in FY26E. This is based on stable cash opex of $65m, resulting in $9.8m cash at FY25E year-end and cash generation thereafter as royalties continue to ramp and Guardian Gen 3 volumes increase.”
In his presentation today on Investor Meet, Paul McGlone reiterated that the company still expects to hit breakeven on a monthly basis in Q4 of this financial year.
He went to explain that if additional working capital is required due to the lumpy nature of automotive revenues: “We have a reasonably simple solution in the form of receivables funding and that process is underway. We expect it to deliver additional working capital in the range of $5-10m.”
Furthermore, he added: “To the extent that we need additional cash, we have a whole range of opportunities before us, some of which are well progressed and are consistent with the types of programmes or results that we’ve delivered in the last 2-3 years.”
I assume here that he is referring to license deals which, as Stifel points out have had a dramatic effect on profitability and cash given its similar 100% gross margin nature to royalties. McNally teased in his note: “Licensing is very difficult to predict but the company has benefitted from licensing deals over the past few years from Magna for $5.4m in October 2022, Collins Aerospace for $10.0m in May 2023, and most recently Caterpillar for $16.5m in June 2024.”
I’m therefore fairly confident Paul McGlone and his team will pull another rabbit out of the bag this year. Happily, it seems smarter people that me are thinking the same.
Speaking directly about the cash concerns McNally wrote: “With $23.4m of cash on the balance sheet we feel that the company has sufficient cash for the year with the goal of reaching run-rate cash flow break even by the end of FY25E (June). The company also has a history of sourcing strategic funding and software license agreements that have benefited cash. We believe these options still exist and can provide additional cash if required.”
Peel Hunt
In a short note issued today Peel Hunt reiterated its ‘BUY’ rating but reduced its target price to 7p from 9p. Analyst Oliver Tipping stated:
“Management has re-affirmed its commitment to reach a cash break-even run rate in FY25. However, we believe this could be challenging.
“Ultimately, OEMs across the industry have been struggling and they dictate the speed of production. We fear timelines could shift to the right.
“Seeing Machines’ ability to reach its break-even run rate goal is likely to hinge on its ability to control costs. Competitors, like Tobii, have already begun severe spending cuts and we believe Seeing Machines will require similar measures given its current cash burn rate of $2m a month. To account for wider industry weakness, we reduce our TP from 9p to 7p.”
Reasons to be cheerful
While the share price tanked on Thursday, as nervous private investors do what they usually do when real life intervenes; panic and sell low, there are reasons to be cheerful.
In the Investor Meet presentation today Seeing Machines did confirm that for this financial year it expects:
1.9 – 2.1 million annual production units for Automotive, contributing to high-margin royalty revenue.
A 20% increase in connected Guardian units generating monthly services revenue.
13,000 – 15,000 Guardian Gen 3 units to be sold, predominantly in Q2 at a much higher margin (50%) than previously with Gen 2 units (10%).
Aviation to achieve Blue Label (functioning prototype) product delivery, adaptable for certain fields of use (simulator, air traffic control).
Cash flow break-even run rate target at end of FY2025.
In addition, during the Investor Meet presentation CEO Paul McGlone revealed that there has been a resurgence in the inflow of RFIs and RFQs for the auto industry. “We are currently processing RFQs for OEMS based in Japan, Korea, Europe, China and North America. The vehicles associated with those RFQs are largely for Europe, Japan and North America and would have start of production timing between 2027 and 2029. And we expect the sourcing of these programmes to begin in 2025 calendar year.”
Thus, I think Peel Hunt’s fears of auto timelines shifting to the right are unfounded. Indeed, Seeing Machines has already suffered from that and the market is now hot for DMS/OMS once more.
Amazing news?
Regarding Gen 3 sales, I’m also hearing a whisper that Seeing Machines has begun trials with a global US online retailer, which is A household name. If they are successful and a deal is announced a few months from now I’m pretty confident the share price will soar on that news alone. Can you guess the name?
I’ve been in this stock a long time, too long in truth. However, I’ve no intention of selling out when the company is so close to achieving breakeven. That’s because I believe it will trigger a bidding war. Do your own research of course.
The writer holds stock in Seeing Machines.
P.S. If anyone does make any money from this information do please consider making a small donation to a charity for the people in Gaza. As we worry about money they are being murdered en masse and ethnically cleansed, which according to international law constitutes genocide. Thanks. |
They ask for questions to be submitted and over 80 were, but they couldn't be bothered to answer any. They couldn't wait to end the presentation. They have literally failed to deliver on any target or objective.
They stated that Europe produces circa 330K commercial vehicles per year. We have the first GSR in place and the second due in 20 months. We had hundreds of thousands of PO'S. We had little or no competition and in most cases were the only company responding to RFQ's. You'd think all of those positive drivers would lead to more than a 15,000 sales target for Gen 3 in this financial year, but no that's the best they are expecting. As I have said you could tell it was all BS. No commercial vehicle manufacturers want the product until they have to. Today Paul also admits that there's lots of competition out there.
One of the other big unknowns, which they never explain, is which dms supplier is filling the void in the information around 'missing OEM's' from now until 2026.
SEE said this on their Website:
"2024
Regulation mandates motor vehicles of categories M and N to be equipped with ADDW systems from 7 July 2024 for all new vehicle types".
So if we assume all vehicle oem's will have a new vehicle type between July 24 and July 26 then all oem's must have selected their dms supplier because of the long lead times (maybe not literally, but with a 2 year lead time we are looking at a 4 year window with some needing to make their dms decision in 2022 for 2024 delivery).
As Paul stated the new RFQ's are looking for delivery from 2027. Twelve months after ALL vehicles are mandated to have camera based DMS.
Even with the Magna mirror option for dms those oem's that haven't chosen their dms supplier either can't have any new vehicle types between now and July 2026 or have literally a few months to make up their minds to meet the July 2026 deadline.
Who's supplying Telsa for example? Either no new vehicle types between now and 2026 or circa 21 months to meet July 26 with a yet to be declared camera based dms supplier.
Obviously we're not expecting any more oem's to meet the 2026 deadline because Paul said the RFQ's they are working on are for delivery from 2027.
No wonder the share price is where it is with so many gaps in our understanding of the future opportunities. |
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