Redeye concludes that Q1 was stronger than expected in terms of both topline and cash flow - stemming from higher sales from Behavioral Research than expected and improved working capital.

Sales in Automotive was SEK13.7m, clearly below our estimates of SEK19m. While the deviation is significant, we are well aware of the difficulty of estimating the exact quarter for an inflection point. On the positive side, it appears that the inflection point will come in Q2 instead.

Sales in Human Research was SEK50.6m, 20% above our estimated 42.0m. As stated before, Smart Eye has changed its accounting principles for the SaaS revenues in this business unit - from recognizing revenues upfront to periodizing them. This will also affect the next quarter. The like-for-like organic growth for Human Research was +31% y/y. Considering Tobii's recent Q1 report with negative y/y growth of 7%, this is very strong. This verifies the wording in the CEO letter about Smart Eye gaining market share in this segment.

Automotive sales came in below our estimates (SEK13.7m vs estimated SEK19m), unchanged from the last quarter. We estimated the inflection point to be in Q1, but it appears to come in Q2 instead. See the next chapter for a detailed walkthrough.

In the earnings call, the CEO said that since last fall, it has sold a number of test systems globally to several fleet customers. This is not only for Europe but also Asia, North America, South America, Africa, and the Middle East. The customers are currently evaluating both Smart Eye's and competitors' products. Hence, these customers will soon decide on what supplier to buy from. Should they choose Smart Eye, orders can be substantial, and the time to revenue recognition is short.

Smart Eye added that it has been ready for high-volume production since February - and that substantial revenues could be generated already in 2023.

Research delivered strong numbers, showing a 34% like-for-like y/y organic growth. All three offerings contributed to the strong growth. Smart Eye states that all labs previously shut during the covid pandemic are now open, which partly explains the y/y growth.

OPEX was below our estimates and landed at SEK98.9m, including other income and SEK100.6m without. Investments in intangible assets amounted to SEK23m, down from SEK24m in the last quarter. Smart Eye stated that SEK3-4m was a one-off related to the rights issue. The total underlying cost base is hence c.SEK119m per quarter.

In the quarter, the underlying burn rate (EBITDA less investments in intangible assets) was SEK -67.2m, down from SEK -84.4m in the previous quarter.

By the end of the quarter, the company's cash balance amounted to SEK239m, vs our estimated SEK211m. There were two reasons to the higher-than-expected cash balance. First, we had overestimated the costs related to the rights issue. Second, Smart Eye decreased its working capital by cSEK8m in Q1, compared to our estimates of increasing working capital from higher inventory with AIS products.

With our new estimates, we still estimate Smart Eye to become cash-flow positive in December 2024, with about SEK56m headroom in cash balance. Should the company need it, Smart Eye has two additional unutilized bank facilities of SEK5m and DKK8m (SEK12m), bringing the total estimated headroom to SEK73m.

Smart Eye states that it expects several Automotive customers to ramp up production in the coming quarters, also confirming in the earnings call that this refers to Q2 already. Smart Eye particularly lifts its OEMs from Japan and Korea as the main drivers. This is how we look at it:

Smart Eye states that it is currently in production with six OEMs. We believe these include BMW (Germany), GM (North America), Nissan (Japan), Hyundai (incl. KIA, Korea), Geely (China), and one more Chinese OEM.

Smart Eye states that it expects most of the growth in 2023 to come from OEMs already in production. These are expected to grow by 1) ramping up existing models and 2) adding more models.

Smart Eye's CEO, Martin Krantz, stated in the conference call that the outlook for its Japanese and Korean OEMs, (Nissan and Hyundai, incl. KIA, we think) is very promising. As such, we think these two OEMs will be the primary revenue drivers in Automotive in the next few quarters. The CEO added that there are more question marks regarding North America and Europe. As such, we expect a slower ramp-up from GM.

Regarding the uncertainty in the European market, we do not think Krantz referred to BMW since this customer is already known to be ramping down volumes. Rather, we think he referred to additional European OEMs that are expected to go into production. Here, we think he referred to the premium parts of the Volkswagen Group, i.e., Audi and Porsche, which are both expected to launch with the help of VW's own software subsidiary, Cariad. Previously, Cariad aimed to launch many models on its Software 2.0 Platform, which has now been delayed. Instead, it aims to launch a few models on its Software 1.2 Platform, including Porsche Macan and Audi Q6 e-tron. We think these models will include Smart Eye's DMS.

However, we think the CEO's positive statement about Japanese OEMs also includes Mitsubishi, which we expect to launch with Smart Eye's DMS later this year. Hence, we believe Mitsubishi will also be an essential driver for Smart Eye's 2023 growth.

Next up are Volvo (EX90) and Polestar (Polestar 3). Less than one week ago, Volvo Cars announced that it delayed production of its EX90 to Q1 2024. Considering Volvo and Polestar use the same platform (SPA2), we assume Polestar 3 will also be delayed to Q1 2024.

Last, we also expect Stellantis and Ford to ramp up later in 2024.

EU General Safety Regulation 2024 (EU GSR 2024) requires all new vehicle models from mid-2024 to include DMS. All conventional vehicles (vehicles that carry passengers or goods) are required to have a driver drowsiness and attention warning (DDAW) system and an advanced driver distraction warning (ADDW) system. Both of these go into the umbrella term DMS. Read more about the specifics of DDAW here, and about ADDW here.

This is not a choice but something required by law. Redeye recently interviewed representatives from the EU commission responsible for setting this up and bringing it into force. We conclude that everything is in order, albeit with a two-to-four-week delay. Nevertheless, considering lead times in Automotive, this will likely not change DMS adoption for models launched around that time.

In the last few months, we heard rumors about a potential delay of EU GSR 2024. The basis for this was that a technical specification of the regulation would be needed to be published at least 15 months before the go-live. The planned go-live date for EU GSR 2024 has been 7 July 2024, implying 7 April 2023 for this deadline.

To assess the validity of this worry, we contacted and interviewed the responsible representatives from the EU Commission. The representatives confirmed that the technical requirements were agreed on 21 March 2023 and that their publication would come in two weeks (i.e., around 4 April). This would then be followed by the normal procedural steps for adopting this regulation.

The representatives also said that “although there will be a slight delay (two to four weeks), the technical requirements and test procedures necessary for the OEMs to be considered when designing their systems are already known and will not change in the following steps of the adoption procedure.”

This two-to-four-week delay implies that EU GSR 2024 will likely be adopted in late July or early August 2024.

Car manufacturers typically plan the release of their next car platforms (and models) years in advance. This means that they decide what features and technologies will be included way before the new models are released. Considering this, we are confident that no OEMs would try to be opportunistic and not include DMS in a model set to be released in early July. As such, we think the two-to-four-week delay is likely to be equivalent to "being on time" and that it will not affect the adoption rate of DMS at any point.