We already knew from the soft profit warning that Q1 would be soft, but as mentioned in our report comment, we still missed the automotive revenue outcome by SEK3m. However, AIS was sequentially lower while NRE was unchanged compared to Q4, meaning the important license revenues were solid.

The EBITDAC (EBITDA-CAPEX) came in at SEK-47m, in line with our estimates, but underlying costs were substantially lower, since reported figures included SEK12m in one-time restructuring costs. Thus, underlying cash burn (EBITDA-CAPEX) was down at SEK35m in Q1 - a promising sign considering that topline was on the weaker side.

As for areas being restructured, Smart Eye mentioned that it is related to lower costs in R&D, which we believe is due to streamlining in general.

New geographies (Japan and US) are now starting to contribute to automotive revenues. This was a highlight from the report, which means that the previous automotive acceleration from South Korea (KIA/Hyundai) will now come from a broader front. Acceleration across many OEMs and geographies means a more diversified ramp-up, which makes Smart Eye less vulnerable for eventual mishappenings for individual OEMs.

Additionally, Smart Eye stated that it expects first and foremost Europe, but also China, to very soon start contributing to the acceleration in automotive. The ramp-up in Europe is logical since EU General Safety Regulation 2024 (EU GSR 2024) will start demand DMS in all car models launched on the EU market from July 7th and onwards. Smart Eye states that the pick-up will definitely come in H2, but perhaps as early as in Q2.

50 car models have been launched, of which 10 were added in Q1. OEM end customers have scheduled to add at least another 30 models by year-end, i.e. a 60% increase from Q1 to Q4. Furthermore, Smart Eye has stated that it expects 200 car models to have reached production by the end of 2025. However, note that individual model volumes differ quite a bit. Moreover, one must remember that it takes anywhere from 6-12 months for the volumes of a car model to ramp up, meaning most new models for the remainder of the year will only have a limited impact. Nonetheless, the direction of the number of models and sales is crystal clear, looking beyond year-end.

Behavioral Research sales were also below our estimates, but the outlook for Q2 is strong. The statements around the prospects for this business were the most positive we have heard so far from the company.

AIS looks ready to start to ramp for real from Q3. Smart Eye is in several dialogues with bus manufacturers that have to adapt to the EU GSR 2024. We have not seen any numbers on market shares in this area, or how many commercial vehicle-companies that have procured DMS, but we suspect this figure to be substantially lower than in passenger vehicles.

In the conference call, Smart Eye stated that AIS, which is hardware combined with software, is not expected to increase the company's working capital. The reason why is that Smart Eye has already purchased sufficient inventory to cover a substantial ramp-up in this area.

The automotive ramp-up is in line with Smart Eye’s internal expectations. The new expectations, that is. During Q1 Smart Eye raised SEK150m, as a safety measure, as it feared further delays from OEM customers could occur. Thus, Smart Eye’s directed share issue was not about making investments in new areas, but rather a matter of being able to follow the business plan even if some unexpected things were to happen.

The cash burn in Q1 was SEK-60m, but one-time OPEX amounted to SEK12m and Q1 is a seasonally bad quarter for working capital. This included one payment in Behavioral Research of almost SEK20m was pushed into Q2, meaning Smart Eye expects a positive working capital effect in Q2. Cash is solid at SEK161m, and including the credit facilities the company has SEK244m in available funds. Following the directed share issue, we expect the rocky road to be over, which also seems to be the interpretation of the stock market.

A key highlight from the conference call was the company's statement regarding timing for reaching positive cashflow. Considering that EBITDA adjusted for SEK12m in one-off costs was a mere SEK -11m, we were not surprised by the company stating that it is likely to reach positive EBITDA in Q3 this year.

Further, the company stated that it expects to reach positive cash flow sometime between Q4 this year and Q2 next year, with Q1 naturally sounding the most probable outcome. Additionally, Smart Eye stated that 'if OEM customers deliver on their plans, breakeven on cashflow is expected in Q4'. To provide some flavor to this, OEMs typically provide production schedules of their respective car models and how they expect them to ramp up by volume. While these ramp-up plans became obsolete during the pandemic and the following semiconductor shortage, we think they should be somewhat accurate by now. However, the uncertain economy naturally creates uncertainty.

We view the pipeline for new tenders as strong, primarily in the US and China due to the market’s expectations of future regulation. We assume the high requirements from IIHS’s (USA) tests have led to positive discussions. Furthermore, the inclusion of DMS in China NCAP in Q1 is an important step, similar to Euro NCAP’s influence in Europe.

General market price pressure from Tobii and other newer players, directly or indirectly as OEMs get more choices and better bargaining power, remains a long-term risk for the ASP. The market has developed quickly into requiring interior sensing as well, which is a general risk in the technology sector. It is also a characteristic of the tough automotive business, where OEMs require more for less, wanting to use the software for other areas, without paying more for it. However, we note that Smart Eye believes interior sensing will be an ally for keeping the ASP.

We have lowered our automotive estimates for 2024 by 7%, expecting a 95% growth, accelerating into 115% during 2025. We lower our OPEX estimates for 2024-2025, expecting Q1 2024 to be a base level until cash flow break-even in Q1 2025, whereafter it will grow by SEK5-7m per quarter. Our new estimates move EBITDA break-even from Q4 2024 to Q3 2024. Cash flow breakeven (EBITDA + CAPEX) is also moved one quarter to Q1 2025.

We raise our base case from SEK148 to SEK155 per share, based on our new earnings estimates for 2024-2025. Our bear and bull case also lifted from SEK45 and SEK200 to SEK50 and SEK210 per share, respectively.

The stock market did not care about the lower sales. We think the reason is the easing of the fear around cost control. At first glance, it might look bad with lower sales, yet again (which was also our first instinct), but the solid cost control trumps the slower sales. We note several investors have been worried about the risk that Smart Eye is burning cash to win market shares at any cost and that DMS profits will flood into new ventures that have lower returns on invested capital. With the Q1 2024 report, this risk is perceived as significantly lower.