$SEE.L: Europe just made this duopoly mandatory. Why is it 11x free cash flow? | Hugo Navarro

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0:31All right. Hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. Today, we've got a really interesting one. We've got Hugo Navarro from Undercovered and Undervalued on. This is his second time pitching. His first time the company he pitched got acquired, I don't know if it was two days, two weeks, or two months later, but it was fast. So this is a different one. It is Seam Machines. The ticker is S-C-L-N, trade in London, full disclosure, not investing advice, foreign stock. There's disclaimers all up and down, including at the end of this podcast, you can see him. But Hugo is super passionate about this idea.

1:00He's written them up multiple times. You can find a link to the write-ups in the show notes. But he pinged me like multiple times like, let's do an episode. Let's do an episode. Let's do an episode. And finally, I was like, man, you are so passionate about this. I've got to have you on to discuss this. It is a complex story hitting a regulatory inflection. But I think it's really interesting. And Hugo thinks there's huge upside here. So I'm going to let him explain all of that to you in one second. But first, a word from our sponsors. today's podcast is sponsored by fiscal.ai fiscal.ai is the modern financial data provider for global equities look that's what they have me tell you but let me tell you how i've been using fiscal.ai and i'll remind you i'm a customer i paid with my own money to connect to the fiscal.ai api there's two things that i've really found it useful for number one this is something super unique they've got a huge database of fun letters and the fun letters are created are connected by the API.

1:49So whenever I'm researching a company, whether it's researching the company because I'm interested in them or looking up an event or prepping for a podcast, the first thing I have my AI do is I say, hey, I'm prepping for a podcast on what are we I'm prepping for a podcast on hymns. And the first thing it does is it says, hey, here's all the recent letters on fiscal.ai of people talking about hymns. And here's their thesis, here's their thesis, all that sort of stuff. So that's the first thing. And that is really unique. And that is really fun. And then the second thing I do is I use it for edited financials, right?

2:18I've got my model and I say, hey, I'm looking at HIMSS. Go build me a model. And it says, sure, I'll build you a model. And every line in that model has a link. So I can see, oh, they're pulling this EBITDA number. They're pulling this segment number. They're pulling this number from three years ago. I click on it and it takes me right to fiscal.ai and it says, hey, here's these company specific KPIs. Here's these ratios. And I can see exactly where they're getting in and exactly where they're coming from. So it is a super reliable data provider that can connect to your AI. I found it super helpful.

2:44I'm a big fan of the podcast. If you want to try it out, you can use my link at fiscal.ai.yav to get 15 % off their AI connector. That's fiscal.ai.yav, and there'll be a link in the show notes. All right. Hello, and welcome to the Yet Another Value podcast with yours, me, Andrew Walker. With me today, I'm happy to have on for, I believe it's the second time. Yeah, it's the second time. My friend, Hugo, from Undervalued and Undercovered. Hugo, how's it going? Pretty well, pretty well. I mean, I hope this one goes like the first time. like we covered NCR Leos. That was both like in two months. So I hope it happens the same.

3:19That is the dream. You know, I think the last time I saw you, you were coming off a whirlwind. You had just been in Vegas and you flew overnight to New York. And well, it looked good looking right now. We're going to dive into the company we're going to talk about in one second. But first disclaimer, remind everyone, nothing on this podcast is investing advice. That's always true, maybe particularly true today, because we're going to be talking about an international security, which obviously, you know, increase risk, taxes, all that sort of stuff. We're not financial advisors, not investment advice, all that sort of stuff.

3:47There is a full disclaimer at the end of this podcast and in the show notes. So, Hugo, the company we want to talk about today is Seen Machines. The ticker there is C-S-E-E. It trades in London. And I will just say before you dive into what they are, I mean, I think you're really passionate about this idea because I saw you back in April or May and you were like, I want to talk about Seen Machines. i was like and then you emailed your junior was like it's a pr announcement like this is starting to work it's getting acceleration i want to talk about it and then in july you're like come on man so i was just like well he is so excited about this like i've i've got to have him on to talk about it so toss it over to you what is seeing machines and why are you so excited about them okay first a bit of context of how i got into seeing machines you know i started looking at this company uh you know randomly just appearing i don't think it was even one of my screeners it over my desk and just started doing some research into it and i just thought that the ESR ramp up i will explain that later was being completely mispriced by this by the market that has worked well it's been a 50 return since i entered into the company i know i think we have a very good asymmetric return for the second leg of the thesis uh so you know quick picture on what's Sync Machines.

5:03Sync Machines is the leader of a two-player duopoly in what's called DMS technology. Basically, DMS technology is a software that checks your face while you are driving or while you are doing all the type of activity to ensure that you are looking at the road in order to avoid any type of accidents. Why is it so interesting? Because, you know, despite this seeming easy to replicate technology is very hard to do there's only two

5:38you cut out for one second your sound cut out if you just want to say what you said start rewind 10 seconds ago oh yeah sure so there's these two players which are the only ones that have the best technology they've been both have taken 20 years and hundreds of millions of dollars to develop this. Like these companies have been listed for decades and they've been losing money for decades. They've spent, I think, Sync Machines has spent half a billion in research and development only over the last two decades. So it's very expensive to develop this technology. But what happens now in Europe, it's mandatory to have this technology, this product on every car.

6:17This means that these two companies and especially Sync Machines will start to produce free cash flow. but you know it's my estimation is that full year 27 like their full year ends in june so when i refer to full year is june 26 to june 27 uh yes for context i think they will make around 20 to 40 million in free cash flow we'll explain why the variation later market cap is 330 so on mid range it trades at around 11 times free cash flow something that i can believe can grow high double digits. Why? First of all, there's a very high OPEX base, around 55 million USD per year. That's largely fixed.

7:00Extra revenue revenues don't mean extra cost. This means that with Europe, with this regulation that's now mandated, they have all the programs in place, they should make free cash flow. But when the next leg comes, that's Japan and America, that's probably around 2030 30 or around that time, every extra dollar of revenue will go straight to free cash flow. Instead of, you know, 70 extra on revenues from Europe, only 20 free cash flow, 70 extra from Japan and America is 70 extra in free cash flow. That's massive. And in between, we have optionality from the fleet segment. That's basically this technology applied to to fleets like truck uh truck fleets uh amazon also they have waymo uh caterpillar stuff like that it also adds optionality because it's also very recurring we'll dig into that data basically this is a thesis where there's huge operational leverage uh aduopoly with what i believe is a very good uh competitive advantage and a hard to replicate technology and you know there are some risk.

8:05And there's some reasons why this is cheap, we could say, but we will dig into that, this podcast. So high level thesis, you've got this oligopoly, basic duopoly, trading at kind of, let's call it 10 times your estimate of forward free cash flow. And not only that, but the free cash flow kind of explodes because it's all operating leverage. And you've got just Europe loans, got the regulatory requirements kicking in. And Japan, I think it kicks in in Japan in 2029 is that right and maybe 29 on 2030 okay perfect and i will say so i read and i shouldn't let people know i will include a link hugo has done tons of write-ups on this company on his uh sub stack i will include a link to one of them whichever one hugo thinks we should direct you to i'll include a link to it but you had one line that just i loved it was from i might be slightly misquoting but you had a line like hey it sounds crazy you're buying something before kind of 16 million cars are mandated to get it, you might say, I'm crazy.

9:02Well, what if I told you to buy a seatbelt manufacturer in the seventies, right? You'd be like a seatbelt manufacturer, no cars have seatbelts in them, or I don't know if it was seventies, sixties, whenever. And a year later, like, you know, 80 % of the cars are rolling off the line with seatbelts. I just thought that was a awesome, awesome framing of it. Cause you are right. I look at it and say, what all cars will have this, but sometimes a regulatory requirement happens and boom, they've all got them. So I'll pause there. I do have some questions, but I'll pause there just because I thought that analogy was so great.

9:30And I want to let you talk about it if you want to. Sure, yeah. That's why I think this is so interesting. First of all, this technology, outside of being a great thesis in my opinion, it saves lots of lives. One of the main costs, if we look by insurance companies, I think the insurance angle is very interesting in the long term. This reduces like 90 % the risk of a catastrophe when you are on the road, both for especially for truck drivers that reduces a lot the insurance cost of cars. You know, for example, we had in the US Tesla's self-driving cars. I think it was Lemon, one of these fintech or, you know, insurance tech companies offer a huge reduction in premium to those drivers that have the self-driving part.

10:25And I think this will happen over the future because it will become clear this has huge cost savings for insurers. And also it will save lots of lives. Because, you know, for example, in Japan, they are pushing this regulation into the 29 or 2030, I think, mainly because there's a huge increase in accidents for people looking at their phones or being distracted on the road. And that's increasing the amount of deaths we are seeing on the road. And there's lots of associations pushing for that. Perfect. So let me find my first kind of pushback I worry about, right? You say, hey, regulatory driven in Europe, and boom, all of them are coming online, like literally as we speak, right?

11:06And I worry that you've got this company that's been in a duopoly with another company that's kind of winning it. When this is a niche market, yeah, they dominate. But I worry when you expand it to 16 million vehicles and it's regulatory driven, all of a sudden, like it's not like it required. These guys have spent cumulatively$200 million in CapEx over kind of the past 10 years. I mean, that's a lot of CapEx. But I would almost guarantee the CapEx you spent 5 to 10 years ago is kind of wasted. Could I come up with a competing product for$40 or$50 million using state-of-the-art technology that comes in here when all of a sudden, hey, 16 million vehicles need it?

11:43Or do one of the big manufacturers look at this and say, hey, I could outsource this when it was a niche thing on high-end vehicles or custom vehicles. But now that it's required, I'm just going to build this in-house. Or, you know, you mentioned Amazon as a customer. That's not on the car car side, right? That's more on the fleet side. But I look at that and say, you get all the data happening inside a car, lots of machine learning, AIs, lots of data. Like I look at it and say, why would Amazon outsource this to someone instead of just like kind of building the product in-house? So I threw a lot of competitive responses to you.

12:16I'd love to just hear how you think about that framing. That's a great question. And, you know, we need to frame it and understand this to, you know, why the thesis is compelling. First of all, SYNC machines and SmartEye are already in those 16 million vehicles. Like we are already post-ESR. And those contracts with these, you know, these vehicles last three to five years usually. So on this first leg, there's a low risk of replacement. But there's, you know, as you said, there's a real risk of once this solution goes into all vehicles. uh some other player trying to take care uh over the long term i am expecting to a third or four player to appeal because this usually happens in the in the oem sector but some reasons why this is hard first of all there are many players that have already tried to get this solution right for example if you look at the top table of uh sync machines mitsubishi electric uh it's a client of uh sync machines why uh because they couldn't develop their own solution they got great results and this is something that tends to happen uh for context a bit i've researched it a lot with inside this industry and lots of conversations with management regarding the technical side of the technology so they they got great results in we will say in lab tests but when they took the solution to a naturalistic environment, it worked really, really badly.

13:47Because, you know, they train all of these with synthetic data that it's called, basically you generate that and train it on it, but that doesn't work well in a real life scenario. Sync Machines initially developed this solution for the mining and tracking sector. It only later became relevant for the automotive as a whole, we could say. So they have billions of hours of footage of truck drivers and mining employees using this technology. So that's extremely important. You have tons of footage of naturalistic data and that's why they have the best solution. If you compare with SmartEye, seeing machines has much better accuracy.

14:33That's key, in my opinion, because over the years... I certainly hear you, But if I was just thinking off the top of my head, you said they've got great data inside. Well, Uber, I don't, you know, every Uber I hop into has someone recording, has the recording on the inside. That's more for safety. But there's like five companies that are providing that that do have the data. And, you know, I would think about a Tesla and a lot of cars coming inside. That example, that example. Tesla has their own DMS solution. There was a huge recent problem with Tesla because some people put out in the internet a video that he was fooling the Tesla self-driving system with like a plastic head.

15:16Like that's the current level of Tesla accuracy regarding BMS. Okay. Let me go to a slightly different risk. We can come back to the business. But I think kind of the elephant in the room when I looked at this is they have a$55 million convertible that is due in October. You and I are talking August 25th, 2026, right? So they said, you can go read their earnings deck. I can't remember when their earnings deck was put out. August 11th. And they said, hey, we're in late stages to renegotiate this thing. And if we don't, like, I believe the convertible owns with the customer and they're fully supportive.

15:57And I hear all that, but I've done markets a long time. And for a company to let a$54 million – I mean this is a$300 million market cap company. For a company to let a$54 million convertible loan get within two months of expiration is lunacy, I'm going to say. There's no company that would do that unless they were absolutely – they absolutely could not rule that, right? and they're putting on a brave face. And I think you could say, hey, there was this huge inflection that they're in the middle of that really juices these results for them, right? So they can do it. But I look at that balance sheet and I say, oh, I hear the explosive nature.

16:37I hear all this. I look at the balance sheet and say, this is the balance sheet of a company that's distressed or there's kind of something I'm missing. So I'd love to talk about the company. I hear you on that. I think a lot of investors are waiting for the convertible to get refinanced before investing into this. You know, first, a little bit of context. They started the refinancing period. They started around April or May because the timing was really bad for this convertible. Basically, they needed to report KPIs in order to show market to lenders that, you know, say, you know, this year I think it's really happening because even in the share price was not reflected.

17:17Like we are going to receive these royalties. ASP is going to hold up. And, you know, Q3 and Q4 has outperformed. And I've been talking with management since April on that note. We will say the signing has slipped multiple times, mainly because due diligence has taken longer than expected. But now as they've said, they've said it publicly, and I published recently an interview, they are in an exclusive period, meaning they are now with a final lender and they are in the final due diligence process meaning final documents and all that stuff but they are also in contact with magna in regard in relation that you know if there's a bit of a delay or something like that we can work it out and get extension so i think this will get solved before october it's it's uh it's a risk uh to be honest but I don't think there's a high probability of this being resolved with dilution.

18:16No, I definitely hear you. It's just, I look at that and say, man, it's such, it's strange timing. It's weird, but I look at that and then I was just flipping through, you know, they put out their semi-annual statement for December 31st. And it says, at the end of it, it says the debtor financing facility, right? And then there's another thing that says, hey, we entered an amendment with a major customer project that accelerated a royalty payment, but in exchange, we need to basically give the customer money back. And I look at all this and say, look, it's a great... So this is footnote 21 of the semi-annual report.

18:54And I try not to like... The royalty acceleration, you mean that one? Like they received 15 million? Yeah, 14.1 million. Yeah. They are not giving money back to the customer. Let me explain that because context is really important there. Basically, there are minimum volume warranties under many of these contracts with OEMs. This contract was, you know, we had one vehicle and suddenly the production program for that vehicle got under the threshold. that trigger the the contract meaning they needed they had to be paid that minimum royalties right now like because they breached the contract they are not this is not regarding to the loan it's because one customer went below the the volumes basically canceled that program they had a car and they stopped producing that car or they thought they were going to produce a hundred and they produce 20.

19:50So that triggered this contract and they received the payments in an accelerated way. Okay. Look, I totally believe you. It's just the way the footnote reads and they don't do a lot of calls, right? So normally I read the earnings calls. I think they only do an earnings call. The way the footnote reads, it says, hey, we get an accelerated payment. It improves near-term liquidity, but gives rise to future payment obligations to the customers. It just, it seems like that's, it seems like that was a quitting move, but that totally makes sense. Yeah, yeah. That's definitely like it was poorly explained.

20:23But, you know, I raised that with management and the explanation was basically there was a break that was canceled and they had that legal right to those minimum payments. So they got them accelerated. Let me go to, so this is a regulatory German thesis, right? As we've talked about, vehicles are accelerating because Europe in July of 2026 said, hey, this is when the cars have to start having this system rolled out. And I do wonder about this. Hey, regulatory-driven theses can be really interesting, but as this company knows, regulatory theses can be delayed or they can be modified. And it feels like this is happening, right?

21:04I mean, it happened in the past. You're seeing the KPIs inflect. But I guess I worry if the companies come out and say, hey, hey, this is too onerous. We're having too much trouble with this. Could there be changes to the regulatory where all of a sudden, hey, you've got this company with this big Convert Duo that's counting on this acceleration and then all of a sudden the acceleration kind of stalls out? I mean, in Europe, I don't think there's that risk. Well, in OEMs, this is a multi-year period. Everyone had already the, when you design a vehicle and you put it with some certain type of software or some certain type of camera until you stop producing that vehicle it will be with that with that software and therefore that's three to five years was nothing where nothing is going to change post that period and especially into japan and the u.s we could see oems pushing back into this regulation but this reached the second leg of the thesis not the first one we could say But it's true what you say, especially because we're seeing some complaints from customers.

22:12But I see that more as bullies because it will require higher quality, higher accuracy systems. That's what Sink Machine offers rather than just trying to take this away. It's very difficult to take this away now. You mentioned higher quality systems. Let me ask a separate thing. So one of the growth areas for these guys, I mean, the core of the thesis, if I could put it that way, is the regulatory driven car growth, right? One of the growth areas that you mentioned is in robotics. They've got a robotics play that they're working on there and things. And you said on robotics, their edge is very high.

22:50Their edge is the same in robotics as they have in cars. Very high performance at very low cost, right? And I believe this is on the robotics side, not on the car side. You can tell me from wrong, but you say, hey, scene machine solution, you run it. You run their solution on a twenty dollar piece of silicone at the edge. You know, it's on the robot instead of having to run it on twenty thousand dollar NVIDIA chips that are kind of in a data center. Right. That sounds awesome. Low latency, low power, way cheaper, all this sort of stuff. I guess my question is, why does scene machine? Because we talked about why they have it in the car.

23:23Right. You said, hey, they've got the data from 10 or 15 years. why does seeing machine have like a unique edge in robotics because robotics is a hot sector there is all sorts of money pouring into it and if you're like hey this one company that's kind of adjacent in the car field has the only way to do a 20 robotics chip i'd say that that seems a little suspicious to me robotic is still really early stage we could say i just signed probably zero value to it is just some optionality let me frame a little bit how this optionality this robotics segment appears one i think almost two years ago mitubishi took a 20 stake in the company mitubishi electric not the part that those cars the part that those robots and stuff for factories so they bought into a stake and they started to develop a plan along with the company in their fleet segment are in adjacent markets some of these adjacent markets they wanted to work on was smart factory and robotics and humanoids they recently did a pilot so you know it's basically them being paid to develop new solutions for mitsubishi and if that ends up working they will get paid a royalty it's just mitsubishi found the technology very interesting because they can do very, we could say, a decent performance on very low cost, but still not proven.

24:49It's not yet commercial, we could say. They've built some prototypes. Mitsubishi has liked them, but it's really early stage. I signed practically zero value to it, although it's exciting over the long term, especially because Mitsubishi spent 40 million pounds buying a stake into this company. I think the price was similar to what's today. let me go to a different question so you mentioned smart eye earlier and look i am i do a half day of prep for these podcasts so i could be completely wrong but my my prep my loose googling quick reviews and everything i believe smart eye sells like a really cheap system right they basically say hey car makers here's the software you go figure out your car your infrared system all this sort of stuff you install that yourself we do the software i think c says hey guys we're going to charge double to triple what smart eye charges but it's around 70 percent more 70 percent more great but we give you the whole package right it's not just the software here's our camera here's our infrared like everything all together all working together almost you know not exactly like a bit of explanation the smart eye does a poor software approach the market really likes that sing machines does a systems approach meaning they have a team that does software and a team that does optics and a team that also does like what's inside the camera so why sing machines can charge can charge more is because they reduce the cost of the overall systems meaning if smart if Smata offers you a software for four bucks, but your camera is 25 and Sigma X offers you a software for eight bucks, but the camera suddenly costs 20 because the software can work better if it's developed for the camera, you know, the overall cost is the same or slightly lower.

26:42So Sigma X develops a systems approach, meaning they can take cost out of the hardware and take an extra margin out of that side. And that's why also they perform better in accuracy because they build a camera for their software. We could say Android versus Apple. Like Apple builds their hardware for their own system. Android just develops the software and everybody that builds a phone just plugs it in. But on a systems approach, it works better because it has been developed to work on it. Okay, no, that's perfect. And it is funny you mentioned Apple because anytime you talk about system integration, like the first thing that pops in your mind is Apple.

27:21and I know you've spoken to people in the automotive industry. Have they confirmed like when you've talked to people outside of C's management team, because I think C's management team is the one that kind of relays that full story. Have people in the industry kind of vouched for, hey, we prefer the C model or yes, you actually do save money even though you're paying more for the hardware. Have you kind of gotten that verification? I have not been able to confirm that because people that work in the automotive industry, they work either with Valet or Magna or tier ones. Like most of them don't know if they are, you know, working with machine machines.

27:55It just goes through a tier one. They are like a tier three, we will say. So they don't really know what's going in their car. They just know that, you know, Valeo makes it work. They comply with regulation. It's okay. Gotcha. Let's go tier one. You know, this is an interesting component. I mean, one of the things that jumps out to me is Magna, I believe, is the one who has the shareholder loans. Yeah, the convertible. As you said, they do business with them. They put them through. Why didn't Magna buy them? Why doesn't this belong as part of a tier one? Yeah, that's hard to tell. Neither SmartTie or Sink Machines are part of a tier one.

28:35I mean, probably it's just because these things have been burning money for so long. It just didn't make sense to have them in the group. like what you are going to pay them right now in royalties compared to what you had to spend over the last two decades to develop this solution like it wouldn't it wouldn't have made sense to buy them back uh like in you know it made some it made sense to have some exclusivity agreement like magna had or some mistake like me to be six doing uh or some partnership like valeo sold like Valeo sold their research and development team basically to SIG machines and they made the partnership that way.

29:15So there are some related transactions, but nobody really ended up buying this. Maybe because there was huge uncertainty if this regulation was ever going to end up coming. Gotcha. Gotcha. What else? I think I've hit a lot of the questions. What else should listeners be i mean again you've published six articles on them in the past year i don't know like i know you've got the management calls what else kind of i i can only get up to speed so much a day what else should i be thinking about or should listeners be thinking about when it comes to something that's key for this full year is the fleet side of the company like automotive right now is low risk we could say the ramp is already here we will see some more royalties coming in we will probably see growth stabilizing around 2.5 million vehicles per quarter.

30:04Not all of that is coming from Europe, because these cars are platforms. If you are developing them in Europe, but you are selling them in the US or Japan, they will come with the technology just because you develop in platforms. So that's some unexpected volume that's flowing through. let's start first with the fleet side the fleet side is basically the guardian 3 solution which is a camera that costs like 500 bucks plus a recurring monitoring fee per year that's like 100 and something that you put it in your truck and it basically checks if you are asleep or if you are distracted and you know it has very good return for for the for the for the um for the fleet trucking company because i'm sure the truck discounts on insurance their drivers are safer all that type of stuff right yeah and especially you know it protects from from tail and the scenarios like this is for heavy trucks especially if they carry very expensive stuff if you have a big accident with one of these trucks you can have a very big liability so basically they are doing many trials but the problem is those trials are not combating so basically they had warian 2 which worked well and they released warian 3 like a year and a half ago and that's a list of working why this is you know we are in a big recession in the tracking industry, but practically worldwide.

31:42Higher insurance costs, higher diesel prices, higher everything, basically. So discretionary cost, we will say something that you don't really need to run the business and that's CapEx. You are going to delay it as much as possible. Well, let me push back on that because the whole push for internal cameras, right, would be A, it's going to save you money on your insurance be the same all that not always like but if you're i guess you know if i'm going and i'm pitching a product and i'm saying hey you install it and it's got all of these benefits and one of the benefits is it's going to save your costs in some way shape or form and i mean i know some of these and we'll come to competition in a second because my other question would be hey i i don't know on the the consumer car side but i know on the trucking side a lot of there are a lot of systems like this so why should this one even take purchase but i guess my push would be okay it's a recession but in a recession if you say hey i can save you money with this that's the first thing people are going to sign up for right yeah but it saves you on tail events we could say like the liability for example if you have one of these devices and your truck driver is asleep and the truck crashes or something like that you can show that it's not your fault as a company so if something really bad happens is that uh that is an interesting question i haven't So if you're a trucking company and you have a truck driver who falls asleep, the truck driver is liable, not you?

33:07I think it's that the case. That's interesting. Because, I mean, if the truck driver… If you can prove that the truck driver did something wrong… Yeah, it was negligent. Like, it happens in aviation. They have the same product for aviation with callings. That's also going slow. So, you know, one of the main things, apart from the tracking, the problem with the tracking industry, one of the problems is, as you said, there are many solutions that offer kind of the same, like telematic solution for fleets. The thing is that those solutions have very bad DMS and machine machines have very good DMS.

33:44So for those that really care about their drivers being distracted, they will buy machine machines. But that's a small part. That's a problem they face. I guess my perspective there would be like, you said they're not converting customers, right? And I think in your report, you mentioned Amazon and Caterpillar might be two customers that they're like on the one yard line with and haven't covered. Caterpillar is already a large customer, but I think there's more pilots with them. Because I just like, you know, when I hear a company saying, oh, we're in a recession, nobody's wants the trucking recession, whatever type of recession, nobody's buying our product.

34:21like i kind of look at and i i've more often than not it's not been hey the it's you it's not them right it's like oh yeah it's it's just one of the problems they are facing like one of one of the reasons is uh the up from hardware fee doesn't seem to be working that well so they might try a more recurring solution basically they were they the ceo and management team has been completely focused over the last couple of years on the automotive side. Now they say, we have this, we are going to try to solve this easiness because this was already working in the past. It's just that we launched a new product, that product got some delays and we launched it in a very bad moment for the industry.

35:05And we have some problems combating larger customers. Their main problem is with larger corporate customers, very big orders. So that's what's happening. So they are trying to do new things. They have some very large pipeline deals. If any of those end up combating, the outcome for this full year will be very different. No, that makes sense. It's just like, as I've gotten more jaded, like management excuses have fallen a little bit soft, gotten less and less interest to me. Let me go to, just to go back to the balance sheet. And I don't believe they published a balance sheet for their June quarter.

35:44I think they just said cash. Not yet. It's just trading update. Say again? It's just a trading update. They have not reported. Yeah, just the trading update. But it looks like working capital really ballooned in H1, right? And that makes sense. Revenue is up. H2, they reported cash. So yeah, working capital has been a problem in H2. But that's... Well, let me finish it. I mean, oh yeah, and I see it in the... It's the fifth bullet of that day. But it makes sense that working capital is up because revenue was up 45 % in the first half of the year, right? But at the same time, accounts receivable goes from$11 million to$25.3 million.

36:21So revenue up 45%, accounts receivable up 120%. And I'd love to hear your thought, but again, it comes back to the balance sheet issue I talked about, right? I see a company that's growing quickly, burning money, got this near-built-do, and receivables are burning up. And I say, oh, you know, if I was like a forensic accountant with a Z score, I'd say, oh, things are getting pretty crazy over here. So, OK, OK. First of all, like working capital is increasing because, you know, let me explain a bit. Once the quarter ends, they get the reports of how many cars they have these royalties. You know, they're made the deal to confirm everything is OK.

37:02And they then it's I think it's 60 to 90 days from end of quarter to where they get paid. and they get paid from basically car manufacturers so it's very very low risk of default and they they set up i think recently a receivables financing solution but they have not used it so far i assume they they saw no need for the moment uh which you know also so speak positively to the progress they are seeing in the refinancing with their new lenders. So I think working capital as they grow, we will see that still, you know, high receivables, especially because they report end of quarter and they get paid like 60 to 90 days after the quarter, but the risk is low and they have that solution to just finance that if they have the need for immediate cash.

37:54But yeah, I understand And the balance sheet looks ugly right now, especially in a company that's just in the brink of free cash flow generation and growth inflection. Let me go to, last question. I mean, I think the big thesis for you here is the operating leverage, right? And I'd like to put robotics and the Guardian systems to the side for a second, because I think people could probably see I'm a little more skeptical and I think they're cherries on top, right? I think the real thing is the automotive production piece. And you can see this. I'm looking at the chart right now. Production goes from 488 ,000 in Q425 to 2.1 million in Q426.

38:38And again, you mentioned it's a summer Q4, but it is exploding up. But at the same time, revenue going up 45 % in 2026, growing even faster, automotive revenue up 135%. Adjusted EBITDA losses in 2025, 26, right? Not much, but it's basically adjusted EBITDA break even, but it's still a loss. I guess my question to you is, how much more can they do operating leverage wise on just the Europe? Like if I said, hey, I don't know if Japan's coming on in 2930. I don't know if US is ever coming. If I was just betting on the European piece, how much more does cars grow? And when does this kind of flip to your 40 million in cash flow number on just Europe.

39:23True. Okay. So basically the difference from this full year to the next one is that next full year will probably be 10 million cars compared to, you know, much lower around five to six on full year 26. So last quarter, it was 2.1 million vehicles. And that was March to June before the regulation kicked in. So many OEMs were already prepared, but some were not. So we should see a bit of a bump into the July to September quarter. So probably around that 9 to 10 million range. If fleet doesn't work, for me, fleet is an important part of the business. I don't think the story is just automotive. on automotive i think it's probably 20 million in free cash flow if fleet doesn't perform well uh for full year 27 and you know a small increases as you know um l2 autonomous vehicles also drive demand for this and the those type of cars are increasing in the u.s mainly so outside of the regulation that will drive demand up so on the fleet one okay just you mentioned l2 automation driving demand, which makes total sense, right?

40:44I think about a Tesla and the classic, you mentioned the guy with the plastic doll head, they ping you if you're not paying attention. But as we go into a more autonomous world, does that actually kill seeing machines, right? Because if I just thought about L5, where the car is completely self-driving, there's no need for me to pay attention. So seeing machines doesn't matter at all in that world. So is this something where, hey, it's really hot right now, but if you were like, Like if you were really believing in the autonomous story, this is actually a huge negative for the company? I mean, on DMS, I think that's, you know, a good time for that because even if we get L5 in five years, regulation will be slow to keep up with that, especially in Europe.

41:26And we will probably see requirements for people in the driver's seat for a long time. So that should keep DMS demand. and what's you know sig machines is already thinking about that management is thinking about that risk because you know if we don't need anybody if we completely trust autonomous vehicles if there's no if there's nothing in the news regarding you know an autonomous vehicle that did something weird and suddenly your grandma is scared and doesn't want to be in a vehicle where there's not a driver on the wheel so if that happens and there's no need for dms they are developing a new solution that's basically 3d uh on the car it's it's still early but we are still early for the need for that so what they are really good is in um vision systems so the the solution here will be instead of lots of expensive sensors that you have on the car like for example for your silver there's a sensor there that costs like you know a couple bucks uh but in each of your silvers it's a couple bucks if you can change that for some cameras in the car that can detect if your seatbelt is on or not rather than depending on a sector that will be like the long-term optionality or long-term alternative if vms gets killed i don't know if i'd want to be seeing that where i said hey you know this driver system that we built on data is gone but we will install cameras that will detect if your seatbelt that doesn't sound like a great world what other thing obviously the majority of this and you just were talking about how hey this is the european car driven story you know i'm i'm a domestic i know you're in you're in spain right am i remembering that correctly yep yeah the thing i keep hearing about domestically and i've thought about this with the risk for u.s auto manufacturers and stuff like chinese cars can't be sold in the u.s right they're just banned tariffed whatever it is in europe i keep hearing that chinese electric vehicles are just taking taking it over by storm.

43:27That doesn't mean, you know, the ADS is happening. So China has to follow local European laws, but I do, you know, who's doing the Chinese ADS when they're selling cars in Europe? Because if they've all got independent plays a la Tesla, go ahead. You see where I'm going. So first of all, China is following IDS too. Like DMS is also mandatory in China, but DMS in China. Yeah. Yeah. It's, it's also mandatory. It's a huge market. there no no but is seeing machine doing it or do they have no no seeing machines they are local players in china like most they have their own but they they've been there's been lots of complaints regarding bad performance of dms in china and in chinese cars in europe uh i've been told that seeing machines is looking to maybe uh use the software on those chinese cars that are going into europe but the problem is that chinese oems don't pay a lot so maybe they just will not pay up so there's a risk that if chinese cash completely takes her away out of european oems the total addressable marking in europe will be reduced a bit okay cool i think i mean i threw some hard questions at you because this is uh you know one thing i would like to touch on like on the fleet side i think this is really important and i think this has a lot of future and for me this thesis is okay the dms ramp up in europe i think it's priced in that's the base i think that's margin of safety if that doesn't do well i should not lose big money i think fleet has huge optionality not only on their classic business model, we could say, of selling the hardware, but on licensing it.

45:15They are going to license their solution to hardware developers. They are already working on a deal to start doing that. And that solves lots of the problems because basically with competition, you stop competing with telematics players and instead you integrate into them, meaning telematics player with really bad DMS solutions have good DMS solutions that can work better with clients and improve safety and clients will demand that. And Sigma since yet gets a royalty for that. The market is smaller, but it's also higher margin. So I think that should be some optionality that we should see over the coming years.

45:54They are already close to a deal with, I think it's Taiwanese or Japanese player that's going to develop their own hardware solution, but their software didn't work as well. So they wanted to put on machine machines as white label. We could see pure royalty like in the automotive side. Have they landed one of those deals or they're just in talks with those deals right now? Not yet. They have not yet landed them. They recently, because the first time I talked with them, I, you know, I raised the same problem you mentioned to me. Okay, you have this great solution, but first of all, you have a very small Salesforce.

46:29You are not a big player. You cannot compete on the other offerings that these telematics players are offering. So, you know, you have a great solution. Why not license it? Why not partner it? So, you know, they've understood that was a very interesting opportunity. They have started pursuing it. So far, they've gotten interest. From my understanding, this deal they are pursuing, it was out of inbound interest. It was not them pursuing other deals, but they are actually now pursuing other players to do this type of licensing deals in the fleet side. Last question. You're right. It mentions that the CEO has a first tranche of performance units that vest, I think at the end of this month, that requires the stock, like they're almost in the money.

47:14So ignore the first tranche. Cause at this point those play out, but I think he's got more tranches. Can you just talk about? Yeah, he has more tranches and at very high prices. Like the poor guy needs this to work and work really well to make money on those. Like I think he has some at 20 pence. or something like that, which you know about a four-year time frame. If they execute on fleet and they execute on automotive, they could achieve that. Basically, 50 million in free cash flow, 20x multiple, you get to 3x higher price than this one, than the current one. So I think if they execute, they can achieve those targets.

47:57And I mean, if they execute on those, he deserves to be paid really well. You know, I've spoken with him quite a lot. He's really hardworking. Like he takes calls on Saturdays, on Sundays. They are always traveling, talking with investors, licensing deals, everything. They are very, very hardworking people. But some stuff I want to mention around management is if you talk with people that have been invested in the stock for the last 10 years, they have a very bad opinion on it, mainly because they usually overpromise on timing. and that's something i i've got to understood better as i've talked with them they tend to over promise on timing because it's hard to know from when you got that deal that's that's practically close to when you receive the paperwork it's very valuable with these oems so my my experience is they tend to be right on what they will achieve but they tend to be a bit late or a while late on timing let me let me push back slightly and two two things first just to the management incentives i should have gone earlier because it is so rare to see stock price incentives in a european company as soon as i saw that i was like oh that is really interesting because it's so rare and when people do that they tend to like again no one can ever control where the stock price goes right but they tend to have a vision of how they're going to get there and the vision that they have when they granted these and the way the awards are so very much plays out with the vision you're doing, right?

49:27So that's nice. I guess my pushback on what you just said, and we can wrap it up after this, but a lot of what I've heard have been the places where I've made the greatest amounts of money and the biggest mistakes, right? Where it's, hey, if you talk to an investor who's been here for 10 years, they hate this management team, right? And every time I invest in a company like, oh, this company has been misunderstood and misfollowed for 10 years, but now I'm going to invest in it in the market, suddenly going to change. You know, this management team, they've been people who have 10 years, they've got gray hairs, they're pulling their hairs off, but I'm going to come in and the management team seems nice to me.

50:00Like, you know, you kind of learn after 10 years and it's like, oh yes, these guys are really good talkers, but they never deliver. And a lot of what you've said has some of that flavor to it, where it's like, Hey, these guys can never quite land the contracts on time because it takes a while. It's like, well, yeah, but you know, I I'm thinking about one company that has been a just pain in my side for years it's like hey at some point it's not me it is actually them right they keep saying oh this big refi is on the come oh this big performance on the come it's like i i'm sure you believe that but now i've got 10 years that you're over promising and you know worked for elon musk but elon musk is he is the true outlier you know i it does it doesn't work for most of the people who that so that would be like kind of last pushback i'd end with i i mean I completely agree.

50:46And it shows in price action. Like there's not a lot of institutionalized in the stock. Like most of this is traded by retail. Like it's like a Sitco on the London market. So the most interesting thing here is that it usually reacts really slow. So, you know, for those listening, probably when they get the refinancing done, it will move slowly. So you will have some time to look into it. It will probably, in my opinion, this will start to move up quickly and fast when they get their fleet segment. You know, they do a turnaround there and they start to deliver on that. So my view is that, okay, I have decent margin of safety with the GSR ramp up and those royalties.

51:30If they execute on fleet and if any of the next regulation legs comes, it's huge upside, but it's definitely one of the riskiest stocks in my portfolio. You know, it's funny you say that because it goes back and forth like hey the business is more than covered by the not the fleet by the european ramp up right and that would tend to suggest like hey everything else is cheering stop this is the least risky but then it's like oh the fleet is on the come it's just really interesting yeah this has been great uh look i i mean i had tons of questions because this is super interesting company and you you did a great job of answering all of these guys i will include a link to whatever whatever write-up you want me to put i'll include a link to it in the show notes so people can go check it out there.

52:13But this has been a great second appearance and looking forward to having you on for a third time. Okay, perfect. Thanks, Andrew. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.

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