Seeing Machines (SEE) is James Faulkner’s Small Cap of the Week

Seeing Machines (SEE) shares soared last year after the company signed a strategic agreement with Caterpillar Global Mining, the world’s leading manufacturer of mining equipment, for in-cab Fatigue Monitoring Systems for use in mining machines. The exclusive agreement covers the use of eye-tracking technology in the cabs of mining vehicles to enable the monitoring of operators for signs of fatigue and distraction. 

Describing the deal as a “major business breakthrough”, Seeing Machines hinted at the wider market opportunities for its novel technology: “After establishing eye-tracking as proven technology in the most difficult environments for this part of the mining industry, the next step is to establish its value in wider markets to protect drivers, workers and the public at large.” The shares have since pulled back somewhat, but the story remains compelling and recent progress has been encouraging.

The business…

Seeing Machines has long been a ‘jam tomorrow’ business, but under CEO Ken Kroeger (appointed July 2011) there is a different feel to this company now. Kroeger is an experienced small cap technology entrepreneur with a track record of commercialising IP.

With a clear focus on the DSS driver fatigue system (which provides the best near-term opportunity), Kroeger has made solid progress in growing services sales, signing new channel partners in key regions such as the Americas and South Africa and begun exploring much wider applications beyond mining and off-road. Back in December 2012 on the old WatsHot website, I called Seeing Machines “a penny share with the scope for explosive upside.” Well, the shares are trading more than 200% higher than then, but I still think there could be more to come!

DSS

Over 64% of current group sales come from DSS – a system fitted inside a vehicle to monitor driver drowsiness and/or distraction. Currently aimed at industrial commercial vehicle drivers, the DSS is a robust autonomous system that uses a small dashboard camera together with cutting-edge eye-tracking algorithms to detect driver fatigue and trigger audio and seat-vibration alerts.

It passively measures driver’s head and eye behaviour to determine the state of attention by day or night, even if an operator wears glasses. To date, Seeing Machines has developed and manufactured the units itself, but there is scope to recruit OEM manufacturers or outsource production as demand builds. It is designed for ease of deployment into environments where fatigue and attention must be monitored and managed in real time such as mining, its main market at present.

The mining industry alone represents a huge market for DSS. There are more than 22,000 mining trucks in operation around the world, with numbers growing at c.7% per annum.

Under 1,200 of them have fatigue detection and systems installed (Seeing Machines has 680 systems installed in haul trucks and other mining-related vehicles) leaving a huge opportunity in this niche market alone. However, Seeing Machines has only scratched the surface here and the potential applications of DSS are much more far-reaching. As shown by use in Australian ‘road trains’, the fatigue management system is applicable to on-road as well as off-road commercial transport – long-distance haulage and coach drivers.

As broker finnCap observes, “With accidents from driver fatigue occurring daily around the world, the cost of accidents in terms of lives and insurance is continually rising and although the expense of a full DSS solution is not yet economic for general deployment, as volume production ramps the cost per system will come down and make it applicable to this much wider market, with a potentially huge ramp in revenue for Seeing Machines.”

Seeing Machines’ ruggedized in-vehicle IVS

Long-term opportunities – consumer electronics…

You may or may not have noticed, but ‘smart’ TVs now come with motion sensing technology, which Seeing Machines promises to take to the next level. Implanting Seeing Machines technology within a Smart TV would enable it to monitor and track the eye movement and facial expressions of viewers: advertisers could ensure that product and branding is correctly positioned for maximum exposure; programme makers and advertisers could monitor expressions and receive immediate feedback on the effect of their output on the viewers; ages of viewers could be monitored and age restrictions enforced; TVs could even turn off/pause if the viewers fall asleep or leave the room. With the sophistication of eye tracking available from Seeing Machines, TVs could even display different programmes to each of multiple viewers on the same screen.

If that isn’t futuristic enough for you, 2014 sees the advent of Google’s Glass project, whereby an augmented reality head-mounted display will enhance real world vision with supplemental information supplied from a mobile internet connection. This kind of human interface will require reliable eye-tracking technology, which Seeing Machines is perfectly positioned to supply. The company already supplies this kind of technology through its FaceLab and FaceAPI divisions, where it is used in the development of flight and car simulators as well as in instrumented vehicles by major automotive makers, military and leading transportation research labs. These divisions generated combined revenues of A$1.2 million in FY2014, but clearly the rewards for addressing the much larger consumer market would be exponential.

The numbers…

FY13 revenues jumped by 39% to A$17.8 million as Seeing Machines began to work closely with Caterpillar dealers. This generated a loss of A$2.6 million, which reflects accelerated investment following the recent £16 million fundraising. For FY15, Edison (admittedly, a paid-for researcher) forecasts revenue of A$25.1 million and a much wider loss of A$9.7 million.

It sees respective numbers of A$41.7 million and a A$5.8 million loss for FY16, with profitability anticipated in FY17 with A$60 million revenues and a A$1.2 million profit. Notably however, these exclude any revenues from auto OEM or consumer electronics. There’s also a cash pile of A$22.8 million, which means Seeing Machines won’t be tapping the market any time soon. With a potential addressable market of $10 billion (according to Edison) for the DSS technology alone, the shares are what you might call a ‘punt’.