Neonode Inc. Q2 FY2020 Earnings Call

Hello, everyone. Thank you for standing by, and welcome to Neonode’s Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session with the company’s covering analysts. At this time for opening remarks and introduction, I would like to turn the call over to David Brunton, Neonode’s Head of Corporate Investor Relations. David please go ahead.

Welcome and thank you for joining us. On today’s call, we will review our second quarter 2020 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest. Before turning the call over to our CEO, Dr. Urban Forssell and CFO, Maria Ek, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guide, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements do not guarantee the future performance that may be made or be subject to risks, uncertainties, and other factors that may affect Neonode’s business financial position and other operating results, which include but are not limited to the risk factors and other qualifications contained in Neonode’s annual report on 10-K, quarterly reports on 10-Q, and other reports filed by Neonode with the SEC to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements. At this time, it is my pleasure to turn the call over to Urban. Urban, please go ahead.

Thank you, Dave. Hello, this is Urban Forssell, I’m the CEO of Neonode since the beginning of the year. Thank you for joining the call. I will take you through business and strategy update today. And I would like to start with this slide here showing a summary of Neonode’s legacy. As many of you know, Neonode started as a smartphone company back in 2001 and launched what is the world’s first infrared-based mobile phone in 2004. This phone made the headlines in several newspapers, received a lot of attention, and featured Neonode’s IR-based touch technology back in 2004. The origins of our touch technology can be traced back to these early smartphone years. Later on, Neonode shifted its focus to more business with e-reader manufacturers, printer manufacturers, and automotive Tier 1 suppliers, and the business model changed from offering business-to-consumer products to technology licensing mainly. Today in 2020, we are working to establish a new strategy and a new direction for the company. We aim to substantially grow the business and make Neonode a much more profitable company. We have presented the outline for this strategy in other presentations, such as with Redeye on April 2 and June 2, and some information has also been included in our first quarter press release. This is an interesting journey for me, having been in the company a little over six months. As all of you know, 2020 hasn't been what we anticipated in 2019 primarily due to COVID-19. This has meant both headwinds and tailwinds for us. Regarding headwinds, we have seen slower growth in the printer market and automotive market. However, concerning tailwinds, we have experienced a significant increase in demand for our contactless touch solutions from customers all over the world. We see this as the starting point for a new normal in society and for Neonode. We strongly believe that going forward, people will avoid touching buttons in elevators, on vending machines, and other self-service kiosks. This is the new normal, as people are concerned about getting infected with bacteria and viruses, like the COVID virus. Companies are scrambling to find technical solutions to these issues, and we believe we have the right answer—a simple, intuitive solution to many of these problems. We consider ourselves among the few companies in the world today that has suitable proven technology. Our zForce touch technology is already implemented in over 75 million different products from leading OEMs in consumer electronics, the printer business, and automotive. Over the last 15 to 20 years, we have built extensive technical expertise and know-how around this technology in various application areas. Our technology is protected by more than 120 patents. Currently, we are in a position where we have existing products that we are shifting to customers. These products are easy to use, scalable, and allow for a short time to market. Our focus over the past couple of years, especially this year, has been to expand our ecosystem of partners. Today, we have established relationships with Digi-Key and CAL, two large fulfillment distributors, along with partnerships with other distributors and value-added partners such as HY-LINE in Germany, Advanced Silicon, and Helix in Switzerland, among others. We also cooperate with many interesting tech companies like Yesar, Easpeed, Holo Industries, and other engineering firms and integrators like Happy Hour. We have a strong network of sales representatives in the U.S. For example, we work with a network called Convergence, which has around 100 sales reps meeting customers weekly and promoting our technology. This is guiding us moving forward. I will explain our technology in more detail before discussing additional examples and information regarding our business. The key technology for our contactless touch and normal touch businesses is called zForce; it is an optical touch technology based on infrared lights, which are invisible to the human eye but still light-based. It supports contactless touch applications alongside displays. For instance, in this slide, if you look at the bottom left, you see a typical example of a medical display. In these applications, a doctor or nurse operates a system through the interface that the display provides. They often wear rubber gloves on their fingers, which could be contaminated with various fluids. They don’t want to touch the screen for that reason or because the screen sits in a sterile environment like a surgery room. Our technology can be adapted in such a way that the operator doesn’t need to physically touch the display. It remains a touch display without the requirement to touch anything physically to control it. This technology can also be extended to touch in mid-air using holographic displays, or we can offer solutions with touch on other surfaces like glass windows, sheets of metal, wooden panels, etc. Gesture sensing is another interaction method with machines. For example, with our technology, you can turn a kitchen fan off and on or regulate its speed using simple hand gestures in mid-air. All this is possible with our patented zForce technology, making it very versatile. We consider ourselves able to provide a safer way to interact with machines, equipment, and various IT systems, as there is no requirement to physically touch the display or touch surface when using zForce technology from Neonode. This technology is robust, relying on light beams that are either broken or reflected, meaning there are no moving parts that can wear out or break. It's flexible, and as you will see in the following slides, there are numerous ways our technology has been applied. Although it is the same core technology, it is very flexible, scalable, and easy to integrate. In demanding applications such as military displays, our technology is particularly ideal, as we do not interfere with the display itself. We serve as an add-on feature, and if desired, the touch functionality can sit a few millimeters in front of the display or surface used. Overall, we believe, and customer feedback confirms, that our zForce technology is a very strong value proposition across many different applications. I previously mentioned contactless touch and holographic displays. Those following us have likely seen our press releases regarding various corporations in these fields this year. I want to highlight here that mechanical controls can be replaced using our zForce technology. Consider replacing mechanical controls in touch or mid-air holographic displays; it becomes apparent that you won’t necessarily need to keep mechanical controls like buttons and switches, such as those found in elevators. You could simply have printed symbols directing users on where to place their fingers or point to control the elevator. Another example is the front of a washing machine. Modern washing machines typically integrate a display with touch or without it, together with physical buttons, switches, and knobs. By utilizing our sensor modules properly mounted on the washing machine and programming the software applications accordingly, we can enable touch functionality across the entire front of the washing machine. This effectively allows for the removal of all physical buttons and switches, enabling control of the machine, including setting programs, timers, and temperatures. This is not only cost-saving but also opens up numerous opportunities for developing user-friendly interfaces for various devices, not just washing machines. Additionally, we are shifting our main focus to products in our company, particularly sensor module products produced at our subsidiary in Western Sweden. We expect to introduce other product lines and new variants soon, seeing the most significant growth potential in contactless touch in a post-COVID environment. We believe the flexible application of our technologies and products offers endless verticals to operate in. We target interactive kiosks, self-service kiosks found in airports, retail stores, ticket machines, ATMs, and more. We see a lot of interest and opportunities in the elevator market, both for new equipment installations and retrofit opportunities. We are already engaged with various medium-sized and small tech companies, maintenance companies, and engineering firms. For example, I want to go through our work on a self-checkout kiosk with one of the world's leading kiosk manufacturers. They reached out to us in April/May, expressing interest in our touch sensor modules. Initially starting with one prominent retail chain in the U.S., it expanded to seven major retailers in different countries, including Australia, Colombia, Singapore, and Russia. The initial order potential is estimated at 50,000 to 200,000 units, with a sales price ranging from $30 to $50 each, potentially higher depending on overall committed orders. Today, we are selling these modules for $50 to $80 each, generating a gross margin of 40% to 50%. We are currently in discussions with the customer, and the pilot project is underway, with feedback being positive. The next example I want to discuss is ATMs. Similar to self-checkout kiosks, there are millions of ATMs worldwide, estimated at about 500,000 in the U.S. and over 3 million globally. ATMs, while being a form of self-service kiosk, are also subject to regulations and safety measures, as both financial institutions and authorities want to ensure security against hacking and skimming devices. This creates complexities for us, as our connections are mainly with OEMs rather than third-party engineering firms. We are already engaged with one of the major players in ATM manufacturing, where we have developed proposals to replace mechanical keypads with our technology to reduce costs and improve maintenance. There exists significant potential for savings when implementing our touchless controls alongside demand driven by concerns over COVID-19. In fact, many ATMs today allow for multiple applications of our technology to increase overall sales on this type of equipment if executed correctly. Thirdly, I want to emphasize the opportunity within the elevator market. We see a tremendous potential given there are approximately 19 million elevators globally, growing by 5% to 7% or about 1.3 million annually. It's estimated that at least 10% of elevators are refurbished, upgraded, or remodeled every year, providing a ripe market for our intervention. We have ongoing interactions with various OEMs and manufacturers of control panels, as well as collaborations with smaller tech companies and engineering firms like Easpeed and Yesar, both developing holographic display solutions for elevators. This market potential is only growing, and we want to capitalize on it. Our fourth example is Changi Airport in Singapore, recognized as the best airport worldwide. During the pandemic, they aimed to enhance safety for travelers and employees with our technology applied to ticket checking kiosks. Local engineering firms quickly developed retrofit solutions, and the airport management expressed satisfaction, requesting similar retrofits for elevators and additional equipment. This case shows the significant potential in airports, along with transport hubs, self-service kiosks, and other venues requiring contactless interaction. Overall, we point to customer interest growing globally, seeing opportunities as we engage the market. We also remain committed to our existing licensing agreements with printer and e-reader manufacturers while exploring new possibilities in military and avionics applications and with industrial control systems. We will be focusing on more niche, high-performance applications that will further showcase the quality of our technology, delivering better image quality and performance benchmarked against competitive solutions. However, we anticipate a slight lowering of average sales price due to different business models, mainly royalty-based. This business model will be stable as we secure long-term revenues from partnerships lasting up to a decade. Furthermore, we have opportunities within the automotive domain as the regulation in Europe demands camera-based driver monitoring systems. Regulations will drive demand for our technology as we engage with European and Asian OEMs for driver monitoring solutions. Ultimately, we aim to grow our product sales alongside maintaining our technology licensing avenues. We have secured recent funding—$13 million—which will accelerate growth in priority markets such as elevators and interactive kiosks while targeting military, rugged, industrial, and automotive markets.

Thanks Urban. You can find our second quarter earnings release and 10-Q available for download from the investors section of our website, at neonod.com. I would like to start with a summary of the quarter. Revenues are down by $1.0 million compared to the same quarter in 2019. Our operating expenses are lower than planned for the quarter—$2.4 million compared to $3.0 million in the same quarter of 2019. Due to that, our operating loss was up by $0.4 million compared to the same quarter last year. We have net revenues of $0.7 million for the second quarter of 2020, which is a decrease of 56% from the comparable quarter last year and a decline of 41% compared to the first quarter. The main reason for the decrease is the lack of estimation for our license revenues in the HMI Solutions business area due to COVID-19, but we see indications that automotive will perform better than expected. Our customers in the license area shipped 0.7 million devices at an average price of $1 this quarter, compared to 1.9 million units shipped last year with an average license fee of $0.17. For automotive business, license fees in the second quarter totaled $147,000 compared to $440,000 in the same period last year. For our consumer business, license fees were $508,000 this year compared to $1.0 million last year. Again, this can be attributed mainly to the pandemic's effects, though we expect a rebound. In the HMI solutions area, while there has been a slow completion of product shipments, we have witnessed an increased market interest. Our gross margin sits at 84% this quarter, down from 96% in 2019 primarily due to inventory write-offs this year. The same reason contributes to a negative gross margin in the HMI products area. Operating expenses decreased by 19% to $2.4 million in the second quarter of 2020 compared to 2019, which is partially due to COVID-19 causing lower professional fees and less travel. As a result, our operating loss has grown by 34% to $1.8 million for the second quarter of 2020 compared to 2019. Our net loss for the quarter was $1.6 million, or $0.18 per share, compared to a net loss of $1.3 million, or $0.14 per share for the second quarter of 2019. As Urban mentioned, the recent private placement yielded a cash inflow of $13.1 million, fortifying our cash position and providing us the means to execute our strategy and accelerate our efforts. Operating activities used $1.0 million in cash during the second quarter of 2020, aligning with the previous year. With this, I would like to hand it back to Urban for some closing remarks.

Okay. Thank you Maria. We are approaching the end of this call and the presentation. We want to highlight the recent private placement closed last week. Through this, we feel we now have adequate resources to accelerate our growth and seize current opportunities. Practically, we will continue on our current path but have the means to bolster our international sales force and engage aggressively in our marketing efforts. We aim to strengthen our engineering division and operations as well. Overall, proceeds will focus on human resources, primarily for hiring new talent to support our existing skilled team. We have the technology for contactless touch, and as mentioned, it is a robust, proven technology. We are eager to provide products and technology licensing that meet the exploding demand for contactless solutions in both new and retrofit equipment. Significant growth potential lies in interactive kiosks and elevator markets. We will continue to find new customers for our zForce technology in military, avionics, and industrial control sectors, along with expanding our offerings in multi-sensing driver monitoring systems. Our focus will remain on execution, increasing sales, and enhancing Neonode's visibility among kiosk and elevator manufacturers, as well as third-party operators in these sectors. Thank you for your attention, and we will open up for questions.

Thank you. There are no questions at this time. Are there any closing comments?

Yes, I will take this opportunity to answer questions submitted by Viktor Westman, an analyst from Redeye, before the call. One question from Viktor was about handling furloughing. As we announced in the Q1 release in May, we had been working shorter hours from mid-April until today. However, we will now return to 100% working hours and also increase headcount. Next, regarding the transportation hubs market, Viktor expressed concern, viewing it as relatively smaller. However, as I pointed out regarding the Changi Airport example, there are over 10,000 airports across the globe, including 17,000 commercial airports. If we account for other transportation locations such as train stations, subways, bus stations, kiosks, and shopping malls, I genuinely believe this represents a substantial market and significant opportunities for Neonode. Another question was regarding lead times with larger OEMs in elevator segments. As we mentioned, we expect the typical sales cycle with a new large OEM customer to fall within three to six months. Some dialogues are advanced, while others are yet to begin. In the next 12 to 18 months, we should have a clearer picture, hopefully announcing several significant contracts with OEM customers across kiosks, elevators, and other licensing ventures. We do not expect a substantial increase in royalty revenues in the coming years; however, our primary focus will remain on product sales for the coming six to 12 months. We will not terminate any existing licensing agreements with printer manufacturers, e-readers, and those in the med-tech field. In fact, we see considerable opportunities for repeat business and new solutions involving contactless technology, all while maintaining strong relationships with existing clients. Thank you for your questions, Viktor. This concludes our call. I appreciate everyone’s attention and participation. Please keep following our progress moving forward, and have a great weekend. Thank you.

Thank you. That does conclude today’s Neonode second quarter 2020 earnings conference call. You may now disconnect your lines and have a wonderful day.