Earnings Call: H2 2020

Nov 2, 2020

Oh, good morning, everyone. Paul McGone here from Sea Machines. I'm here today to present to you the financial results for FY 'twenty. And we'll also give you, an update on how it performed over the first quarter. Needless to say trading conditions for us and for everybody over the last 12 months have been very, very challenging. But we're also quite pleased with the outcome. Our business has continued to grow. We've continued to manage costs and cash. And I think as everybody has now seen, we've had a a post close event, which has, showed up our balance sheet and gives us a great deal of confidence moving forward. That we can execute the plans that are in front of us and, frankly, set ourselves in a position to deliver the growth that's been on promise for several years now. So with that being said, I'd like to walk you through a presentation, and this presentation will cover the numbers for FY 2020. We'll give you a sense of where we're going strategically in each of the the segments that we operate within transport And importantly, give you some insight into our 1st quarter's results, which, as I said, are quite pleasing. And I do expect that trajectory to continue, through the first half. So a good start to this year a pleasing result under the circumstances for last year. So if if you, give me a few minutes, I'll take you through the story. And, hopefully, that will resonate with all investors at this point in time. From a highlight point of view, revenue of 40,000,000, which is a 25% increase, from the previous year. Again, given the circumstances of COVID, we're quite pleased with how revenue is is, is, closed for the, for the year. We're seeing underlying growth. And in particular, our fleet business, continues to do well. The annualized recurring revenue up 17% on the same period, last year at 14,000,000. This is a very important element of our business today and will remain a very important element of our business going forward. As our fleet installation rate grows, this recurring revenue grows, in alignment. It's got a compounding effect and frankly underpins the cash flow of our business at least out until 2023 when we'll start to see very significant revenues from our, automotive license revenue, begins to contribute significantly. Cash, We're very pleased with the cash result, 22 percent above consensus. That's a combination of initiatives that we took to reduce the cost of doing business. Also good receipts from customers was significantly tightened our commercial operations and our terms of trade and all of those things, have contributed in some way, to our cash position. Of course, we have had some governments forward as many companies have through the course of the year, and and that is is also being a help. Just recently, we announced a placement to federated Hermes, a very large and successful fund manager in the US of $28,000,000. So our cash position today, we are very pleased with and very confident that we'll be able to execute our plan as previously articulated. So this is a very important, new injection for us. I have talked about it as being strategic, and I do believe that it is. And I'll I'll just spend a minute just explaining myself there. We've been talking with potential new US investors now for many months And, we get a a resounding positive, feeling from most of them. And the big issue has been liquidity, enough stock on market for new investors, to form a position. So in in our view, this placement was a very important first step in order to get, an important and sophisticated US investor on our register. And we're certainly of the view that this will, enable other US investor to follow. So, from a, the point of view of introducing our technology and our company to new investors that frankly have a sophisticated approach. They understand small cap growth and they understand technology. May, in particular, understand automotive and transport. So so we think this is, of course, the the injection to balance sheet is important, but it's also important we think as the first step in attracting significantly more, US investor on market support, for our company. I'll take a look at a few of the operational highlights, many of which we've reported, the first, the first one I'll start with is we have 2 automotive programs coming into start of production this calendar year. And one of the great frustrations in automotive, as I think everybody knows, is that we're unable to speak specifically of the OEMs and the vehicles that we're launching. Or where our technology is being launched. But that is hopefully just around the corner. And it's a very important milestone for us as we've delivered technology that's leading, very sophisticated into 2 very prominent and major OEMs. This is the inflection point for us in automotive. And it's the start of a, a rolling, number of, vehicles that will hit the market over the course of this year and next. In Fleet, our Guardian connections increased 46%. And again, As everybody knows, the the market was very, very difficult, during COVID, certainly up until May, June of this year. The, I think the important thing here to to mention is that a rather perverse reason for the slowdown for us was not that the businesses that we were supporting were under, financial stress necessarily because most of the fleets that we sell our product into are large fleets that move fast moving consumer goods. So their problem was utilization. They were all operating in the maximum capacity right up through until around about July. So getting access to vehicles, to install was very, very difficult. Pleased to say that, the recovery is well underway. And as I talk through the Q1 results, I'm sure that you'll, agree with me on that. Now from a regulatory point of view, we, we continue to be supported directly and indirectly, regulators and influences in all of the major markets around the world are pressing for a reduction in fatigue and distraction risk, and our technology is specifically designed to mediate those 2 risks. I think by now everybody, would know that the, the single biggest contributors to claims costs, certainly in, in the trucking environment, fatigue and distraction in that order. And, they they, lead the way in terms of claims cost by some distance. So this is not only about cost, though. It's also about the impact on human life. And it's very, very clear. And as I talk through some of the operating statistics of our fleet business. You'll see that what we do has a profound impact on on human life. And that's why our purpose is to get everyone home safely. And our ultimate ideal, is 0 road deaths. Now that's very lofty. I I understand that. But it's the purpose that drives us. So when we talk about artificial intelligence, machine learning, the application of new technology, We're in an environment where we're deploying this technology to have a profound impact on human life. And I think that's what sets apart from many other technologies that are available in the market today. Of course, we've traveled a long way. Our our technologies accumulated more than 5,000,000,000 kilometers And, that, that data is, central to the continued tuning of our algorithms that enablers to deliver automotive and aviation grade monitoring systems. And and that's, something that differentiates us, quite profoundly. Euroncap, still a very strong global leader in safety. And the rest of the market are following the lead from the UN cap. We now have a product or in fact a family of products that are specifically optimized to deliver mass market driver monitoring systems that adhere to the safety standards of Eero NCAP. And we can move up and down the quality stat, with ease given the portfolio of software, and hardware applications that support our software covering every location in the vehicle. It seems quite a long time ago now, but in January, we're at CES and, again, it's been well publicized at we were on the BMW stand with wonderful relationship with BMW, and that continues to develop. I think that's also testament to the quality of our technology. And and, we see that kind of relationship expanding over time. On the strategic partnership front, This is very important to us. So we've elected to, to expand and collaborate more. I called out more than a year ago now that we were moderating our strategy to seek every opportunity to leverage our intellectual property, to do that through collaboration, We've recently announced, a couple of MOUs, which are very specifically a result of that strategy And over time, I'm quite confident that those relationships were built into agreements that support the development of our technology more broadly and faster as this market continues to develop. Of course, over the course of the FY 2020 year with the COVID issues that we had to face, we made some permanent adjustment to our cost base and, reduced cost of doing business by $12,000,000 and those costs are now in place. The cost of that transition has been booked, and we'll see those benefits flowed through over the course of FY 2020 and FY 2021. So from an operational point of view, despite the environment, there's been a lot of a lot of work go on, in in in the business. All of our teams are fully engaged and fully occupied. And we've never been busier. Turning to the numbers now for a minute. And this, this is a chart that shows revenue from 20 17. There's really just a couple of things I want to point out here. So we can see the growth from 19 to 20, which we're very pleased with. We, we know that, there was a one off license fee in our, OEM business, our automotive business, late last year, which contributed to, to a strong result. And our Fleet business, our aftermarket business continues to grow. I'll just draw your attention to the period 17 to 18, though, and where we saw a significant jump in, in, in revenue. And you might ask the question, well, what happened? I think now most investors know that at that time, we had a range of issues predominantly in our fleet business. And in that distribution network, we subsequently had some technical issues. And the way in which we sold that stock, frankly, caused a range of, commercial issues that, really caused that business to stand still for a year. Now we've we've worked very hard to unravel those issues. We've stabilized the technology. We've introduced new features. And we now have a platform that is ready for growth. And that growth rate, you can see between 2019 2020. On the commercial side, we've unwra unwound a lot of the problems that we had in that 17 to 18 period. We now have a commercial platform in in fleet that we're very pleased with. It's very solid we we can now attain good gross margins for every hardware sale. We have, on average, 3 to 5 year contracts for every deal that we do with customers. The business is very sticky, and we also enjoy very strong margins in that recurring revenue that's derived from the services that that we provide. So the business today in fleet in particular is, definitely in a far stronger position than it has been in any time in the past. All business that we write today is profitable, whether it be from a hardware point of view or a services point of view, and we expect the underlying growth rate of that business to deliver profitable revenue and cash positive returns from here forward. So we're quite pleased, with how that's going today. In terms of the P and L, I'll just draw draw your attention to a couple of the line items of course, we'll publish the detailed accounts and notes, which you can all review, in, in your own time. The left hand side, we've got the statutory results on, on the right hand side, the normalized result where we've, highlighted some one offs and some changes in in, in the way that we manage our business. Firstly, we've set the business up into 2 P and Ls. OEM, which includes auto and aviation at aftermarket. And we've done that so that we can fully allocate the costs into those P and Ls. And increase our focus on profitability. This is already having good results. So we can see revenue growth, 25% and, gross profit, improvement as well. So this business going forward we expect to see strong double digit growth and strong underlying margins across the board. And this is a very important reset, not just in the way we manage the business, but in our narrative going forward. We're focused on cash We're focused on profit, and we're focused on performance. So, despite the loss for the year, which is significant, on a normalized basis, it's better than we had planned. And we expect that that loss will reduce in a linear fashion between now and 2023. I'll refer to 2023 several times because that's the year in which our automotive license revenues really begin to take off. And from that point forward, under our current plan, we expect significant positive cash generation and profitability. Same for the balance sheet and the cash flow. So you can see in the cash flow there that we have quite a good outcome, in terms of managing cash. Our, net working capital is strong. You'll, you'll note reductions in trying other receivables and inventory, we're managing the business more efficiently. So we have better terms and conditions that are reducing our receivables balances. We have a better operating environment and a better supply chain where we are able to reduce inventories and more closely match inventory purchases with sales through to our distributors. And that's obviously, very important for cash flow, but it's, a sign of the improvement in the underlying efficiency of, our business, primarily today in flip. So we're quite pleased with our balance sheet position. Of course, the new injection of cash strengthens our balance sheet even further. And, as you'll see in a minute, Q1 results, I think are the first landmark that point out that this improvement is well and truly underway. I'll take you to the outlook now, and Firstly, just to, I guess, talk through this whole issue of performance. I'm at the view that we have a number of, well, we have a number of strategic imperatives of course, but the most important strategic imperative is that we perform. And, and performance is central, to us delivering on the promise, but it's also central to you, the investors, and the market more broadly, believing the long term potential that we have or even the medium term potential It's very difficult to do that if you are a serial underperformer. So our internal mantra today is that performance is the most important strategic imperative and on the back of that, we will be given permission to continue to grow. So for Q1 and for the first time, I'm very pleased to say that we're ahead of target. We're ahead of budget by some 10%. If we look at Q1 from a revenue point of view and look at the same period last year, we're at 20% above that period. So for me, this demonstrates that we have an underlying growth rate that is now consistent, and we're confident that that growth rate will continue. We have far better financial controls. We're far better able to forecast and plan. And of course, that's wonderful, but without the whole team's focus on delivery, it's all for naught. So we're planning better, and we're delivering against our commitments. And that's very, very important. Years of date cash, so cash at the end of September was 35,000,000. And as you will recall, I just pointed out that cash at June was 38,000,000. So we've done very, very well in terms of cash management, excluding the, additional $28,000,000 investment, and that sets us up very strongly, for the future. Just a couple of call outs on, automotive. We're very, very strong in driver monitoring. We've recently launched our occupant monitoring strategy and product. We're now in the marketing phase for occupant monitoring. We see this as being additive or complimentary to what we do in driver monitoring, and early signs are very, very positive. For how we're, rolling out that addition to our portfolio. So that will be an important part of our business going forward. The primary focus today and for frankly, the medium term is, of course, driver monitoring systems. And they will be augmented with, occupant monitoring, looking at the, the, the, the front two seats and ultimately all occupants in the vehicle. Our engagements in the semiconductor space, you've seen announcements there we continue to, explore every opportunity to build relationships in that space. That again, I think is a differentiator for us. It's a specific and purposeful strategic shift. It, of course, doesn't mean we're in the hardware business. We are not. We are in the software business, but we've, taken or gone to the effort over several years first with Fovio and now with our ocular product. To accelerate our software and present it in a way that it can be licensed to expand our reach across all areas of the automotive space. At long last, we've been able to execute a memorandum of understanding with L3 Harris. We're we're very excited about this. Of course, aviation has been very significantly hit by COVID. But as I've mentioned before, before aviation can recover, they need to bring back online. Pilots have them recertified or trained. So the simulator space is a very, very important and early signal to the rest of the aviation environment. And critical to recovery. So we're very pleased to be working with L3 Harris and the customers that we jointly support, and we expect that on the back of this, there will be a license agreement closed that will enable our simulator product, to flow through into the end users. So very pleased with that. In automotive, I just wanted to, draw everybody's attention to the market. And there are two charts on this page, the left by semi cast, the right by ABI. What this shows you is total vehicles and the dark blue line, an expectation from semi cast on worldwide DMS units and then the installation rate in percentage terms in the light blue line above. The reason for putting this this picture up is to reconfirm that the addressable market for us and that the addressable market for DMS is very, very substantial and increasing rapidly. 100 vehicles, 100,000,000 vehicles a year, of which, semi cars believe some 70 odd percent, will take up DMS by the year 2026 and potentially higher penetration rates beyond that date. So all of the work that we've done over the last 5 years, without heavy investment in research and development, heavy investment in getting out technology, designed for each individual application is now starting to show results We have start of production this year. Those start of production vehicles will increase, and they are increasing in a market that's very large and growing very rapidly. And and that is a, a unique opportunity given that the number of players that support this market today are very, very limited. And they're very limited because to develop accurate eye tracking is a very, very complicated thing to do. It takes a long time and it takes a significant amount of money. So we believe that we are well set to take our rightful share of this large and growing market And as I've said before, today, we're at that inflection point. If we move to the next chart, through another researcher, you'll see some differences in, in the take up rate, which you would expect, as different people have different assumptions that underpin the market. We've also added here, occupant monitoring in in the green box. So you can see that while small in the scheme of things, We do believe it's incremental. We have some very good technology that we've we've, delivered into proof of concept for while wide field of view cameras that deliver frankly DMS performance across the the front 2 occupants in the cabin. So this is an incremental, play for us. And, you can see very clearly that, DMS is central. It's the driver. It's the big growth environment. And I'm sure that occupant monitoring will grow, faster, the further out we go, But right now, the core focus is DMS. DMS has an element of occupant monitoring and the upside potential for us, and the upside potential for safety on the road is very, very significant. This is a simple diagram. It's stylized, but it shows you the OEMs coming online at the start of production date, across this year and next. So as you can see, We have several OEMs going to start production this year. As we win more, RFQs, they will sit on top. But this delivers a cumulative outcome in terms of license volumes going forward. So again, I've said many times that the important thing to look at here is that a business that is involved in this kind of technology delivers ongoing volumetric growth. The OEMs are professional procurement organizations. And they will choose player a or player b for all kinds of reasons, not always technical, often commercial, and often to do with the tier 1, nothing to do with the tier 2. So what's important is that we continue to deliver volumetric growth in our license revenues that flow into production. And this picture demonstrates that. You can see over this next year, year or 2, Each of these programs sits on top of one another. They stretch out 6, 7, 8 years And that is the profile that will deliver the underlying growth rate in our license volumes for automotive going forward. Now between here and 202526, If we take the 1 off engineering services out of the automotive equation, this business alone, this automotive business alone, delivers a compound growth rate, an annual growth rate of roughly 100% a year. Between now 2 102526, driven by the booked business that you see on this stylized chart. So again, a very strong sign that this business has a is at the inflection point These production volumes are locked in. They will grow exponentially. And of course, we expect to win additional business throughout the life cycle. So this is a very strong position statement for us referencing those market slides that that that were on the previous page. And you can correlate from those two pictures quite simply that this business is poised now today for significant growth. So the OEMs have a challenge, of course. And that is they have a large range of vehicles, models. There are a number of challenges in terms of where to place a driver monitoring system, where to place the camera, where to place the processing, And these challenges are very, very complex. And with Euro Ncap mandating this technology, it's also about cost. This challenge is about cost, complexity, and choice. So our strategy is to work with the OEMs and deliver them a range of options to deploy our software into any of the locations that are viable inside of the vehicle. On a stand alone basis in the instrument cluster, above the head in the mirror in infotainment or in this ADAS environment. Now to be able to present all of those choices to an OEM, in our view, enables them to consider a supplier in the context of low cost and lower risk. And our work with the silicon side of the, the equation in this whole supply chain enables those options to be presented in almost a prepackaged way if required. Of course, we still develop software and we will still integrate into any environment that is available as we do with 70% of the business that we've won today. But we firmly have the view that this move into embedding, our, our technology, into the the platforms provided by others. Increases optionality, reduces cost, and ultimately reduces risk, and there are three factors that are very, very important to the OEM. This, little picture here is an example of our, wide, field view camera in use And it's, in in the market today, we're responding to RFI's, as as we speak. So we're very pleased with how this technology has developed. I've mentioned the partnerships already Everyone knows about Xilinx and a failure chip. We've spoken about Qualcomm and we're deepening our relationship with Qualcomm. We have other, silicon players that we're talking to. And have announced, one MOU, to that effect. So this strategy is well and truly underway. Free pillar strategy we think is right, and it's designed to solve the problem of the OEM. Turning, to Fleet for a moment, this map represents the locations of vehicles that we support around the world. So you can see that our spread is is is growing all the time. We're very pleased, with this growth. But let me just call out, a fact or a couple of facts that go back to the sort of central position on purpose. And that is that everybody deserves to get home safely. Our technology has distracted 7,600,000 identified 7,600,000 destruction events. More importantly, though, we have intervened directly in more than 165,000 fatigue events in the last 12 months. Now I'm not going to say that every one of those fatigue events would have resulted in a catastrophic accident, but there's no doubt that a significant number would have. So you can see at, you know, the the current size of our business, which is still relatively small in in in the in the great scheme. Even at that level, the impact that we're having on human life and safety on road is frankly profound. This amazes me. And and it's something that I'm very passionate about, and it's something that everybody in our business is very passionate about. This is what drives As a consequence of that delivery, being able to, deliver up that level of risk mitigation to customers, we've seen our customer numbers grow by over 60% at the end of FY 20, despite COVID. We've reset our commercials, as I said earlier. We've got better pricing in place through our distributors. We've got, lower costs that are now both flowing through from this quarter. So as we go forward, you'll see margin expansion in this fleet business as it grows. So, I'm very positive on on Fleet. I am different investors have a different focus. Some on autos. Some on Fleet. The combination in my mind delivers a balanced outcome that, mitigates to some extent, the long delays in automotive until we get to 2023 when we see all of those big production numbers flow through. But this business will continue to grow double digits, deliver recurring revenue, which is very, very important, and have the kind of safety impact that we're seeing here, which will grow year on year on year. So, we're we're very, very pleased with that. We're also in, in the advanced stages of design for our generation 3 product and, and, and also generation 4. And this, this we're quite excited about because these are the the advances that will enable us to penetrate below the heavy fleet niche that we currently serve. So that is light commercial vehicles and trucks less than 15 ton. And this is the environment where the addressable market opportunity grows for us very, very rapid So let's have a look at what that opportunity is. So we look at some research from Frost and Sullivan, and this is the the the video telematics segment. One could argue that we're in a subsegment of that called video safety telematics, either way you want to look at it, the addressable market in this space is very, very large. So in the dark bar, global units, you can see, generation 12 yellow, very, very small, doesn't even register, on the graph. And the light blue line is our total market penetration. So, you know, today, we're at we're about, you know, 2 to 3%. We expect that we will grow our business to 7 or 8 percent over the course of our planning horizon, which is 2025. Now still, those numbers in in the the great scheme of video telematics are very, very small. And and this is a picture that gives me great confidence that despite the small scale of our business today, and frankly, on those numbers, the relatively small scale in 2025, this market opportunity And the business model that we deploy here will deliver very significant value to shareholders over time, particularly now that we have Good product that's fit for purpose, doing its job, reducing fatigue and distraction risks in the numbers that I've mentioned, and with with a set of, commercials that deliver profit and cash on every deal that we do. So I'm quite excited about the potential. And, you know, we have we have no big claims to say that we're going to be 10, 20, 30 percent of the mark here, very modest market share, but is a very, very high contributor to value for us. So this is a great market opportunity. Regulation, of course, is impacting in every market. I've mentioned already that, fatigue and claims, costs and insurance, are the highest drivers of cost. And as a consequence of that insurance become more and more interested in this, We have a formal arrangement here in Australia with NTI Insurance market leader, where we've we've co developing and distributing products with insurance benefits to the end user. We have insurance types in other markets as well, a Mexican distributor, and in fact, our South African distributor. Our distribution channels can continue to expand, a new distributor in Taiwan just recently has sold their first customer in a few months, and it normally takes 9 months or more for new to get going. So we're really pleased with progress there. And as I've said, we have a product road map that can now reach out beyond the niche of heavy vehicles and into light commercial, and that opens up the market opportunity for this particular business very significantly. In aviation, it's an early stage. It's a horizon 3. We talk about a lot because we've created the eye tracking market. In this segment. And I think all investors would know we receive many accolades for the technology. And guess everybody's saying that's great, but where's the money? The aviation business is similar to automotive. There's a long lead time. There's capital investment, there's engineering services, and then there's production. The important thing to recognize in aviation is that we have created this market. We have a leadership position. The accolades that we've received are for good reason. So now let's just turn to what the market opportunity looks like. Firstly, the average selling price for our technology and aviation is significantly higher than in the other markets that we operate. Of course, total units is lower, but the average selling price compensates for that answer. So we look at simulators, primarily for training in aircraft for pilot monitoring and in consults for air traffic control. We see the direct serviceable market for us in simulators in commercial at north of $200,000,000, $280,000,000 for military, and we have units in play across commercial and military today. The the announcement with LP Harris will enable us to expedite the development of his simulator market and grow it over coming years. In terms of aircraft, again, lower volume, but significantly high opportunity, 500,000,000 for commercial, more than 500,000,000 for military. And in consoles, again, more than 500,000,000 So it's all important to point out now that we're making progress with the partners that will deliver our product, to call out what the opportunity is. Yes. It's still definitely horizon 3, but this is an opportunity that should not, be unnoticed. Okay. So let me just close by, kind of recapping where we're at right now. The automotive market, the penetration of driver monitoring system, the addition of occupant monitoring systems and the volumetric potential of that business is very significant. We're at an inflection point. Our customer's vehicles is hitting the start of production that will continue in a linear fashion over the next 2 financial years, which will deliver year on year growth in licensing of approximately a 100% per annum. This is, very important. After years of investment, we can see, the future and the future looks very good. For automotive software licensing of DMS and OMS, across the board. Regulation is not abating at all. Yes, there's some conversation around the COVID impact. There's some conversation about potential delays, but this is a permanent metatrend that can't be stopped. The impact on society for the number of accidents more than 1,300,000 a year can't be ignored and regulators around the world in all areas of transport are seeing this as a as a as a permanent feature. Our strategy has evolved, started with Fabio Chip, called software central. Now we have other arrangements where we embed our software and offer it for license. We expected that will continue, and the objective here is to deliver across all of the the problem areas of the OEM reducing their risk, improving their choice, and lowering their costs. So we're we're very happy that we think that we're on the right path. Recurring revenue, new channels growing around the world, again supported by regulation, different business modeling fleet, shorter, sales lead time, very, very sticky business, less than 2% churn having a profound impact on drivers and society as we identify and remove fatiguing and distraction risk. Aviation, again, Horizon III, very large opportunity, opportunity that we seeing machines have created, and we think we're in a strong leadership position there. And to cap it off, and to, you know, remind everybody that we will continue to pursue opportunities to leverage our intellectual property wherever we can. And our focus today is on transport, but I'm sure that as we get involved in more of the large silicon partnerships that we've been talking about, who knows the, the opportunity for deployment of accurate eye tracking, beyond transport may well become a reality for us. But today, very focused on transport and, strategic relationships we're building, I believe will will will see us perform very well over coming years. So on that note, thank you for for listening. I hope you're pleased with these results. And in particular, how we've kicked off, this new year with good results for Q1. I expect that those results will continue through to the half, And, as I say, our primary focus is on performance. And, I'm firmly with the view that performance will give us the permission to continue to grow. So thank you very much.