Neonode Inc. Q2 FY2022 Earnings Call

Hi, and welcome to Neonode’s Q2 2022 Earnings Call. Today, we’ll start with the company presentation, which is then followed by questions-and-answer sessions led by me and the other covering analysts. The analysts are welcome to dial in after the company presentation to ask questions. And with that said, I hand it over to the CEO of Neonode, welcome, Urban Forssell.

Thank you, Jesper, and welcome to this second quarter 2022 earnings call from my side. I apologize for a slight delay in this call; it was due to a minor technical issue which is now resolved. So you can all follow this with good quality. Today, joining me in this presentation is our CFO, Fredrik Nihlen, and I will give the word to Fredrik shortly. But before we proceed, I would like you to take a moment to read the following legal disclaimer. This presentation and the related oral and written statements of the company and its management may contain forward-looking statements. Forward-looking statements include information about current expectations, strategy, plans, potential financial performance, or future events. They also may include statements about market opportunity and sales growth, financial results, use of cash, product development and introductions, regulatory matters, and sales efforts. Forward-looking statements are based on assumptions, expectations, and information available to the company and its management and involve a number of known and unknown risks, uncertainties, and other factors that may cause the company’s actual results, levels of activity, performance, or achievements to be materially different from any expressed or implied by these forward-looking statements. I also refer all viewers of this call to see our official filings with the SEC that are available through neonode.com. Prospective investors are advised to carefully consider these various risks, uncertainties, and other factors. Any forward-looking statements included in this presentation are made as of today’s date. The company and its management undertake no duty to update or revise forward-looking statements. This presentation has been prepared by the company based on its own information as well as information from public sources. Certain of the information contained herein may be derived from information provided by industry sources. The company believes such information is accurate, and that the sources from which this information has been obtained are reliable. However, the company has not independently verified such information and cannot guarantee the accuracy of such information. Thank you. And with that, we move on to the main part of the presentation. Fredrik, please come up and present Q2 2022 financial results.

Thank you, Urban. I will summarize the financial results for Q2 2022, and you can find the details on our webpage neonode.com under the Investors section and in our 10-Q. Total revenues for Q2 2022 were $1.3 million, a decrease of 26% year-over-year. License revenues decreased this quarter mainly because our customers are experiencing component shortages and cannot produce products with our technology, leading to lower revenues. Our product revenues were $0.2 million in Q2 2022, representing a decrease of 39% year-over-year. In 2021, we saw an increase in demand for our products, particularly TSMs, which were included in retrofit solutions. However, in 2022, we are still impacted by lockdowns due to COVID-19. We also see that product developments, particularly new ones, take longer, sometimes up to 18 months or more, which negatively impacts our product revenues. Our gross margin is 56% for Q2 2022, an increase of 17 percentage points year-over-year. If we look at the adjusted margin for TSMs, we can see a positive trend. The 56% is based on low volumes, and we expect that we will experience some push down when larger volumes come in. Our operating expenses were $2.8 million in Q2 2022, a decrease of 14% year-over-year, mainly due to lower staff expenses and also lower depreciation and amortization costs. This results in a net loss of $1.5 million for Q2 compared to a net loss of $1.7 million for the same period last year. Coming to cash, we had a net cash burn of $2.9 million in Q2 2022, an increase of 29% quarter-over-quarter. For the first half of 2022, we invested in our inventory to secure production of our TSMs. We do not expect any further large investments in inventory for the rest of the year. This gives us a cash and accounts receivable balance of $13.5 million as of June 30, 2022. And with that, I will hand it back to you, Urban.

Thank you. I will share some insights into our corporate strategies and also our current business development activities that we are focusing on in the company. Let me mention that, from my side, I believe sales and the overall results for the second quarter this year are below expectations, and we are working hard to change this in the coming quarters and years. We believe that our overall business strategy is sound and is the right one. Those of you who follow us and have joined the previous earnings call will recognize some of this. Our business model rests on two pillars: technology licensing, where we work with two technology platforms, one called zForce, which is an advanced optical technology platform suitable for touch, gesture sensing, and object detection applications. The second platform we are working with is called MultiSensing, a software platform for scene analysis that we apply in automotive applications for driver and in-cabin monitoring. For the licensing business, the target is clearly on two segments: printers and automotive. These are our focus segments for this business. The second pillar is product sales, where we offer a range of touch sensor module products based on the zForce technology. Thus, there’s a link between our licensing business and the product business through the technology in this case. Here, the focus is on the elevator and interactive kiosk segments. We believe that these two segments, individually and together, form a strong foundation for the company and will pave the way for growth and return to profitability and positive cash flow in the coming years. In 2020 and 2021, we developed an overall strategy for the company that we are still executing on and believe it is the right strategy. You can call it a three-step approach, focusing on marketing and sales, creating awareness and demand. We have grown our partner network and this year have started to focus more on key markets, including Japan, South Korea, and China. We have also been working to expand our customer offerings for licensing and the products business with more vertical integration. We are currently working on new product concepts. We are also investigating outsourcing the TSM production and actively looking for a second source to complement our own production in Pronode, on the West Coast of Sweden. In the third step, starting next year, we will more actively and aggressively pursue targets like expanding the business scope, new market segments, and some new product offerings. We are constantly evaluating potential partnerships and cooperations that can strengthen our case and contribute value to customers and investors alike. Within our business model, we work with licensing, product sales, and also offer engineering services typically as fixed price commitments. We see significant potential to grow all three revenue streams, with the biggest potential in the coming two to three years in the products business. A strong reason for this is that we have a much higher average sales price when we sell products than when we license technology per unit. Thus, we have a stronger lever if we can achieve higher sales volumes in the products business than we do with licensing. Licensing also has potential for growth, but it is a more medium- to long-term aspect because typically, when we work with customers, for example, in automotive, there’s a long development cycle before we can earn more royalty revenues from licensing. During that development period, we can earn NRE revenues, or non-recurring engineering revenues. We are actively working on several promising projects that are bringing NRE revenues and paving the way for future licensing. Overall, there is potential in all three revenue streams, with the short- and medium-term biggest potential for growth lying in the products business. Our products, which we call touch sensor modules, or TSMs, are standardized commercial off-the-shelf sensor products featuring our zForce reflective technology. We offer them in 11 different links and in two main variants. Customers can buy them from us, some distributors, or value-added resellers. Smart embedded sensor modules involve advanced optics, electronics, and software and are versatile enough to be used for various applications. We have chosen to focus on contactless touch applications, where we believe we have a unique offering that provides significant value to many applications. For contactless touch applications with our TSMs, there are two main ways to realize the contactless touch function. One is to position the sensor module such that the optical detection field is situated at a distance in front of or above a display or keypad intended to become a contactless interface. The other method aligns the light field from our sensor with a projected image that can be produced by a holographic display, which is becoming increasingly popular among users. We are observing strong traction in this segment, and this technology combination is likely to create many opportunities for us. To illustrate how this may look, here is a typical kiosk application, a retrofit solution developed and installed by our partner Happymeter in Singapore. This is from Hamad Airport and provides a typical check-in kiosk that has transitioned from a normal touch interface to a contactless touch solution. Users can input their data on the screen without touching it, which works perfectly and limits investments needed to convert outdated kiosks, as this can be done in mere minutes. If you search online through platforms like YouTube or LinkedIn for Happymeter, you will see several demonstrations managing to install a solution like this on a kiosk in real time. I mentioned holographic displays, and here’s an example of how that can look. It’s quite futuristic and attention-grabbing. This solution was developed and launched by our partner in the United States called Holo Industries. They utilize technology from Asukanet in Japan, another partner that we have collaborated with on similar applications. In this case, the solution is a patient monitoring device, where the patient’s data is projected into midair. Nurses or doctors can interact with the projected image using our touch sensor modules installed at the base of the platform. This is a very interesting development, and we see considerable interest in it. Overall, our technology has numerous applications across different types of kiosks and elevator situations in an array of segments. This paves the way for a very compelling business case. How are we trying to address and penetrate these various market segments? We have a very structured approach in our marketing and lead generation work. For contactless touch, we focus on three main segments: transportation, retail, and hospitality. Within transportation, we aim to communicate various ways contactless touch can create a safer and better user experience, particularly when entering airports or train stations. Our efforts involve informing, educating, persuading, motivating, and inspiring potential customers through digital marketing, online events, and various other campaigns. We perform these activities from Neonode and collaborate with our partners, who also engage in similar efforts independently. Let me progress here and state that within transportation, we have had, and continue to have, a strong focus on aviation, particularly on people movement within airports. If you’ve been following us or wish to visit our website or check us out on social media, you will see evidence of our campaigns and advertising designed to generate interest, inform, and educate potential customers, as well as drive sales. We've worked on infographics that showcase the relevance of Neonode’s touch sensor modules and our technology, highlighting the value we bring to users at various points of an airport, from the parking lot when they arrive, to moving through terminal buildings, using smart carts, elevators, escalators, digital signage, kiosks, ATMs, vending machines, and even inside aircraft. We participated in the world’s largest airport event, known as the Passenger Terminal Expo, which took place in Paris in June. We had a booth at the event with several partners and customers co-exhibiting, in addition to other partners hosting their own booths featuring various products that carry our technology. We garnered substantial interest, all of which was supported by our digital marketing campaigns and other pre-event activities. Following this event, we wish to strengthen our partnerships, an instance being our value-added reseller, MZ Technology in France, which plans to expand into the Middle East. We have recently signed a new agreement with them to broaden their operational region to include the Middle East, which I believe is a direct outcome of the attention we received at the show. We have similar signs of success with other customers and partners we met there. In the automotive sector, we are also combining digital marketing campaigns and outreach to foster interest and understanding in Neonode’s offerings. This includes focusing on driver and in-cabin monitoring, as well as all detection for head-up displays. Our efforts are generating considerable interest that we are pursuing. We have initiated work on several serious projects, thanks to the work we’ve conducted throughout the spring. Let me summarize our presentation during this call: sales and results for Q2 this year are below expectations, and we are working diligently to turn this situation around. We are tackling multiple hurdles that hinder our progress, including COVID-related lockdowns, particularly in China, Korea, and Taiwan. These regions are grappling with severe lockdowns that affect their industries and domestic markets. We observe that several customers and partners in mainland China and Korea are facing substantial survival challenges, which hampers new product launches and projects. Other markets, however, are beginning to return to normal as of August. Additionally, as Fredrik mentioned, there is a semiconductor shortage affecting several of our customers in the printer and automotive sectors, as well as those in interactive kiosks and elevators. I want to emphasize that this is not a severe issue for Neonode; we have secured an ample supply of components necessary for our production. We are working closely with Texas Instruments, who supplies the critical component used in all our licensing and touch sensor modules. Several customers in the automotive sector report challenges that have hindered their vehicle production and subsequently led to lowered sales volumes and royalty revenues for us. We are hopeful that, over the third and fourth quarters, conditions will begin to improve, given that semiconductor companies are under significant pressure to increase capacity. Many have established new plants that have started operations this summer, and there is a consensus that conditions should stabilize moving into the latter part of this year. Reports from Texas Instruments indicate that demand for their integrated circuits, only available to Neonode’s license customers, remains robust and stable, suggesting a potential rebound in demand. We also express some surprise regarding the long sales and development cycles. For some customers, this is linked to lockdowns and macroeconomic uncertainties, combined with high interest rates affecting their willingness to launch new products. Nevertheless, we have several large corporations in Asia that have developed products we have collaboratively worked on for two years now but are hesitating to launch due to concerns about the overall market conditions. Thus, we encounter various factors contributing to a slower sales pace. Nevertheless, we see stable and increasing demand for our touch sensor modules, primarily driven by growing interest in holographic display solutions across different domains such as retail, hospitality, and transportation. Many stakeholders express enthusiasm for our unique value proposition that combines our TSMs with holographic display technology, allowing us to create hovering, interactive mid-air images. For implementing these offerings, a unique holographic plate is required, and only a handful of companies produce these. However, for the touch sensor modules, customers will need to procure directly from Neonode, which is a favorable position for us. We are keen to encourage all companies to develop and sell these products aggressively. We also see growing interest, which I've previously mentioned, in our multi-sensing technology from automotive OEMs and Tier 1 customers. Although these developments are more medium- to long-term, we are very encouraged by them. I previously stated that we aim to revitalize and grow our licensing business, and I now feel even more confident that we are on the right path. We hope to announce new wins soon. Overall, we remain optimistic about our prospects for growth and improving cash flow, both for the remainder of this year and into the next year. Our growth targets remain ambitious, and we are working diligently to actualize this potential and convert it into strong revenue growth in the coming years. This concludes our presentation today, and we will now move on to the Q&A section of this event.

Thanks for that Urban and Fredrik. We’ll start the Q&A session with a few questions from my side, and then we’ll take additional questions from other analysts. Regarding your product segment, it seems that COVID lockdowns are clearly hindering your business there. Could you provide an update on your main or largest projects?

Once again, I reiterate that we operate in elevators and interactive kiosks. In the elevator sector, we had significant success in securing customers and partners developing retrofit solutions in the first years. Currently, we are seeing more than two, let’s say two major elevator OEMs developing new equipment solutions incorporating our technology; they are notably diverse. On the flip side, some of the major elevator companies are progressing slowly; they are large industry groups - meticulous in their development and testing before releasing any products publicly. Gradually, we are making headway in increasing our market share for retrofits and begin to penetrate the new equipment segment. The kiosk segment has also evolved over the past two years with retrofit solutions, but it is a far more fragmented market compared to elevators. We see both retrofit and OEM developments in Asia, and we are pleased to announce some big OEM customers are currently engaged in their own retrofits while simultaneously developing next-generation products integrated with our TSMs. Some of these customers belong to Fortune 500 or, if not, Fortune 200 categories. It’s genuinely encouraging to see the progress. For example, I recently visited clients in Japan before the summer and was quite impressed with their development efforts and future plans. We hope to motivate them to expedite these launches because if some of these prominent names introduce new products featuring our TSMs, it could positively influence our discussions with others.

Essentially, you have a broad array of customers from whom you’re awaiting conversions into volume sales?

Precisely; it’s always about focus, persistence, and hard work. Some customers are closer to launch than others, and it’s a diverse spectrum. Remember, when discussing both elevators and kiosks, the market consists of a few significant players at the top, but they tend to be slower to adapt. They conduct extensive evaluations and market trends before making substantial moves. This scenario required prior awareness; we continue pushing them to motivate action, inspire, and showcase existing examples, with strong support from our various partners, all sharing the vision of reaching our objectives together.

Moving on to driver monitoring procurements, there have been many instances where design wins are being awarded. Do you have anything to share regarding the traction you’re observing or potential design wins on the horizon?

Yes, we are late entrants to the market compared to certain competitors, so some suppliers have already been chosen. However, we perceive a second wave aligning with our strategy. Our developed software platform is very flexible, easily adaptable to distinct requirements. We can integrate driver monitoring with in-cabin monitoring and various features efficiently. Consequently, several OEM customers and Tier 1s that previously decided to go with other solutions have approached us after dissatisfaction with their previous options. This has allowed us to cultivate growing relationships and develop concepts showcasing our advantages.

Could you provide a timeframe for the procurements you’re involved in?

It varies; we believe we might land some contracts this year while also having prospects for next year. The launches will depend on product release schedules, typically extending a few years out due to the nature of the automotive industry, which necessitates development and testing of solutions in conjunction with platform launches. Nevertheless, we remain optimistic about the customer value in our solutions, which have proven to be technically robust and appealing to market needs.

Last question for Fredrik; there has been considerable macroeconomic uncertainty relating to inflation and significant currency fluctuations. How does that impact your business?

In the short term, inflation will not have a direct impact on us. We have secured inventory to produce our TSMs. That said, we could see pressure for salary increases next year as employees note inflation is high. Overall, that is not a primary concern; however, the major impact relates to currency fluctuations, as our cost base is predominantly in Swedish Krona. When the SEK weakens and is consolidated into U.S. dollars, we achieve a lower cost base, which is the principal area of effect.

So the cash you hold in U.S. dollars will last a bit longer?

Yes.

That concludes my questions for now. It appears we do not have any additional inquiries from external analysts at this time. Thank you all for watching this Neonode Q2 conference call.

Thank you.

Thank you.