Smart Eye AB (publ)

Good day and a warm welcome to this earnings call with SmartEye following the Q2 2025 report and as usual it's hosted here at the RedEyes headquarters in Stockholm. We will as usual start with the company presentation followed by a Q&A session and we remind all investors watching online to keep submitting your questions and we will take them up at the end of the Q&A. And with us today we have SmartEyes CEO Martin Krantz and SmartEyes CFO Mats Benaminsson. And without further ado I'll leave the floor over to you guys. Thank you.

It's good to be here again after the summer and talking about the second quarter. It was in July postponed with two weeks the quarterly report because we were in the middle of executing a share program for the staff so we didn't want to create any insider effects so that's why it was delayed with two weeks. But now we're here presenting it. And it's a very good quarter, I would say. It's the best quarter in the history of SmartEye. We have had net sales increasing 12%. At the same end, net sales is at 92 million. And this is something which we did in, we had FX headwinds. So the decrease of the dollar and the euro compared to Swedish krona has worked against us. But even though we have this effect, we are at EBITDA plus 1 million SEK. for the first time in 10 years. Last time we had positive EBITDA was in 2015 and we had just gotten the first important orders for design with BMW and Audi and that was we were starting to ramp up and even ever since then we've been had having red numbers but now It's moving quickly in the right direction. The automotive organic growth is 42%. It consists mostly of growth in license revenue. Other types of revenue in automotive decreases slightly, but licenses are rising quickly. Behavioral research, the business unit for that is decreasing with 1% organically. Of course we were not planning for this. We were planning for a small modest growth. But the market has been challenging and we believe strongly we have increased our market share. Even though we were decreasing slightly. We are now at 90 car models that have reached production with 12 OEMs and automotive licenses are growing with well beyond 100%. And last but not least, our savings program has been finalized really by the end of Q1. So we had full effect from that in Q2 and the OPEX has been reduced with 21% compared to one year ago compared to Q2 2024. And that's of course a little bit helped by FXFX as well. but if you think talking about both opex and top line we have one million sec in profit very good we are very content with that this is just to remind that we have had unparalleled success on the dms market we have more car models we have more OEMs. We have the biggest OEMs in the world. It's 365 car models. They are estimated to be worth close to 9 billion Swedish crowns once all the cars under these contracts have been produced and ramped up and ramped down. Of course, that takes more than a decade before that has happened. close to 9 billion during a very long time. But there's also upsell potential in these existing contracts with the big OEMs. We have upsell potential for more than 5 billion. So we expect more design wins to come in, more deals to come through just with existing customers. 12 of these 23 OEMs have entered production and many of the remaining 11 OEMs are actually gonna enter into production this year, second half of this year. So we see a lot of European car models or car models destined to be exported to Europe to go into production now. And even more so during next year. So there will be a quick ramp up from where we are right now to the second half of 2026 when the European legislation is mandatory and all European cars need to have this. It's going to be probably close to 16 million cars yearly, which is 4 million cars per quarter. That's the level of European... deliveries second half of next year. This is what it looks like in global terms. One North American OEM out of three have entered production but they have done so in earnest with 24 car models being produced right now so we receive volumes from that. In Europe we have 13 OEMs, only 6 OEMs are in production with 24 design wins. And in Asia we have 7 OEMs of which 5 are in production, 42 design wins. So you can see there's a lot of growth to be expected in Asia, in Europe and North America during the next 12 months. This is what it looks like. We have said that our estimates are that we will have 70 to 80 car models in production in 2025. 15 of those are in production after Q2. So that's 55 to 65 car models that we expect to go into production second half of this year. that's a quick acceleration at least according to me but what will the car market look like in 26 27 and 28 this is our estimated yeah estimation of that or it's like a top down i mean our our short-term forecasts for for our own deliveries that's what we make those bottom up but this is looking at the entire market top down we say that the total addressable market is 91 million vehicles that was the deliveries in 24 of these vehicles 15 million are delivered in europe 16 of the entire market The new regulation GSR is going to produce 100% take rate from the second half of 26 and full year 2027. So 15 million cars or thereabout in Europe in 2027. And also in 2027 we believe that the rest of world there will be 14% take rate. Or rather 14% of the global, let's say, global number of cars will be delivered in the rest of the world. So total market estimation of 30% in 2027. And SmartEye's clearly stated ambition is to have 40% of this or more.

Yes, let's continue to look into the financial summary. Net sales is, as Martin stated, 92 million in the quarter. It's a growth of 3%, but if we consider the FX effect of 8 million negative in the quarter, you can see that we have good underlying growth. And that is driven by automotive. For behavioral research, there is almost the same amount of net sales compared to last year. The ruling 12 for net sales amounting to 361 million. So we have a growth of 5% there. And we have stable gross margin. So we improve our gross profit with 1.8 million. For automotive and we ended up with 42 million in net sales for the quarter and this is a growth of 26%. This is a very strong growth I think but at the same time we need to consider the NRE adjustment that we did last year in Q4. and also the FX effect. So the underlying growth for automotive is 42%. And of course that is driven by the license revenue that Martin talked about earlier and the ramp up of our car programs that is ongoing at our customers. The AIS product have also picked up and have some higher sales in the quarter compared to last year. Offset we have the project revenue that is decreasing in the quarter compared For behavioral research, we have a negative growth of 5% and adjusted for FX hits minus one. So it's amounting to 51 million in the quarter. And the ruling 12 is 5% negative. And iMotion and research instruments have actually reported the same level of revenue if we exclude the FX effect compared to last year. Then looking into the profitability, the EBITDA is now positive. So it's a really good improvement of 24 million. And this improvement is, of course, driven by the license revenue. And that we performed downsizing in the US and Swedish operation during the winter. And then we have also managed to do additional savings in Q2. So OPEX amounting to 82 million and it's down with 21%. The operational result EBIT is also improving with 24 million. But if we look into the earnings before tax, we can see that we have an impact referring to our increase of financial expenses. Finally, looking into the balance sheet, we have 12 million in cash and in balance. We have utilized 100 million of the credit facilities, but we still have 50 million left and also our bank facility. So the available cash and in balance amounting to 93.4 million. The cash flow is positive in the quarter. If we take out the financing net of 41 million, the free cash flow is minus 38 million. And this is an improvement compared to the previous quarter. And we will see that that will continue. We have some one-time payments in the quarter and this refers to the downsizing that we did in the winter. Investments is higher, a little bit higher here this quarter. 32 million, 1 million is referring to Tangible and the remaining part is referring to capitalization of development expenses. And finally, the operational result have a negative impact of minus six million. So in total, that was all from us. Thank you very much.

thank you very much for that presentation guys uh let's start with some maybe quarterly specific questions so first of all you mentioned like the different regions here within automotive and that you see growth across all regions can we get some more color like is it volume cross volume growth across the board or are you seeing any specific region developing better or worse or

The region that we were expecting to start to pick up a little bit earlier than this quarter was Europe. But Europe had a really good development for us this quarter. Other regions were maybe more like a continuation of previous ramp up.

And do you expect Europe to continue into Q3, Q4?

Yeah, Europe is going to go from being a small part of the total volume to become the major part of total volumes as we get closer and closer to GSR.

Perfect, I appreciate the color. And you also state that AIS is driving growth within automotive in the quarter?

AIS is still small, but it's better than in Q1, but still on a small level. Okay, sure.

And this is maybe a little niche question to you Mats, but many investors are talking about FX effects now. And just to get a better understanding for SmartEye here, I guess you invoice your OEM customers like by the end of the quarter or maybe sometimes also after the quarter. Should we consider that point in time to be the time where the FX conversion rate is set as well? Or how should we view it?

That's right. If we look into the volumes that we receive now in Q2, these reports ending at our tables in the beginning of August and then we issue the invoices. And then of course the currency could have been higher or lower compared to the Q2. And then, of course, when we're done issuing the invoices, we will have the payment later on. And then, of course, it can go up and down. And then, of course, that will affect our cash flow even more.

But so it's reasonable to assume that invoicing within automotive and especially licensing does not happen on a gradual basis during the quarter. It's more of a one-time thing.

Yeah it is and actually most of our customers we have the payments in the quarter after the reported revenue.

And maybe we can move on a bit to automotive. And I believe that when I first started looking into Smarta, it was maybe five and a half years left until the European legislation. Now we're only nine months away, so time moves fast. But firstly, how does it feel to be approaching this significant milestone, I guess?

Yeah, it feels great, of course. And the volumes are not very high at the moment. We're talking about 100% growth, but from a low level. So still in Q2, we are... far from where we are going to be, especially in Q3 26. That's when no cars are really allowed to be sold anymore if they don't have DMS. It's going to be like a seat belt or an airbag. So it's good. It's going to be a good year. It's going to be four great quarters before we get to that point where we have full take rate in Europe.

And is it possible to maybe like roughly guide us through how these next nine months up until the legislation will go from the OEM side? I mean, do they start to gradually increase the adoption of DMS or will it be more of a catch-up effect maybe one quarter ahead of the... legislation or exactly on legislation or is it possible to say anything about that?

Yeah we have of course we have a model we have a say financial model where we are modeling it and that model is fairly like heavy, I mean, with large, really large increases, especially the last two quarters before the legislation kicks in. And that is, let's say, that's a ketchup effect, really, literally speaking, like a ketchup effect happening before July 26th. And this is compared to how our business plan looked like two or three years ago. We believed that we would have a more gradual increase. And now when we look at the end result, how it's actually playing out is more of everything coming at once there. Q1, Q2, Q3 next year.

Perfect. I appreciate that colorful answer. Can we maybe also dive a bit into what are the OEMs actually working on now and doing? I mean, are they all ready for the legislation or are they hurrying to be able to deliver in July 2026?

It's definitely going to be a scramble, definitely. They have had a long time to prepare, it's been in preparation since 2019, so I believe it's going to be like the Greek dance Sorba, starting slow and going faster and faster towards the end.

Okay, that's a good metaphor. Is there anything else that SmartEye needs to do to prepare? How's your timeline looking?

Yeah, we're in a good spot. I mean, we're delivering software, so there's no like... It's not difficult to deliver more software, we just increase the zeros on the invoice.

Moving on from the legislation a bit, you press released some interesting news during the quarter. I'm a bit curious about AI1, which is a full-featured GMS in a single compact unit. Can you tell us a little bit more about this product? What is the business case here and like value prop for your customers in more general terms?

So we have we are working with I mean all the we've always been known to be hardware agnostic so we are working with all the all the let's say silicon or sensor manufacturers so in this case it's a company called OmniVision a US-based company who are developing a new ASIC or a new system on a chip, we can say, which is very cost-efficient. And they're also developing an image sensor that fits very well together with this SoC. And SmartEye, we have the most efficient software. So even though it doesn't have extremely much processing power, it's still enough for SmartEye to create a good DMS system. So these are the, I would say, three key components that you have a chip, you have an imagery, you have the software that fits very nicely together. Which makes that you can make high quality, low cost DMS available. So we started to show this at the in-cabin event in Detroit in June. That's when we released it to the world that we have made it work with these three key components working together. And we have had great interest since then. And I think in many emerging markets where they want to have a reliable, well-working, but low-cost solution, this is a really attractive value proposition. We haven't had any design wins or contracts signed yet, but I'm very optimistic that we will see that going forward. We are pursuing several interesting opportunities.

That seems encouraging. You mentioned a very high performance on a minimal footprint. What is it that enables you to have such high performance? Why can't competitors...

Yeah, you need these three components. You need to have a low-cost processing platform where you get a lot of bang for the buck for the processing power that you actually receive. You need to have an image that fits well together with the processor and the whole system. It needs to be designed in a certain way. And you need to have a software that can still utilize the inherent processing power that exists, which is not much compared to other platforms, but still enough since Smarta is so efficient. So it's just a question of combining these three things in a good package and make it into a nice product.

And just from a financial perspective, do you supply and invoice the OEMs for the hardware as well?

We see this as it could be scenarios where Smarta is software tier one, we can be software tier two. doing the actual hardware. It could be along the lines of our regular business model. We don't have to reinvent a new business model here.

Moving on, you also announced three new interior design wins during the quarter. It was maybe some time ago now, but it happened during Q2. It was with a Korean car manufacturer. And I'm curious about like how is the procurement activity regarding interior sensing now amongst your customers? Are there any procurements closing into nomination this year or maybe later?

I would say we have more procurements being active than ever. Many of them are interior sensing or cabin monitoring. But DMS is definitely in the front, let's say, top priority for most of our customers. So it's about broadening the total market for DMS that's taking the lion's share of our resources for the moment.

I see. And regarding cabin monitoring, there's a lot of talk going on about using the rear view mirror as the perfect location to place the camera for both DMS and cabin monitoring. So my first question is, does SmartEye have any design wins with the camera placed on that location? And if so, when do you expect it to enter production?

The answer is yes. We have mirrors going into production the first half of next year. They will do both cabin monitoring and driver monitoring from this one camera position. When you look at the DMS and cabin monitoring market there are many different concepts. camera placements, you have central compute, you have edge computing and so on. SmartEye supports all of these configurations. A supplier who wants to go with SmartEye doesn't have to sacrifice a certain camera position inside a mirror, under the mirror, in the roof module, in the A-pillar, center stack, cluster, whatever. SmartEye supports it all. And we also support virtually every processing platform. Okay.

And so you said that first half of 2026, this will go into production. It's both DMS and cabin monitoring. Absolutely. I believe then that that should be your first. Is it your first design win with cabin monitoring that enters production?

Yes. We in cabin monitoring, we're going to production early 2026 and then it rolls out from there. And is it 14 design wins we have at present? 10.

But it will surely increase. How do you feel about your competitiveness within this niche, cabin monitoring specifically? We know that DMS, you are the leading star, the market leader, but cabin monitoring and interior sensing?

Yeah, it's a very early days for cabin monitoring. We're just on like the first, you can compare it to where we were in 2017 for DMS. So it's just starting up. And we are a couple of companies who have signed wins and go into production either late this year or early next year. So I would say it's a very, very open race in the beginning. We have a high ambition. Our ambition is 40% for DMS or more. And we have the same ambition for cabin monitoring, 40% or more.

Fair enough. And talking about competition, recently Mobileye announced it is entering the DMS space. Do you care to comment about how big of a threat you think they are?

Yes, Mobileye is a great company, great engineers, great scientists, market leaders in ADAS. part of the Intel family. So I think very highly of Mobileye. They are now finally seeing what we at Smart have seen for more than a decade, that the measuring inside of the car is really interesting and lucrative. So I believe they will mainly be a threat if the DMS is integrated into their... They are selling hardware and software integrated. They are selling big central compute processors. So if it's integrated on their processors, I believe Mobile High will be a big threat. But if it's integrated into someone else's processor, I think Mobile High will probably not have a large market share there. So you can sort of take a sliver of their processing market share and see that as their potential future DMS. But everyone who's in this business knows that you have these long lead times. I mean, you win an order and then you wait three years before production starts and then you ramp up.

Okay, thank you. And moving on a bit to behavioral research. Can you comment on the sentiment among your customers? I mean, there's been a couple of quarters with kind of volatile development. I mean, Q4 was really strong. Q1 and Q2 maybe a bit on the weaker side now. Minus 1% organic growth. You said that you think you strengthened your market position, but what are the customer dialogues like right now? Is there any budget constraints?

Yeah, so I would say we had a... We expected modest growth when we had a budget in the beginning of the year. But of course we didn't expect everything to go down. What we've seen is that most markets are performing very close to where we planned them to be in the beginning of this year. except the US. So US is lagging. You could call it a Trump effect, you could call it whatever, tariffs, whatever. But I think it's, I mean, United States is like a leading nation when it comes to doing research and buying research equipment. I don't expect this softness of the U.S. market to go on forever. I think there will at some point in time be that it starts to rise again and then maybe we see a little bit of extra rise because it's been softer for a few quarters. So I still believe that we will have a strong Q4 because that's a seasonal effect where a lot of research budgets are being spent before the end of the year. So we expect Q4 to pick up and hopefully Q3 to be better. But currently we're not projecting an explosive growth or anything, more like a flat line for it.

Fair enough. And a question that came to mind here when you were talking is maybe a question to Mats regarding behavioral research and the revenue split there. I mean, you haven't commented anything on the revenue split between like Affectiva and Emotions and Research Instruments there, but is it like a 50-50 revenue split between the business areas or is it maybe hard to

No, it's more that iMotion is the major part in that. And then, of course, we have research instruments and media analytics. They are a little bit different between them. But the thing is that media analytics, they have few but stable customers. And research instruments have... Also stable customers, but also the potential of new customers and new markets to enter.

I guess actually that was everything on behavioral research and I have some financial questions before we let in some questions from investors and like looking at your cost savings program and the figures you have released it seems like you maybe outperformed the expectations there on how much you could get the cost down so maybe if you could put some color on like yeah how did you manage to do better than expected did you find any additional costs you could cut and are you satisfied maybe to start with?

Yes of course we have done more savings than we expected and talked about earlier and of course we are very I'm very happy with the organization we have worked for a long time to really keep the spending down to to have higher freeze and really thinking when we do hiring, which competence and where to hire. And we have looked through IT expenses, data acquisition and data management expenses as well. In all areas we have worked very hard with these. So it's really good work that the organization have done. And of course it was a tough situation in the winter when we had to have, I think it was around 9% of the employees that had to leave in US and Sweden.

Can you give us some kind of indication of OPEX levels going forward? I mean, you're actually at positive EBITDA now, not even breakeven, but one million plus. How should we think about OPEX going forward, maybe Q3, Q4?

We continue to be very restrictive when we do hiring and we need to evaluate. We need to continue to keep spending down because we need to, at the same time, see that the license revenue increasing as we expected them to do. So we are still in a, so to say, cost savings mode, I think, for the coming quarters. And very shortly for Q3, we have talked about previously about the seasonal effect for the Swedish employees when we have this vacation depth that is have effect in Q3.

And so maybe we shouldn't expect like a massive increase in OPEX going forward just because your EBITDA profitable now we should expect OPEX to

We always need to consider how to do our spending and when to do it.

Perfect. Do you dare to comment anything about your financing and credit facilities? For example, now you are finally at positive EBITDA. I believe you have said earlier that that opens up maybe new doors when talking about financing from credit institutions and so on. Is that like an ongoing work or is it now that you will start to meet with banks and maybe...

We have always had dialogues with our banks, our own bank and other banks as well. And we have also had that feedback that if we have a couple of quarters with a positive EBITDA then we are in a much better position to have a corporate loan for example. But for the moment we have our available cash and in balance for 93 million and we expect that to be good enough so far. But we just need to monitoring it and continue to work with our dialogues and see what opportunities we have. The good thing is that we think that we have a lot of good opportunities for this going forward.

Good. And final financial question here is, you're now at EBITDA breakeven. Do you expect cash flow breakeven still to be two to three quarters later or what's the forecast there?

We have communicated that before, two to three quarters after EBITDA positive. I think it's the same analysis we do now.

Basically, going from EBITDA to positive is mostly going to depend on license revenue with 100% gross profit. And we don't know exactly how many cars will be delivered until after the quarter has ended. So after Q3, we will see how that went. After Q4, how did it go? You have another thing going in Q4, which is that behavioral research is expected to have a strong quarter with strong cash flow in Q4. So that's how we are seeing it.

but but the main the lion's share the main part will come from from licenses yeah thank you for that now i will uh start to bring in some questions from investors that we're reaching here uh while we're broadcasting so starting with one question here about greater than a company which smart is collaborating with for those who don't know They communicated an MOU valued at 1.4 billion euros with an existing partner. Is it smart they are talking about? I wish.

So I think we are working with them and we are incorporating their risk analysis into our aftermarket product. And the goal is that we will start selling that during the fall here. and i know that they have a really interesting technology they are really deep automotive insiders know what they're doing so we love to work together with them and uh i think what the the mou that they communicated recently i think they just made a really really good deal with someone yeah

Thanks for the clarification. This year DesignWin announcements have dried up for all DMS OMS suppliers and a new pattern has emerged. What has changed in the market mechanics?

I would say that automotive procurement is a slow process that everyone has to realize that. So it's not standing still. We are actually in more parallel procurement processes right now than what we have ever been. So the market should just expect there will be announcements being made during the late summer, early spring, early winter.

Moving on. There would appear to be benefits from integrating outward-looking ADAS sensor signals, for example Mobileye, LiDAR, etc. with DMS. Which market players are taking care of such integration?

uh right now the answer is that it's not really anyone who has been doing it yet so what we have seen now is that the oems have been preoccupied with much more mundane issues such as getting their software defined vehicles out the door and things like that so so this is still something which has been talked about for five years but no one has really put the flag down and said Let's do it. Let's show the world exactly how it's being done. But it's a very interesting topic.

And is the AIS product line performing as expected? Has it passed its teething problems in Swedish called barnsjukdomar?

Yes, that's a good question. It is delayed. First it was delayed mostly because of COVID and semiconductors and things like that. Now we have had it on the market for two years. And during these two years we have had, I would say, more success when it comes to selling it to OEMs for small volume. projects. So we have a lot of buses coming out now because of the GSR regulation in Europe. We have trucks, we have a sports car coming out, going into production later this year. So that has been successful. When it comes to fleet customer, the growth has been slower than expected. But I would say that the teething problems are over and we are ready to sell more of that product to fleet customers going forward.

And is there reason to believe that you will revise down the number of estimated design wins given the adjusted sales volumes from respective OEMs?

No, I would say not. they can definitely change their let's say going from like the more traditional ways of making car into going into s software defined vehicles there can definitely be changes but i think there will not be more or less cars being manufactured in the world because of it it will be maybe that you change more the digital architecture than anything else yeah

We're getting a lot of questions here. So I'm trying to navigate maybe a bit of a more long term question to you. What kind of companies smarter in 2030?

uh like it's 2030 smarta is a shining star in automotive safety and ai for cars and right now it's more of a hidden gem gem but but not in 2030 no

Thanks for that. And one investor is wondering if there's any risk that the EU legislation will be pushed forward. What do you see?

I expect that risk to be extremely low. But who knows if there's geopolitical events or whatever.

We have gone through many of these questions already. One investor is wondering, only five more car models entered production in Q2. What is the reason behind a lower number than in Q1 and how many cars do you expect to enter production in Q3 and Q4?

Yeah, that was part of the presentation. So 55 to 65 more core models this year. And we have a fairly good visibility into which core models, which OEMs. So we will have more than 12 OEMs in production by the end of this year. and many more car models.

Okay, so is that kind of why you're still standing firm on the 55 to 65 additional car models that will come in the second half of the year? Is it because you have pretty good visibility?

Yeah, we know which OEMs and which car models we expect to go into production.

Okay. Regarding the large Japanese contract, I believe the one announced in, I guess it was April or May, I don't remember exactly, but when do you expect this design to start converting into orders? I believe revenue maybe is... I believe you communicated that it was 2027.

Yeah, it was 2027, right? Mid-2027. There is no change in the time plan there. We are sticking to the same time plan.

So I actually think that is everything we will be able to... We have actually answered most of the questions here, so we will conclude the Q&A session here and I'll leave the floor over to you to maybe close with some words.

Yeah, best quarter in the history of SmartEye, but not as good as Q3. Perfect. We'll end with that. Thank you for coming.