Seeing Machines (LSE:SEE) — FY2024 Results

0:00 Good morning, and welcome to the SEEING MACHINES LIMITED Full Year twenty twenty four Results Investor Presentation. The screen. Due to the number of attendees today, the company may not be in a position to answer every question received during the meeting itself. Have the company can review your questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Paul McGloud, CEO. Good morning, sir.

0:29 Good morning, and thanks very much for listening. Okay. Just a a a quick reminder for those that might be new to the story. We're a business that develops vision systems underpinned by some significant software, machine learning. And we focus on transport, three areas of transport, in particular, new automotive vehicles, aviation, and across aviation, three subsegments. That includes pilot simulators and training aircraft and air traffic control, and what we call aftermarket, which is where we install our technology and hardware into trucks, buses, and fleets that are already on the road.

1:24 Let's just, take a a quick look at the year that we've just passed, and it's it's really pleasing to see that we have delivered a reasonable growth rate. Quite certain that on an automotive royalty basis, we are very much in a leadership position. As of the June 30, we were in over 2,200,000 vehicles, and that number continues to increase quarter on quarter. We've launched our Guardian generation three product, and we're really excited about the capability of this product, the much lower unit cost, the much smaller form factor, and its ability to integrate with many other systems and platforms that are already in place in the market.

2:11 So that's a real milestone for us, and we're we're really looking forward to how that propels us over the course of this next financial year. We've called out a few times before that our strategy, particularly in automotive, is to have fewer deeper collaboration partners or customer relationships, and we've certainly delivered on that. And I think from our perspective, whilst, you know, industry conditions are challenging, those relationships are very deep, very long term, and will serve us well as as we move forward. And we we've also entered into a new agreement with Calcula, and and that's really important to us because it opens up some new fields of use that were previously restricted to us and, of course, continues the collaboration with them across the mining sector. I think the other thing to mention, about the year that we've just gone through is there's been significant turmoil worldwide.

3:16 Everybody knows that. In our core business, automotive, I think it's, fair to say that there has been heavy weather or headwinds in the automotive manufacturing sector. That's continuing at some pace. And if you if you think for a minute about all of the things that they have to deal with at the at the minute, they've got manufacturing overcapacity. They've got electric vehicle overinvestment. They've got severe price competition. Incredible technical complexity as as they're moving to EV away from ICE and into software defined vehicles, significant cost pressures and competitive pressures. And then, of course, you've got the whole geopolitical situation that is adding complexity week by week and month by month.

4:07 I think what's important to point out, though, for us is all of these issues aren't necessarily directly impacting the, requirement for our end use customers to take up DMS and OMS software, but it's very much, has the potential to continue to deliver volatility in production volumes. And, of course, that's relevant, when the vehicles that you're in are impacted. So at a very, very high level, we don't see any material impact in the take up of DMS per se, but we do see that the trials, tribulations and troubles of the automotive manufacturing sector and the significant profit issues that they're having driven by all of those factors mentioned, can certainly and do certainly impact volumes on a quarter by quarter basis.

5:08 On the aftermarket side, though, it's quite a different story. And regulators and industry bodies and large corporates worldwide are doubling down on safety. Of course, in Europe, there's legislation to push that along. But in other parts of the world, whether it's driven by insurance, insurance claims costs, aging driver population, the inability to insure young drivers, You name it. There's a whole range of factors that are driving the the users of these kinds of aftermarket systems to consider technical investment. So that's a really positive, part of the equation, and I think something that over the course of this next year or two may counterbalance, the issues that we're seeing in automotive manufacturing.

6:07 We mentioned, just immediately post year end that we acquired a small team of highly expert engineers, out of Berlin, a company called Asafas Vision. Asaphas was previously owned by Valdeo, who are one of our major long term customers who we collaborate with quite deeply. And the business that we've acquired is very, very important for a for a number of reasons. Firstly, it expands our presence in the right time zone, smack in the middle of where all of our European customers are, and and we're already starting to see the benefits of being able to, meet with, communicate with, our existing customers, in their time zone, and we expect that the benefits of that will will continue.

7:00 They're they're a very capable and highly specialized team with some really significant, data assets and model assets that we've already started to deploy across our business. And the objective here is to, take the best out of what the Acifas team brings and the best out of what we bring and create something, even better. So the integration approach that we're taking is very much centered around, areas of excellence and trying to, expand those areas of excellence or best practice wherever they reside. The transaction itself, the the terms of that transaction were upfront, a payment of US $1,000,000 and then a further $1,000,000 on its anniversary.

7:49 And there is an additional $4,000,000 for a total of 6,000,000 payable on meeting specific business outcomes over the course of the next five years. So the the the business, as it's integrated in into SEEING MACHINES, we expect to be cash neutral. It it posts revenue. It has its own customers. But the the biggest draw that it brings to us is existing work with Valhiro and, of course, leveraging further the the long term collaboration relationship that we've just entered into. So we're we're really quite pleased with the acquisition, and we're certainly very pleased with how it's being integrated.

8:39 For a minute, just want to look back on the size of the opportunity that we're talking about here. We often talk about the addressable market for automotive and even the addressable market for aviation, but we rarely talk about the addressable market for fleet or or aftermarket. And the reason we tend not to do that is because it's so large in comparison to everything else. Now there are obviously more competitors in this space, and if we consider telematics broadly, that is the case. But for the specific product and service that we offer, we have a very unique position. So video safety telematics offer that focuses specifically on mitigating the risk of fatigue and distraction and is connected to the driver on a twenty four seven basis, delivering real time intervention is quite unique.

9:42 So we we do expect, now that we have our new product in place, that we will see considerable growth coming out of the fleet business. Now for automotive and aviation, it's a different business model. It's a it's a software focus, very high margin, and we continue to remain very, very focused on that core, part of our business. And what we'll talk about throughout this presentation is, something that we've touched on before, and that is as our revenue mix changes over time, the business becomes more orientated around software, the margins expand quite dramatically. And by the same token, as we've moved from our generation two Guardian product to our generation three Guardian product, we see average margins on the hardware alone moving from circa 10% to 50%.

10:41 So that will be a material contribution to our our business going forward. The other thing I'd like to say is that in order to now that we have our our product and production supply chain set, we are actively in discussions to expand our distribution network, and we expect that we will, over the coming quarter or two, have additional new distributors in place in The USA, in Europe, and in Asia. So just onto the onto the the revenue by segment, and, again, this is something that we've talked about a fair bit in the past, but it's very important, I think, that we keep, emphasizing what's happening to, revenue over time. So if we look at the revenue by segment in 24, 61% aftermarket, 33% automotive, and 6% aviation.

11:42 And if we look forward to, you know, what we expect to see in FY '26, what jumps off the page there is a far more significant contribution from automotive, which is royalties. And as that circle grows, as the revenue grows, certainly a great a greater quantum from aftermarket. Now a year ago, when we looked at the outlook from the beginning of twenty four, so end of twenty three to '26, we spoke about, an aspiration of hitting no less than 125,000,000 of revenue by '26. Now what's what's, important for us to think about here is all of the circumstances in automotive in particular that I called out just a moment ago, but most of the business over this time frame is contracted in automotive.

12:40 So, really, the the risk that we're trying to manage and the visibility and and issues that the current market dynamics present to us in terms of visibility are really about timing. So internally, our aspirations haven't changed. We will have to manage the external circumstances, and, we have a number of ways to do that that we'll talk about through this presentation.

13:10 So as that revenue mix and the segment mix changes, the important message out of that is that our gross margins change dramatically. So, again, if we look at '24, roundabout 29% hardware, relatively low margin for our older product, circa 10%, 21% royalty, 16% license, NRE 16%, also quite low margin, and and services. So relatively even mix of revenue for different parts of our business. But if we look forward to '26, I just wanna talk through again the implications of of this segment change and the revenue mix change.

14:03 So at roughly 45 to 50% royalties with a very high margin contribution, most of that drops straight to the bottom line. NRE, five to 10%, which is still the sort of lead indicator of future future royalties, very low margin. The hardware split, this is very, very important because with our new product, of course, gross margins improved by a factor of five from 10% to 50, and services as as that part of our business expands, which is driven by the installation of hardware that has a compounding effect year on year, also a quite high margin.

14:50 And so so the the gross margin profile of the business will change very dramatically driven by the increased percentage of royalties, the increased margin or the lower cost of goods on hardware, and an expansion in our services margin driven by digit digitization that, lowers the cost to serve year on year. So this is really the main part of the story that we touched on last year and and we wanna emphasize again. And just taking one example, automotive, production volumes or or royalties.

15:36 You can see the cumulative quarter on quarter royalty position in the light blue bars and then the quarterly production in in the in the solid line. We did report some volatility in q two in '24 that rebounded in in q three and q four. So, you know, on a year on year basis, we definitely see consistent growth. We do expect that doubling on average year on year to continue as we've stated many times before, albeit we may see some volatility here and there. Our royalties for the quarter come in at the end of the month, and we expect unfortunately, we don't have them all in today. We have all all but one.

16:29 But we are expecting another growth quarter in royalties that we'll report early next week so that at the end of q one, we expected our cumulative total to be 2,600,000 or greater than 2,600,000, up from 2,200,000 last quarter. So that growth rate is continuing, and that's why we can say at least from a royalty perspective, we maintain a market leading position. At that point, I'll just hand over to Martin who'll cover a more detailed review of performance for the year. Thanks, Paul. We can see here the the highlights that we have for financial performance for for FY '24.

17:22 The majority of these things we covered off in the in the trading update and also in the quarter four KPI announcement back in early August. So the numbers that we provided there are just confirmed with our full year results in addition to the EBITDA loss of of $17,900,000. Now the the slides presentation slides will be up on the website later this morning, and they're within the slide deck is an appendix that provides a further breakdown of some of the OEM revenue that's included in the financial statements and other elements to give people a better idea or more detail in terms of some of the trends that we're seeing.

18:14 So go going through to current cash position and the pathway to the breakeven run rate. So Paul mentioned in his section, the the underpinning of of that movement is really the change in revenue mix, the increase in royalties that we're seeing

18:36 that we'll continue to see as we go through FY '25, looking as if we're gonna have some positive growth for the first quarter, and that will continue throughout the rest of the year. In addition to that, we expect to see a particular improvement with aftermarket margins as we go through into the second half. So in order to break that down and see the cash burn rate for FY twenty four when we exclude the receipt of the cat licensing deal of $16,500,000 in q four. That cash burn rate was around $2,500,000 a month. And as we've gone into the first quarter of f y twenty five, the cash burn rate has reduced to $2,000,000.

19:25 Now we exit we expect to see the benefit of gross margin as we go through to the second half of around $1,500,000 per month. We'd expect to see in the second half gross profit margin to the group moving from what we saw in f y twenty four of around 47%, increasing to the mid sixties. So a significant improvement in gross margin. In addition, in the second half of f y twenty four, we made a number of cost reductions, some of which we flagged at the at the interim results, which included reducing some of the outsourced research and development partnerships that we have. So as some of the projects were completed, we reduced the outsourced resources that we used.

20:19 That is something that will continue as we go through FY '25 with additional resources reducing as we complete projects, particularly the the gen three project. So that will lead to a a benefit of approximately 500 k per month. So in in combination, they're the elements that really underpin the the change in the cash burn profile as we go through to the end of FY twenty five. Just to run through some of the more detailed financial performance information, one of the things here I just wanna kind of bring out is the the half by half revenue split.

21:08 So you can see in the dark blue elements of the bar is the first half revenue, the second half revenue in the lighter blue part of the stack. In f y twenty four, this was largely impacted by the aftermarket revenue and the hardware sales as we got to the end of of gen two production in the latter part of FY twenty four. There's a small amount of Jetboor. There was a small amount of gen two stock remaining at the end of June, which is largely being sold and will be completely sold by the end of the the first half. The other thing that impacts the the first half, second half split is the ongoing increase in royalty revenues, and that will be something that will continue into FY '25.

21:57 And we expect to see whilst not the the same level of split or skew between first half and second half, but we will see a greater second half revenue than first half revenue in FY twenty five. In terms of aftermarket, we saw 32% growth in revenue in FY twenty four. We expect to see the same or similar SKU first half and second half because of the availability of gen three production in the second half of f y twenty five. The other thing that will flow through from here, as we've talked about previously, is the significant increase in margin. So whilst aftermarket may not see 32% revenue growth, as we go into FY twenty five, we expect to see a significant increase in gross profit for the business unit throughout the year.

22:55 In terms of automotive, we actually saw a decrease in revenue, in f y twenty four compared to '23. That was largely due to the impact of the exclusivity arrangement with Magna, where we recognized over 10, over $10,000,000 of revenue in FY '23 and under $4,000,000 in FY '24. We expect to see in FY '25 a similar level of revenue from that exclusivity arrangement, and the revenue growth path will normalize as we go through into FY '25.

23:34 Just move on from aviation. I think there, though, you can see the impact that we got from the Collins agreement. So there's exclusivity and NRE revenue included in the $4,000,000, and aviation starting to provide a material impact in terms of revenue growth. And we expect to see a similar amount of revenue from NRE and exclusivity in FY twenty five.

24:05 Moving now into the operation operating expenses. Now we've included here the way that we view operating expenses internally, which is prior to any capitalization for r and d. So the r and d expenses are effectively grossed up. As you can see, we had a peak cost in the first half of f y twenty four and a reduced spend as we went into second half. That was, as I said before, largely due to the scaling down of the outsourced resources for a number of automotive and Guardian related projects. As I said, that will continue as we go through into the first half of f y twenty five, and we complete the product development for for the Guardian Gen three product.

24:57 There's additional scope to reduce costs further as we go through the as we go through the year. We made some adjustments in the latter part of second half of FY twenty four, and the benefit of those cost reductions will flow through the full year for f y twenty five. And we'll continue to have disciplined cost management throughout the year to help support the cash flow breakeven run rate target. And that's something that we'll continue to do, as Paul mentioned, with some volatility expected in the automotive business, and we'll be able to flex costs based on what we're seeing from a revenue perspective.

25:39 Okay. Thanks, Martin. I wanna take us back to last year. We provided a few dot points on the outlook, and and we felt it important to close the loop on those to let everyone know exactly how how we've landed. So we called out a a doubling of automotive volume, and we achieved 76%. Now so on the on the one hand, we we didn't hit our expectation. On the other hand, we don't control that. That's controlled by our customers. We're still quite happy with the 76% increase, and we are still looking at, on average, a 100% year on year growth over this medium term. Guardian units, 25% increase was the goal. We achieved 19.

26:26 Now at the end of the year, as we reported, we did have a number of units, that were sold not connected, and we don't include those in this metric, of course. If we did, we we certainly would have overachieved. But those, those units, of course, will be connected, primarily over the course of this this next two quarters. Gen three launch, we did our soft launch in in January, that we announced around CES. The initial product variant was to support GSR compliance in Europe. We're fully production ready as of May, and we're expanding our production capability and the lines to meet future demand. We've homologated with two really important European customers, and that really sets the platform for GSR growth.

27:23 Aviation, targeted 5% of '24 revenue. We met that goal. And, you know, that commons agreement will cover in a minute in a little more detail, but we are moving forward with that. We called out a reduction in the cash burn. We've reduced that burn rate from four to 2,500,000, and you've you've just seen that the current quarter is down to 2,000,000. And through cost and margin, we expect it to breakeven by the end of the year, as we said last year. So I I think a reasonable scorecard for the goals that we set at the beginning of twenty four. So if we look forward from this point, what are we expecting to see?

28:14 Again, notwithstanding the volatility and the difficulty in being very accurate in our forecast between one point nine and two point one million additional, units of of royalty in order move. And, of course, that's, as we've mentioned many times, at a significant margin, and that represents roughly the doubling of our business year on year. We do expect a 20% increase in connected units in Guardian and between 13,015 Guardian Gen three units sold predominantly in the second half. And, of course, that contributes a much more significant margin than the volume we sold of predominantly Gen two units in the year prior.

29:04 In aviation, our contractual commitment is to achieve what's called blue label, which is a functioning prototype product, and and and that can be used for specific fields of use, I. Simulators and air traffic control. And then we we have different deliverables for the following year, but it it's very important to us that we achieve this specific outcome in this financial year. And as we've said earlier, cash flow breakeven run rate towards the end of this trading period, this calendar year sorry, financial year. So

29:48 I'll just turn to some of the preloaded questions. We received approximately 80 questions in advance, and I've attempted to group some of them together, and and I'll answer those in aggregate as best I can. So lots of questions on cash flow and breakeven. I think we've covered that through this presentation, so we're still committed as we've just said. Requirements for capital, cash or fundraise, lots of questions around that. You will note in our annual report that we've called out the risk, and that risk is linked to the kind of uncertainty that we've spoken about this morning.

30:39 But I want to also say that we are very confident in our ability to bring capital into the business. And the key call out that that really drives the risk that's been called out in the audited annual report is really to do with, working capital and the lumpy nature of automotive receivables. So if we consider that as a very specific issue for us to manage, We have a reasonably simple solution, and that is, receivables funding, and that process is underway. And we expect it to deliver, additional working capital in the range 5 to 10,000,000 US dollars.

31:25 And 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 programs or or results that we've delivered in the last two to three years. So we we feel quite confident that we can get the cash in place to continue to run our business, and we can do that in a way that benefits everybody. Lots of questions about Magna, the exclusive arrangement that we have for the mirror, some questions around the convertible notes. So quite quite a lot of questions here, so I'll attempt to answer them as as best I can.

32:22 We have a a wonderful customer relationship in collaboration with Magna. It's obviously anchored on the joint mirror solution that that we've developed. That is a world first. It is in production. The volumes that that we derive in our royalties for this product represent just under 20% of our total quarterly royalties, so that, by any measure, is successful. And we're continuing to, seek out together, new opportunities in in into the future. So very, very solid from a, I guess, a customer supply or collaboration point of view.

33:08 With regard to the note, on the one hand, it's not due until the end of calendar twenty six, so quite a way away. And we have this profile of cash generation and margin expansion that we've spoken about already. On the on the other hand, you you know, it's easy to to say, well, two years isn't long. And so and so our planning for that event is in in progress. We're not rushing or concerned about that, and we believe that we'll have a whole range of options at that point in time to cover the note, and that would include swapping the debt like for like. So we're not we're not concerned about that at the moment. We have a plan in place, and we have a range of options.

34:03 Automotive. Lots and lots of varied questions around automotive, in particular, the pipeline, RFQs, RFIs. You know, we called out a few years ago a big pipeline, and that hasn't materialized well, it hasn't materialized for the industry. And in my last presentation, I mentioned that our customers have kind of sat back, reassessed the technical difficulties, the technical risks, the market conditions, and really put the brakes on the the award of of new business. Now what we're seeing today, though, is quite a different story. We're seeing a resurgence in in in the inflow of both RFIs, request for information, and RFQs or quotes.

34:58 And we're currently processing RFQs for OEMs based in Japan, Korea, Europe, China, and North America. Now those, 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 programs to begin in 2025 calendar So, there was definitely a slowdown in the issuance of of new quotes, of new tenders.

35:45 And what we're seeing at this point in time is that it's starting to hot up again, but not just in Europe, but in, all the markets around the world that produce vehicles. So, I I think at least from a confidence point of view in the forward pipeline, we're we're feeling much better that it's returned to to a really strong position going forward. Finally, on Collins, lots of questions well, lots of questions around aviation, and, of course, that's relevant to Collins, which is who we have the exclusive arrangement with. I suppose there's a sense that it's very slow and the sense that we have indicated, RFQs in the past that haven't come to fruition, and that is true.

36:39 The way we're working with Collins is to develop the blue label product as as I mentioned a moment ago, and that's due this financial year. The next step is is is what they call a a red label product, which is a a fully functional product, but one that is not yet certified by the FAA. And then the final step is the black label product, and that's certified and ready to install into aircraft in in in the field. So that's the process. So we're both working very much on building the pipeline. The pipeline is building. The sales conversion is slow, and we are still continuing to sign up small pieces of business with our existing customers in particular in the simulator environment.

37:31 And and I I expect that to continue until we have this, at least this, red label product, up and running with Collins. So there is action. You have seen that we are generating revenue either through the exclusive arrangement or through NRE, and this is all driven towards building a certified product that we can market or that Collins can market through their sales network. So that's that's the the end of the session, and, in particular, covering off, the majority of the preloaded questions.

38:20 Fantastic. Thank you very much, Deepal, for covering off those themes and those questions received. And, of course, you'll be able to review all questions submitted and published responses where appropriate to do so on the investor meet company platform. Perhaps before redirecting investors to provide you their feedback, which I particularly is important to you and the team, could I just ask you for a few closing comments, please? Well, firstly, thanks for listening into us at at an early hour in in the morning. We'd really appreciate it. From our perspective, we're working very hard to deliver programs that we've won. That's the thing that delivers royalty flow. Failing on programs doesn't help anybody, so we're very focused on that. We do see an increasing pipeline returning, which gives us a great deal of confidence going forward.

39:06 We'll manage the uncertainty as everybody in the industry will. And I do expect that in our Guardian, business, the uniqueness of our service and its performance relative to peers will see us dramatically increase our financial performance over the course of this year and next. And that's the that's the the key for us. So thank you all for taking the time to listen. Fantastic. Thank you indeed for updating investors today. Can I please ask investors not to close the session to be automatically redirected to provide your feedback in order the management team can better understand your views and expectations? This will only take a moment to complete and is greatly valued by the company. On behalf of the management team at SEEING MACHINES LIMITED, we'd like to thank you for attending today's presentation. That concludes today's session, and good morning to you all.

39:54 Thank you.