Smart Eye: Cost control & continued automotive ramp-up
Research Update
2024-05-16
14:00
Analyst Q&A
Closed
Jesper von Koch answered 8 questions.
Redeye provides a research update following Smart Eye’s Q1 2024 report. Sales fell short of its expectations, but this was offset by substantially lower costs. As a result, EBITDA came in ahead of our estimates. Further, the pipeline of potential near-term design wins appears promising. Redeye raises its EBITDA estimates for 2024e-2025e and increase its valuation range.
JVK
MW
Jesper Von Koch
Martin Wahlström
Contents
Investment thesis
Q1 review
Slight topline disappointment - but cost base well below estimates
Japan and North America accelerating - Europe next up
10 new car models added in Q1. 50 to 80 by year-end. 200 in 2025
Behavioral Research weak in Q2 - but very promising outlook
AIS ready for take-off
Strong cost control makes cash position even more solid
Breakeven on EBITDA in Q3 and on cashflow in Q4'24-Q2'25
Strong pipeline for upcoming design wins
Pricing pressure remains a risk
Financial estimates
Faster breakeven due to lower costs
Smart Eye: Estimate changes
Financial estimates
Raising our fair value range
Quality Rating
Financials
Rating definitions
The team
Download article
Q1 came in slightly below our topline estimates, both for Automotive and Behavioural Research. For Automotive, AIS revenues fell sequentially while NRE revenues were unchanged, meaning that the important license revenues showed solid development. For Behavioral Research, Q1 is seasonally very weak, which explains the sequential decline. The outlook for Q2 was, however, very optimistic. On a much positive note, strict cost control surprised us. Excluding one-off costs of SEK12m related to streamlining, the EBITDA loss was a mere SEK11m and EBITDA-CAPEX SEK-35m. The strict cost control bodes well for what will happen to cash flow when revenue growth accelerates.
Japan and North America started contributing to Automotive growth in Q1, an important step in the acceleration plan. Further, Smart Eye stated that it expects first and foremost Europe, but also China, to very soon start contributing to the acceleration in Automotive. Also, the pipeline for new tenders is strong, primarily in the US and China, due to the market’s expectations of future regulation. As such, new design wins could come in imminently. During Q1, DMS was included in China NCAP - an important step towards global DMS adoption.
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, moving our EBITDA breakeven from Q4 2024 to Q3 2024, while cash-flow breakeven (EBITDA-CAPEX) is moved from Q2 to Q1 2025. On the back of this, we raise our fair value range from SEK45-200 to SEK50-210, with Base Case raised from SEK148 to SEK155.
SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
Revenues | 219.6 | 302.2 | 416.9 | 655.3 | 1,265.5 |
Revenue Growth | 101% | 37.6% | 38.0% | 57.2% | 93.1% |
EBITDA | -193.9 | -127.7 | -9.4 | 153.0 | 554.1 |
EBIT | -343.0 | -282.9 | -165.4 | 3.0 | 419.1 |
EBIT Margin | -156% | -93.6% | -39.7% | 0.5% | 33.1% |
Net Income | -339.9 | -283.3 | -165.4 | 2.4 | 419.1 |
EV/Sales | 14.5 | 10.3 | 7.2 | 4.5 | 1.9 |
EV/EBIT | -9.3 | -11.0 | -18.1 | 990 | 5.7 |
Case
In pole position within eye tracking for mandated driver monitoring
Evidence
The revenue acceleration is highly predictable
Supportive Analysis
Challenge
Head-to-head competition with main competitor
Challenge
Possible pricing pressure
Valuation
Rapid, predictable growth to a low price
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.
SEKm | 2022 | 2023 | Q1 24 | Q2 24E | Q3 24E | Q4 24E | 2024E | 2025E | 2026E |
Total net sales | 220 | 302 | 86 | ||||||
New | 98 | 109 | 125 | 417 | 655 | 1,266 | |||
Old | 100 | 112 | 157 | 463 | 659 | 1,217 | |||
Change | -3% | -3% | -21% | -10% | -1% | 4% | |||
Gross margin | 88% | 88% | 90% | ||||||
New | 88% | 86% | 87% | 87% | 85% | 87% | |||
Old | 87% | 87% | 87% | 87% | 86% | 89% | |||
Change | 1% | -2% | 0% | 0% | -1% | -2% | |||
OPEX | 386 | 395 | 100 | ||||||
New | 90 | 92 | 92 | 373 | 405 | 541 | |||
Old | 101 | 100 | 106 | 405 | 456 | 518 | |||
Change | -11% | -8% | -13% | -8% | -11% | 5% | |||
EBITDA | -194 | -128 | -23 | ||||||
New | -4 | 1 | 16 | -9 | 153 | 554 | |||
Old | -14 | -3 | 31 | -2 | 114 | 560 | |||
Change | -71% | -143% | -47% | 0% | 34% | -1% | |||
EBIT | -343 | -283 | -62 | ||||||
New | -43 | -38 | -23 | -165 | 3 | 419 | |||
Old | -54 | -43 | -9 | -162 | -46 | 425 | |||
Change | -20% | -12% | 157% | 2% | -106% | -1% | |||
EBIT (%) | -156% | -94% | -71% | ||||||
New | -44% | -35% | -19% | -40% | 0% | 33% | |||
Old | -54% | -39% | -6% | -35% | -7% | 35% | |||
Change | 10% | 4% | -13% | -5% | 7% | -2% |
Smart Eye: Estimates | ||||||||||
SEKm | 2021 | 2022 | 2023 | Q1 24 | Q2 24E | Q3 24E | Q4 24E | 2024E | 2025E | 2026E |
Net sales | 109 | 220 | 302 | 86 | 98 | 109 | 125 | 417 | 655 | 1,266 |
- Automotive | 47 | 50 | 88 | 33 | 39 | 47 | 56 | 175 | 375 | 957 |
- Research | 62 | 170 | 214 | 53 | 59 | 62 | 68 | 242 | 281 | 309 |
Gross Profit | 97 | 193 | 267 | 77 | 86 | 93 | 108 | 364 | 558 | 1,095 |
EBITDA | -89 | -194 | -128 | -23 | -4 | 1 | 16 | -9 | 153 | 554 |
EBIT | -131 | -343 | -283 | -62 | -43 | -38 | -23 | -165 | 3 | 419 |
EPS (SEK) | -5.9 | -9.7 | -8.0 | -1.7 | -1.2 | -1.0 | -0.6 | -4.5 | 0.1 | 11.4 |
Growth (%) | 78% | 101% | 38% | 34% | 42% | 40% | 37% | 34% | 53% | 97% |
Gross margin | 89% | 88% | 88% | 90% | 88% | 86% | 87% | 87% | 85% | 87% |
EBITDA margin (%) | -81% | -88% | -42% | -27% | -4% | 1% | 13% | -2% | 23% | 44% |
EBIT margin (%) | -120% | -156% | -94% | -71% | -44% | -35% | -19% | -40% | 0% | 33% |
Net income margin (%) | -120% | -155% | -94% | -71% | -44% | -35% | -19% | -40% | 0% | 33% |
(SEKm) | 2020 | 2021 | 2022 | 2023 | 2024E | 2025E | 2026E | 2027E | 2028E | 2029E |
Revenue | 61 | 109 | 220 | 302 | 417 | 655 | 1,266 | 1,607 | 1,842 | 2,100 |
- Revenue growth | 0% | 78% | 101% | 38% | 38% | 57% | 93% | 27% | 15% | 14% |
Gross margin | n/a | 89% | 88% | 88% | 87% | 85% | 87% | 88% | 90% | 91% |
Gross Profit | 102 | 97 | 193 | 267 | 364 | 558 | 1,095 | 1,418 | 1,649 | 1,905 |
OPEX | 153 | 186 | 386 | 395 | 373 | 405 | 541 | 606 | 679 | 781 |
EBITDA | -52 | -89 | -194 | -128 | -9 | 153 | 554 | 812 | 970 | 1,124 |
D&A | 24 | 42 | 149 | 155 | 156 | 150 | 135 | 135 | 135 | 135 |
EBIT | -75 | -131 | -343 | -283 | -165 | 3 | 419 | 677 | 835 | 989 |
EBIT margin | -123% | -120% | -156% | -94% | -40% | 0% | 33% | 42% | 45% | 47% |
Tax | -16 | -28 | 0 | 0 | 0 | 0 | 0 | 68 | 175 | 208 |
Net profit | -60 | -104 | -343 | -283 | -165 | 3 | 419 | 609 | 660 | 781 |
Cash flow | ||||||||||
Share issue | 0 | 0 | 0 | 295 | 142 | 0 | 0 | 0 | 0 | 0 |
Operational cashflow, incl. Tax | 0 | 0 | -194 | -128 | -9 | 153 | 554 | 744 | 795 | 916 |
Investments in intangible assets | 0 | 0 | -90 | -88 | -96 | -96 | -96 | -96 | -96 | -96 |
Changes in Working Capital | 0 | 0 | 0 | -102 | -11 | -48 | -82 | -30 | -20 | -20 |
Free cash flow | 0 | 0 | -284 | -22 | 26 | 9 | 376 | 619 | 679 | 801 |
Net debt | -219 | -275 | -3 | -80 | -106 | -115 | -491 | -1,110 | -1,789 | -2,589 |
(SEKm) | 2020 | 2021 | 2022 | 2023 | 2024E | 2025E | 2026E | 2027E | 2028E | 2029E |
DMS incl. NRE | ||||||||||
- Revenue | 41 | 47 | 50 | 84 | 138 | 277 | 719 | 986 | 1,167 | 1,367 |
- Revenue growth | 0% | 14% | 6% | 69% | 64% | 101% | 160% | 37% | 18% | 17% |
- Gross margin | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% |
- Gross Profit | 41 | 47 | 50 | 84 | 138 | 277 | 719 | 986 | 1,167 | 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 | 37 | 98 | 205 | 228 | 228 | 228 |
- Gross margin | 35% | 35% | 35% | 35% | 35% | 35% | 35% | 35% | 35% | 35% |
- Gross Profit | 0 | 0 | 0 | 1 | 13 | 34 | 72 | 80 | 80 | 80 |
Research | ||||||||||
- Revenue | 41 | 47 | 170 | 214 | 242 | 281 | 309 | 339 | 373 | 392 |
- Revenue growth | 0% | 14% | 261% | 26% | 13% | 16% | 10% | 10% | 10% | 5% |
- Gross margin | 0% | 0% | 88% | 85% | 88% | 88% | 88% | 88% | 88% | 88% |
- Gross Profit | 0 | 0 | 149 | 182 | 213 | 247 | 272 | 299 | 329 | 345 |
2020 | 2021 | 2022 | 2023 | 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% | 4% | 10% | 33% | 48% | 61% | 77% |
- Nbr of cars with DMS, m | 0 | 0 | 1 | 2 | 4 | 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 | 2 | 4 | 13 | 18 | 23 | 28 |
- Average Selling Price | 85 | 86 | 70 | 67 | 63 | 60 | 54 | 52 | 50 | 48 |
- License revenue, SEKm | 0 | 0 | 29 | 69 | 111 | 247 | 689 | 956 | 1,137 | 1,337 |
- NRE revenue, SEKm | 0 | 0 | 21 | 24 | 27 | 30 | 30 | 30 | 30 | 30 |
Total DMS revenue | 41 | 47 | 50 | 92 | 138 | 277 | 719 | 986 | 1,167 | 1,367 |
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.
Assumptions, fair value range | |||
Bear Case | Base case | Bull case | |
Valuation | 50 | 155 | 210 |
2023-2027 estimates | |||
Total sales CAGR | 36% | 49% | 48% |
Automotive sales CAGR | 78% | 91% | 91% |
Research sales CAGR | 1% | 14% | 14% |
Total sales 2027 | 1,401 | 1,822 | 2,168 |
Avg EBIT margin 2025-2027 | 29% | 41% | 48% |
EBIT margin 2027 | 35% | 47% | 54% |
Terminal EBIT margin | 15% | 26% | 30% |
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. 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.
Disclosures and disclaimers
Contents
Investment thesis
Q1 review
Slight topline disappointment - but cost base well below estimates
Japan and North America accelerating - Europe next up
10 new car models added in Q1. 50 to 80 by year-end. 200 in 2025
Behavioral Research weak in Q2 - but very promising outlook
AIS ready for take-off
Strong cost control makes cash position even more solid
Breakeven on EBITDA in Q3 and on cashflow in Q4'24-Q2'25
Strong pipeline for upcoming design wins
Pricing pressure remains a risk
Financial estimates
Faster breakeven due to lower costs
Smart Eye: Estimate changes
Financial estimates
Raising our fair value range
Quality Rating
Financials
Rating definitions
The team
Download article