Neonode Inc. Q3 FY2021 Earnings Call

Hello everyone. Thank you for standing by and welcome to Neonode's Third Quarter 2021 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. Thank you. And 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 and start the conference.

Welcome and thank you for joining us. On today's call, we will review our third quarter 2021 financial results and provide a corporate update. Our update will include details of our business strategies, customer activities, and other items of interest. On today's call is our CEO, Urban Forssell; and our CFO, Fredrik Nihlén. Fredrik will present the financial results of the company for the third quarter and comment on the equity financing we completed in October. Urban will comment on overall strategies, customer activities, and other market opportunities. Before we continue with this presentation, 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, guides, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements do not guarantee future performance that may involve or subject to risks, uncertainties, and other factors that may affect Neonode's business, financial position, and other operating results. Such risks include, but are not limited to, the risk factors and other qualifications contained in Neonode's annual report on Form 10-K, quarterly reports on Form 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 obligations to update these forward-looking statements. Before I hand the call over to Fredrik, I'd like to summarize some highlights of today's presentation. Neonode, like many companies, faced a few setbacks in our third quarter due to the COVID-19 pandemic when our first key mover Asian markets went into lockdown to contain the spread of the Delta variant. The combination of the lockdowns and global supply chain constraints that impacted our customers' businesses had a negative impact on our third quarter sales compared to the prior six months. The company is navigating the headwinds by continuing its marketing and sales work and increasing our partner network, which has resulted in an increasing and diverse sales pipeline, which Urban will discuss. We're well-positioned to become the leader in the growing contactless touch market. To provide a strong basis of support for growth, we strengthened our cash position through a successful capital raise directed to long-term investors in Sweden and Europe. And at this time, it's my pleasure to turn the call over to Fredrik Nihlén who will give a third quarter financial update. Fredrik, please go ahead.

Thank you, David, and welcome everyone to our third quarter earnings call. Also from my side. You can find our third quarter earnings release, along with the details of our financial performance for the first quarter and year-to-date 2021 available to download from the investor section on the website neonode.com. In the interest of time, I will only summarize the key points here. Our total revenues year-to-date reached $4.3 million, which is an increase of 23% compared to the same period last year. Revenue from Sensor Modules increased by 80% for the same period. Looking exclusively at the third quarter 2021 compared to the third quarter last year, we can see a slowdown in sales. Our revenues decreased primarily due to the global supply chain constraints and specifically, semiconductor component shortages affecting our customers within the printer and automotive markets. This, combined with renewed pandemic-driven lockdowns in our key markets, negatively impacted our revenues in the third quarter. Operating expenses for the third quarter decreased by 12% compared to the same period last year, due to one-time costs in Q3 last year. The decrease by 90% compared to the second quarter is mainly due to a lower activity level during the summer vacation period. The cost level we saw in Q2 this year is more in line with the expected cost level going forward. Our total gross margin year-to-date 2021 was 86% compared to 90% for the same period in 2020. The decrease is related to a higher share of product sales which drives cost of sales plus licensing has 100% gross margin. Gross margin for products was 31% year-to-date, which is the same level as last year. We expect to see an increase in margins in the coming quarters as we have updated the prices for TSMs. Net cash used in operating activities during the third quarter of 2021 was $1.6 million. Compared to the same quarter last year, net cash from operating activities has decreased by 12%. The decrease is mostly related to the timing of the supplier invoices. Some updates on our registered direct offering: In October, we sold 1.088 million shares of our common stock at a price of $7.75 to certain Swedish and European investors. The direct offering closed on October 26 and we received net proceeds of approximately $13.1 million from the offering after deducting placement fees and other related expenses. The offering was oversubscribed, and we are happy to welcome new and old strategic Swedish and European investors. We intend to use the net proceeds of the offering for continued investments in sales and marketing to create greater awareness and drive demand for contactless touch and touch sensor modules. We will also use the net proceeds to support the expected growth of our TSM production volumes, which will tie up capital in components and finished goods. Lastly, the net proceeds can also be used for general corporate and working capital purposes. I will now turn the call over to Urban who will give our business and strategy updates.

Thank you, Fredrik. Today, I will review some slides describing our vision, our technologies, and our business strategies. I will also describe our key markets and how we work to increase those sales in these markets. First slide here: our vision statement is to transform the way humans interact with machines, which is very much related to our mission statement, tying back to Neonode's history. This company was founded as a smartphone company 20 years ago and was the first company to launch a gesture-based touch phone on the market, the Neonode N1, which was introduced as early as 2002 at the CeBit Fair in Germany. Later, we helped HP, Lexmark, Canon, and other printer manufacturers to eliminate traditional buttons on their printers and replace them with clever touch displays that allowed for scrolling and selecting different options using a touch interface. Currently, we are significantly focused on contactless touch technology, or as some prefer to call it, touchless touch. This is still aligned with our work in human-machine interaction or HMI, and we want to transform the way humans interact with machines to enhance convenience, customer experience, and value for all users. We are a deep tech company, and all our work is concentrated around two versatile technology platforms. One, known as C-force, is an infrared-based optical technology that supports touch and gesture sensing through advanced optics, electronics, and software algorithms. We also have developed a software platform for scene analysis, which we call multi-sensing, supporting applications such as eye tracking, drowsiness detection, distraction monitoring in vehicles, and general occupancy monitoring. Today, we have a particular focus on contactless touch, which has been our main focus since last year, where we see the biggest potential for top-line growth and improving our margins and cash flow. What is contactless touch? As the term suggests, it involves a touch-like interaction with displays, keypads, buttons, and holographic images without physical contact. Users can interact with our technology by hovering their finger or another object in front of it, which is interpreted as a touch or click, enhancing safety and customer experience in various applications. The market for this technology is vast, and we are mainly targeting the elevator and kiosk segments, especially interactive kiosks that are typically used in self-service settings. In summary, I believe we are well-positioned to capitalize on this emerging market. To provide additional context, our solutions have several strong features compared to other technologies, offering an intuitive user interface that is easy to use and install. We offer cost-effective and easy-to-implement solutions for both retrofit and new designs. Our offering supports advanced multi-finger operation, making it interesting for kiosk applications. Additionally, while there is growing interest in kiosk applications, the elevator market remains a significant opportunity. We have engagement with various companies, including a major elevator OEM that is deploying our solutions in their elevators. This is a testament to the strategy we outlined here and reflects positively on our business model. Nevertheless, despite the slower sales in the third quarter, our sales pipeline remains very interesting and promising. We are optimistic about future growth and are positioned to lead the contactless touch market with our technology and partner network. I will now turn it back to David to lead us through the Q&A session.

Thank you, Urban. We will now open the call for Q&A from our analysts. Please go ahead and join the queue.

[Operator Instructions] We will take our first question from Tyler Burmeister with Craig-Hallum. Your line is now open.

Hey, guys. Thanks for letting us ask a couple of questions here. Urban, first, on the headwinds you're seeing with supply constraints and lockdowns, could you break those out? Is one having a bigger impact than the other? And to the degree you can, what's the timeline for improvement? Is it Q4, or will those headwinds linger into next year? Any color there would be great.

Yes. First of all, I want to underline that much of the component shortage is affecting our customers indirectly rather than our production. We have secured components for our production and are running normally. However, we see indirect effects from component shortages. Many Tier 1 automotive suppliers and OEMs are reporting slowdowns in production as they struggle to find components. This is impacting our royalty revenues. Similarly, some of our printer customers are experiencing slower sales due to these shortages. For touch sensor module sales, some Asian customers are prioritizing existing production over launching new products due to component shortages, which has delayed decision-making and launch processes. While these effects were significant in the third quarter, some are still visible in the fourth quarter. I expect that we could see a rebound next year. However, Q3 was slow, and Q4 is a bit slower than we had anticipated at the end of Q2. Nonetheless, we are confident in our newly raised cash and the promising sales pipeline, allowing us to weather this storm while growing steadily.

That's great. Appreciate the color there. Then you recently announced a win with a major elevator customer that's going to deploy air-touch solutions in all their new elevators. Could you provide any insight on the size of that deal and what other customers of similar size you have in your pipeline?

With this customer, they have been very strict about confidentiality, so I can't disclose their name or product lines involved. This business was achieved with one of the major elevator OEMs, which dominate the market. We are pleased with this business as it validates our strategy. The process began with retrofit opportunities, and the OEM recognized the value of our solutions, which led to their interest in deploying our technology in their new elevators. The average installation will likely involve more than one TSM per elevator since some elevators may use two TSMs for full panel coverage. We are actively working to convince other OEMs to adopt our solutions consistent with our strategy. It's worth noting that the sales cycle in this industry is long, with this partnership taking over a year to finalize.

That's great. I appreciate that clarity. Regarding your ongoing patent litigation, I suspect you can't comment too much, but I wanted to give you a chance to provide any updates or thoughts on it.

I can only respond with no comment and refer you to our previous agreement with Aequitas Technologies LLC, which we announced in an 8-K filing with the SEC in 2019.

We can move to our next question. The questioner is Jesper von Koch with Redeye. Your line is now open.

Hello team. Since the current revenue is at depressed levels just before what seems like a potential acceleration, could you provide any guidance for 2022? Additionally, could you comment on the illustration from slide 27 regarding estimates?

We will not provide specific guidance, but we are very motivated by the new opportunities and the strength of our pipeline, which looks promising for next year. Personally, I'm hopeful and believe we are on the verge of a breakthrough in our business. While Q3 showed some headwinds, especially now in Q4, the overall outlook is bright. We are committed to realizing more of this potential next year.

Can you provide some insight into the elevator market as a whole regarding TSM take rates? How many TSMs do you expect per installed elevator?

Our solution is a great choice for control panels inside elevators. Typically, you would use one or two TSMs per elevator, with an average closer to 1.3-1.5 TSMs per elevator. There's also a significant opportunity with the whole call buttons on each floor, where additional TSMs can be used, depending on the building's height and the number of floors. However, some elevator OEMs handle the whole call buttons separately, making it difficult to estimate our market share. Nevertheless, we have greater opportunities beyond one TSM per elevator.

You have seen strong traction in the elevator segment, and you recently announced a good contract with a sushi restaurant chain in Japan. How do you see demand in the self-service kiosk market compared to others?

These two markets are fundamentally different. The elevator market is dominated by 10 to 11 large OEMs, accounting for over 95% of the global market. In contrast, the kiosk market is much more fragmented, with thousands of kiosk OEM companies. While we've seen significant traction in elevators, we are similarly engaged with many medium-sized and smaller kiosk OEMs as well. The dynamics of these markets differ, but we feel optimistic about our position in both segments. We are a deep-tech company. Our hardware expertise will continue to play a vital role in our offerings. However, the importance of the software aspect is growing. We see great potential in using our touch sensor modules for new applications where the software becomes the key differentiator. We are enhancing our offerings to increase revenue from services and explore potential software-driven applications in various sectors. We are considering opportunities for strategic partnerships or acquisitions in the future, but it’s not immediate. As we stabilize and grow our organic business, we will also look at potential avenues for enhancing our growth through partnerships.

Thank you, Urban. Thank you to everyone for joining us today. We wish everyone a good day and encourage you to stay safe. Thank you. Goodbye.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.