Smart Eye: Investment case de-risked

Research Update

2023-11-10

07:25

Analyst Q&A

Closed

Jesper von Koch answered 19 questions.

Redeye states that the Smart Eye investment case is now playing out exactly according to plan. Research is growing strongly, the accelerated growth of Automotive has begun, and cost control is held tight. Furthermore, the new credit-facility of SEK50m is greatly de-risking the investment case as it practically eliminates the risk of an additional capital raise. Redeye raises its fair value range.

JVK

Jesper Von Koch

Contents

Investment thesis

Follow-up on financial KPIs

Automotive Solutions: Ramping up according to plan

Behavioral Research: Another strong quarter

Strict cost control

Cash flow according to plan - new credit facility very positive

Market development and competition

New design win for Seeing Machines - its first in 2023

Financial estimates

Smart Eye: Estimate changes

Financial estimates

Fair value range

Quality Rating

Financials

Rating definitions

The team

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The long-awaited growth run is here

The Q3 report came in right on our estimates on practically all fronts - implying strong growth and cash flow under control. The significant growth in Automotive (+83% y/y) originated, just as in Q2, mainly from the ramp-up of KIA/Hyundai. Behavioral Research also developed well, with +42% y/y but +17% if adjusting for the impact of new accounting principles. Looking into Q4 and 2024, we expect continued ramp-up from KIA/Hyundai, acceleration from GM, Nissan and Mitsubishi, and start of production for Audi, Porsche, Volvo, and Polestar.

SEK50m credit facility should make cash suffice

On the day of the report, Smart Eye announced having signed a SEK50m credit-facility agreement. We think highly positive of this news. While we had previously estimated the company to reach positive cash flow with SEK54m to spare before cash runs out, we now estimate this buffer to exceed SEK100m. This creates extra room for eventual delays in some OEM ramp-ups. As such, any worries about an extra capital injection should now fade.

Reduced financial risk enables investors to look at 2026 with multi-bagger potential

As a result of the Q3 report, Redeye only makes minor estimate changes. However, the SEK50m credit facility reduces the risk of any more dilution, affecting our Bear Case positively. As the credit facility practically eliminates the risk of a new capital injection, we think investors will start to lift their gaze and consider Smart Eye's cash-flow generation in 2026e and 2027e. We estimate Smart Eye to earn SEK410m and SEK630m in free cash flow in 2026e and 2027e, respectively, implying 4.8x and 3.1x FCF (share price SEK57). Considering that Smart Eye will then still have plenty of room left to grow, we think an FCF-multiple of 15x is more reasonable. As such, Redeye considers a multi-bagger scenario possible in the next 3-4 years. Redeye maintains its Base Case but raises its Bear Case from SEK40 to SEK45 and its Bull Case from SEK190 to SEK200.

Key financials

SEKm	2021	2022	2023e	2024e	2025e
Revenues	109.3	219.6	305.8	498.5	659.1
Revenue Growth	78.3%	101%	39.3%	63.0%	32.2%
EBITDA	-89.0	-193.9	-113.0	34.8	115.9
EBIT	-131.4	-343.0	-267.8	-124.0	-42.9
EBIT Margin	-120%	-156%	-87.6%	-24.9%	-6.5%
Net Income	-131.2	-339.9	-267.0	-124.0	-34.1
EV/Revenue	37.3	9.1	6.2	3.9	3.0
EV/EBIT	-31.0	-5.8	-7.1	-15.8	-45.5
EV/EBITDA	-45.8	-10.3	-16.8	56.5	16.8
P/E	-33.2	-5.9	-7.5	-16.2	-58.9

Investment thesis

Case

In pole position within eye tracking for mandated driver monitoring

Due to EU and Euro NCAP's decisions to mandate driver monitoring, the market for driver monitoring systems (DMS) is about to explode. Smart Eye has devoted ~20 years of 100% focus to and investments in this very niche. The company is in pole position with an unmatched 217 design wins for 19 car OEMs. As for barriers to entry, the technology needs to cope with e.g. changing light conditions, tunnels, sunshine, darkness, vibrations, etc. and at the same time never fail. Competition is, therefore, basically limited to one other tier-2 player aside from the tier-1 customers’ own solutions. However, we believe it is unlikely that the customers, in the long run, are willing to put up with all investments and maintain the focus necessary for in-house sourcing. Smart Eye states that being platform-independent and hardware agnostic, it has a competitive edge as its technology can be locked late in the development process. With very predictable hyper-growth between 2022 to 2027 (exp. CAGR of 48%) and a highly scalable business model, we are estimating Smart Eye to be trading at a 5x and 3x FCF multiple for 2026 and 2027 respectively. We think this lays the ground for a potential multi-bagger in the next few years.

Evidence

The revenue acceleration is highly predictable

Design wins are worth more than presented because OEMs use *platforms* of software + hardware that they typically use for all car models launched in a 7-year period. As each car model is sold for ~7 years, cars from a single platform are sold for 14 years. As OEMs often copy platform components to other cars, getting into one car model implies a high probability of getting into several additional models. Thus, Smart Eye has likely secured a solid market share well into the 2030s.

Supportive Analysis

The market for DMS will explode in the coming years driven by regulation. We estimate that penetration will go from < 1m cars a year to ~30m by 2026. In the EU, Euro NCAP demands DMS in all new models launched from 2023 to get a five-star safety rating - which typically 75-80% of all cars have. The EU General Safety Regulation requires all new car models from 2024, and all new cars sold from 2026 to include DMS. Adoption in the US will follow suit from requirements by IIHS and NHTSA, with a probable scenario of mandated DMS in 2027.

Challenge

Head-to-head competition with main competitor

The market for DMS is an oligopoly. While Smart Eye is the market leader, main competitor Seeing Machines offers strong competition. While Smart Eye's software is hardware agnostic, Seeing Machines has chosen to specialize its software to some specific hardware and processor suppliers over the years, currently with a close partnership with Magna and its mirror. While we were previously more scared of this risk, we think Smart Eye has the last year proved to remain on the DMS throne.

Valuation

Rapid, predictable growth to a low price

Even though the exact ramp-up of sales is hard to predict, we believe rapid sales growth between 2023 and 2027 is rather safe to assume. The ramp-up of sales stems from already awarded design wins and expected design wins on existing platforms. Considering an estimated low/mid-single-digit FCF multiple for 2026, combined with the highly predictable ramp-up of sales, we think Smart Eye has a good journey ahead.

Follow-up on financial KPIs

The Q3 report came in right on our estimates on practically all fronts - implying strong growth and cash flow under control. The significant growth in Automotive originated, just as in Q2, mainly from the ramp-up of KIA/Hyundai.

Total revenue was SEK77.7m, +53% y/y, and in line with our estimates. EBITDA-CAPEX (underlying cash flow) was SEK -42.4m, beating our SEK -44.3m estimates thanks to the better-than-expected gross margin.

Smart Eye: Estimates vs Outcome
SEKm	Q3'23A	Q3'23E	Last year	Last quarter	vs Est.	Y/Y	Q/Q	Org. y/y
Sales & cost level
Net sales	77.7	77.5	50.9	64.3	0%	53%	21%	32%
- of which Automotive	24.0	25.5	13.1	13.7	-6%	83%	75%	83%
- of which Behavioral Research	53.7	52.0	37.8	50.6	3%	42%	6%	17%
OPEX	93.5	92.1	100.1	98.8	2%	-7%	-5%
EBITDA	-23.4	-22.3	-55.6	-44.2	5%	-58%	-47%
EBIT	-63.1	-60.0	-95.1	-81.9	5%	-34%	-23%
EBITDA - CAPEX (burn rate)	-42.4	-44.3	-81.7	-67.4	-4%	-48%	-37%
Cash level	128.5	128.3		180.4	0%

Automotive Solutions: Ramping up according to plan

Smart Eye: Automotive Solutions

Source: Smart Eye

Automotive sales came in just below our estimates (SEK24.0m vs estimated SEK25.5m), corresponding to +21% q/q and +83% y/y. The main reason for the sequential increase is a continued ramp of from KIA/Hyundai.

Looking ahead, we expect the following OEMs to drive growth in the near future:

KIA/Hyundai ("the Korean OEM": Started proper ramp-up in Q2, and grew further in Q3. However, we think this OEM has so far only reached 35-40% of its volumes (25% in Q2). We expect it to reach full production in 2025.

Mitsubishi and Nissan ("the Japanese OEMs"): This is an alliance between these two and Renault. Considering that they share car platforms, we think Renault should be close to ramping up. However, we have not heard anything about it but have spotted at least one car model that appears to have DMS as default. The Japanese OEMs have been in production for some quarters, but so far, with insignificant volumes. We expect them to start ramping up in Q4, but it is difficult to assess the magnitude of it. IHS projects almost 400k annually produced cars for these two combined.

General Motors (GM) ("the first American"): So far, we think GM is only live with one or a few models, though we expect several additional models to be launched very soon. Considering the strike at the GM factory in Detroit, which has now ended, there could be some delays here. Q4 could show a minor boost, but the majority will likely come later.

Audi and Porche ("the European OEMs"): Just as for GM, these OEMs hold significant potential. Audi entered production in November with its Q6 e-tron, and we believe some other models could also have entered production in Q4.

Volvo and Polestar (and Geely): Volvo EX90 and Polestar 3 share the same platform (SPA2) and will include DMS. From what we have heard, Polestar 3 will start production in January, while EX90 will start in March. Then, Polestar 4 (Geely's SEA1 platform) started production in November 2023. On the second SEA platform are Volvo EX30, Zeekr X, and Smart #1 and #3, all of which have DMS.

In the conference call, it was clear that the most immediate ramp-up will mainly happen from the European OEMs, whereas the Japanese and North American ones are more likely to accelerate in Q1'24. Nevertheless, while tracking the production of these models is possible, it is tough to know precisely in what quarter we will see the main uplift in license revenues for Smart Eye.

Behavioral Research: Another strong quarter

Smart Eye: Behavioral Research

Source: Smart Eye

Research delivered strong numbers, showing a 17% like-for-like y/y organic growth. Smart Eye expects a seasonally strong Q4 in this area. The company has identified several synergies when combining the technologies of iMotions, Affectiva, and Research Instruments. Smart Eye is now implementing the new product offerings and expects to see the results starting early next year.

Strict cost control

The total cost base (incl. investments in intangibles) was held tight in Q3 and landed at SEK113m including other income and SEK112m without – SEK4m lower than in the last quarter, likely due to vacation.

Smart Eye: Cost base

Source: Smart Eye

Cash flow according to plan - new credit facility very positive

In the quarter, the burn rate (EBITDA less investments in intangible assets) was SEK -42m, down from SEK -55m in the previous quarter. By the end of the quarter, the company's cash balance amounted to SEK128.5m.

On the day of the report, Smart Eye announced having signed a SEK50m credit-facility agreement. We think highly positive of this news. Including loan facilities, Smart Eye had SEK212m in available cash. While we had previously estimated the company to reach positive cash flow with SEK54m to spare before cash runs out - this creates extra room for eventual delays in some OEM ramp-ups. As such, any worries about an extra capital injection should now fade. We now estimate Smart Eye to reach positive cash flow with more than SEK100m to spare.

Smart Eye: Financial situation

Source: Redeye estimates

See below for our more exact projections:

Source: Redeye estimates

Market development and competition

New design win for Seeing Machines - its first in 2023

On 8 November, Smart Eye's closest competitor, Seeing Machines, announced that it had been awarded a new automotive program (design win).

Volkswagen could possibly be the OEM

The design win is for an 'existing large European OEM'. Considering the European OEMs that we believe Seeing Machines has previously won, we believe Volkswagen is the one that fits the best. The total value of the award is USD15m, but Seeing Machines did not state the number of car models included. The latest recorded number for Seeing Machines is "more than 160", which was said in its latest award. As we have explained, we think this number is somewhat inflated compared to Smart Eye's 229 DWs.

Delivered to 'multiple platforms' indicating software-defined vehicles

The design win is said to be delivered across multiple platforms - which we think is synonymous with being a 'software-defined vehicle' (SDV). This is the first time we have encountered this phrasing by Seeing Machines. However, Smart Eye has at least been awarded one automotive program for SDVs - in the announcement in December 2022 when winning what we believe is Ford.

However, we know that Seeing Machines’ DMS solution inside Magna’s rearview mirror is also very flexible. As such, being deployed across multiple platforms could also imply this joint solution with Magna.

First time Seeing Machines uses 'interior sensing' as an expression

In the press release, Seeing Machines called its own technology "interior sensing technology", compared to previously only having talked about "driver and occupant monitoring systems". Smart Eye, on the other hand, has used "interior sensing" for almost three years. While this difference does not necessarily have to imply anything, it could point to Seeing Machines being a little 'late to the party'. It should be noted that the design win itself was 'only' for driver monitoring system.

Financial estimates

Minor changes to general estimates

We lower our estimated average selling price (ASP) for DMS in 2026e from SEK59 to SEK54

Smart Eye: Estimate changes

SEKm	2021	2022	Q1 23	Q2 23	Q3 23	Q4 23E	2023E	2024E	2025E	2026E
Total net sales	109	220	64	69	78
New						95	306	499	659	1,209
Old						95	306	499	659	1,209
Change						0%	0%	0%	0%	0%
Gross margin	89%	88%	85%	90%	90%
New						90%	89%	88%	87%	89%
Old						90%	89%	88%	87%	89%
Change						0%	0%	0%	0%	0%
OPEX	186	386	99	95	94
New						98	385	404	455	515
Old						98	385	404	455	515
Change						0%	0%	0%	0%	0%
EBITDA	-89	-194	-44	-33	-23
New						-12	-113	35	116	556
Old						-12	-113	35	116	556
Change						0%	0%	0%	0%	0%
EBIT	-131	-343	-82	-71	-63
New						-52	-268	-124	-43	421
Old						-52	-268	-124	-43	421
Change						0%	0%	0%	0%	0%
EBIT (%)	-120%	-156%	-127%	-103%	-81%
New						-55%	-88%	-25%	-7%	35%
Old						-55%	-88%	-25%	-6%	35%
Change						0%	0%	0%	0%	0%

Financial estimates

Smart Eye: P&L and cash flow

(SEKm)	2020	2021	2022	2023E	2024E	2025E	2026E	2027E	2028E	2029E
Revenue	61	109	220	306	499	659	1,209	1,580	1,814	2,071
- Revenue growth	0%	78%	101%	39%	63%	32%	84%	31%	15%	14%
Gross margin	n/a	89%	88%	89%	88%	87%	89%	89%	90%	91%
Gross Profit	102	97	193	272	439	571	1,071	1,404	1,634	1,889
OPEX	153	186	386	385	404	455	515	577	646	743
EBITDA	-52	-89	-194	-113	35	116	556	826	987	1,145
D&A	24	42	149	155	159	159	135	135	135	135
EBIT	-75	-131	-343	-268	-124	-43	421	691	852	1,010
EBIT margin	-123%	-120%	-156%	-88%	-25%	-7%	35%	44%	47%	49%
Tax	-16	-28	0	0	0	0	0	69	179	212
Net profit	-60	-104	-343	-268	-124	-43	421	622	673	798

Cash flow
Share issue	0	0	0	282	0	0	0	0	0	0
Operational cashflow, incl. Tax	0	0	-194	-113	35	116	556	757	808	933
Investments in intangible assets	0	0	-90	-83	-87	-87	-87	-87	-87	-87
Changes in Working Capital	0	0	0	-10	-11	-24	-64	-44	-20	-20
Free cash flow	0	0	-284	76	-63	5	405	626	701	826
Net debt	-219	-275	-3	-79	-16	-20	-425	-1,052	-1,753	-2,579

Smart Eye: Estimates per business unit

(SEKm)	2020	2021	2022	2023E	2024E	2025E	2026E	2027E	2028E	2029E
DMS incl. NRE
- Revenue	41	47	50	92	210	301	719	986	1,166	1,367
- Revenue growth	0%	14%	6%	85%	128%	43%	139%	37%	18%	17%
- Gross margin	100%	100%	100%	100%	100%	100%	100%	100%	100%	100%
- Gross Profit	41	47	50	92	210	301	719	986	1,166	1,367
Interior Sensing
- Revenue	0	0	0	0	0	0	33	54	74	113
- Gross margin	100%	100%	100%	100%	100%	100%	100%	100%	100%	100%
- Gross Profit	0	0	0	0	0	0	33	54	74	113
AIS
- Revenue	0	0	0	4	47	86	158	210	210	210
- Gross margin	35%	35%	35%	35%	35%	35%	35%	35%	35%	35%
- Gross Profit	0	0	0	1	17	30	55	74	74	74
Research
- Revenue	41	47	170	210	241	273	300	330	363	381
- Revenue growth	0%	14%	261%	24%	15%	13%	10%	10%	10%	5%
- Gross margin	0%	0%	88%	85%	88%	88%	88%	88%	88%	88%
- Gross Profit	0	0	149	178	212	240	264	290	319	335

Smart Eye: DMS estimates

DMS
	2020	2021	2022	2023E	2024E	2025E	2026E	2027E	2028E	2029E
- Nbr of cars, m	95	95	82	85	89	91	92	93	93	93
- Take rate (global)	0%	0%	1%	3%	7%	11%	33%	48%	61%	77%
- Nbr of cars with DMS, m	0	0	1	2	7	10	30	45	57	71
- SEYE market share		52%	46%	45%	44%	43%	42%	41%	40%	39%
- SEYE nbr of DMS sold, m	0	0	0	1	3	4	13	18	23	28
- Average Selling Price	85	86	70	67	64	60	54	52	50	48
- License revenue, SEKm	0	0	29	69	183	271	689	956	1,137	1,337
- NRE revenue, SEKm	0	0	20	23	27	30	30	30	30	30
Total DMS revenue	41	47	50	92	210	301	719	986	1,166	1,367

Fair value range

Assumptions, fair value range
	Bear Case	Base case	Bull case
Valuation	45	145	200
2023-2027 estimates
Total sales CAGR	41%	48%	53%
Automotive sales CAGR	83%	90%	95%
Research sales CAGR	6%	14%	19%
Total sales 2027	1,224	1,571	1,857
Avg EBIT margin 2025-2027	12%	24%	31%
EBIT margin 2027	33%	45%	52%
Terminal EBIT margin	16%	26%	30%

Quality Rating

People: 4

Smart Eye is governed by an owner operator as the co-founder is the CEO, which is positive in many ways. Compensation is moderate and just. We especially like the tendency to include all employees in the stock option programs, which indicates a healthy HR policy that could explain the relatively low employee turnover. The solid growth trend during the years prior to the listing implies that so far investments have been savvy and execution essentially flawless. Overall the Management score is hampered by Smart Eye's short period on the stock market where e.g. there is not much history of Smart Eye's communication to the shareholders as a listed company. As mentioned Smart Eye is governed by owner operators where the founding family (Martin & Mats Krantz) together owns ~9% of the company. Overall, insiders in the Board as well as Management own a lot of shares and keep on adding to their positions. The founding family really has put their money where their mouths are. Thus, the ownership structure is in short very appealing. Our only concern is if there are enough financial muscles to back up the Company should there be need for future supplementary investments.

Business: 4

Smart Eye is the market leader in a viable niche within driver monitoring whose Automotive business unit is expected to grow at a CAGR of more than 100 percent until 2025, especially driven by autonomous vehicles and traffic safety. Following an 18 year focus in automotive Smart Eye has established important relations with all potential tier 1 customers. Smart Eye's automotive focus and the recurring software licenses together imply sticky and predictable revenue for the foreseeable future. In addition, high barriers to entry mean limited competition. All in all, it is a great business.

Financials: 2

Our profitability rating is fully retrospective and requires consistent, positive earnings. As Smart Eye is not profitable at the moment it therefore cannot have a higher score for now. However, Smart Eye has a scalable business model with low costs, meaning the stage is set for a gradually increased rating ahead should the Company keep up its growth trend. The cash position and liquidity measurements of Smart Eye are currently tight and we expect the company to reach positive cash flow in Q4 2024 with cSEK60m to spare. Smart Eye also loses some points as the company at the moment has negative earnings and cash flow. In addition, there is a risk in the cyclicality of the automotive industry as the customers must be able to afford to fully embrace the new driver monitoring technology. However, the amount of customers and their respective share of total sales is reasonably diversified.

Financials

Income statement
SEKm	2021	2022	2023e	2024e	2025e
Revenues	109.3	219.6	305.8	498.5	659.1
Cost of Revenue	12.4	27.0	33.5	59.7	88.5
Operating Expenses	185.9	386.5	385.3	404.1	454.8
EBITDA	-89.0	-193.9	-113.0	34.8	115.9
Depreciation	42.4	0.00	0.00	0.00	0.00
Amortizations	0.00	149.0	154.9	158.8	158.8
EBIT	-131.4	-343.0	-267.8	-124.0	-42.9
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	-0.19	1.0	1.1	0.00	0.00
Net Financial Items	0.20	-1.0	0.82	0.00	0.00
EBT	-131.2	-344.0	-267.0	-124.0	-42.9
Income Tax Expenses	0.00	-4.1	0.00	0.00	-8.8
Net Income	-131.2	-339.9	-267.0	-124.0	-34.1
Balance sheet
Assets
Non-current assets
SEKm	2021	2022	2023e	2024e	2025e
Property, Plant and Equipment (Net)	4.7	6.3	15.0	15.0	15.0
Goodwill	760.5	0.00	0.00	0.00	0.00
Intangible Assets	616.5	1,505.3	1,433.6	1,361.7	1,298.9
Right-of-Use Assets	0.00	0.00	0.00	0.00	0.00
Other Non-Current Assets	0.00	0.00	0.00	0.00	0.00
Total Non-Current Assets	1,381.6	1,511.6	1,448.6	1,376.7	1,313.9
Current assets
SEKm	2021	2022	2023e	2024e	2025e
Inventories	6.6	10.4	2.5	9.9	31.7
Accounts Receivable	78.8	96.4	76.5	109.7	112.0
Other Current Assets	0.00	0.00	0.00	0.00	0.00
Cash Equivalents	278.4	62.7	107.6	43.5	56.9
Total Current Assets	363.7	169.5	186.6	163.1	200.6
Total Assets	1,745.3	1,681.1	1,635.2	1,539.9	1,514.6
Equity and Liabilities
Equity
SEKm	2021	2022	2023e	2024e	2025e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	1,449.9	1,302.8	1,331.0	1,207.0	1,172.9
Non-current liabilities
SEKm	2021	2022	2023e	2024e	2025e
Long Term Debt	3.1	1.7	1.7	1.7	1.7
Long Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Other Long Term Liabilities	75.8	0.00	0.00	0.00	0.00
Total Non-Current Liabilities	78.9	1.7	1.7	1.7	1.7
Current liabilities
SEKm	2021	2022	2023e	2024e	2025e
Short Term Debt	0.00	60.0	0.00	0.00	0.00
Short Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Accounts Payable	20.2	28.4	24.5	29.9	39.5
Other Current Liabilities	196.3	154.0	143.8	167.1	166.2
Total Current Liabilities	216.5	242.4	168.3	197.0	205.8
Total Liabilities and Equity	1,745.3	1,546.9	1,501.0	1,405.7	1,380.4
Cash flow
SEKm	2021	2022	2023e	2024e	2025e
Operating Cash Flow	-104.0	-273.5	-98.4	22.8	109.3
Investing Cash Flow	-314.0	-95.5	-91.9	-86.9	-96.0
Financing Cash Flow	478.0	60.0	235.2	0.00	0.00

Rating definitions

The team

Disclosures and disclaimers

Premium Plan required to unlock

Contents

Investment thesis

Follow-up on financial KPIs

Automotive Solutions: Ramping up according to plan

Behavioral Research: Another strong quarter

Strict cost control

Cash flow according to plan - new credit facility very positive

Market development and competition

New design win for Seeing Machines - its first in 2023

Financial estimates

Smart Eye: Estimate changes

Financial estimates

Fair value range

Quality Rating

Financials

Rating definitions

The team

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