Neonode Inc. Q1 FY2023 Earnings Call

Hi and welcome to the Neonode Q1 2023 Earnings Call. We will start today by an accompanying presentation by the company, followed by a presentation of the Q1 results. After that, we will continue with a Q&A session in the end. So with that said, I welcome on stage the company’s CEO, Urban Forssell. Welcome.

Thank you, Jesper. And also from my side, welcome to our Q1 earnings call. Today’s call will be managed by me and our CFO, Fredrik Nihlen. Before we start the company presentation and the main content of this call, let me go through a legal disclaimer with you. So please read the text shown on the screen and I will summarize it here. This presentation contains and related oral and written statements of Neonode Inc, 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 may also include statements about market opportunity and sales growth, financial results, use of cash, product development and introduction, 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. 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 it has been obtained are reliable. However, the company has not independently verified such information and cannot guarantee the accuracy of such information. Thank you for your patience. And with this, I would like to go through a fairly brief agenda today. I will next give a summary of the key points for the quarter. After which, I will give the word to Fredrik who will go through the Q1 financial results. After his presentation, I will come back and share some brief business updates. And after this, we go to the Q&A, which Jesper will lead from stage here. So a summary of key points for Q1. Our licensing revenues were stable in the first quarter. We conclude that the worldwide semiconductor supply shortage situation has begun to improve. Several of our customers have been hampered by a lack of semiconductors and other supply issues during the last two years, and this situation is now starting to improve. Also, our printer and automotive customer sales have stabilized. Therefore, our license volumes and our license revenues are on a good level and stable compared to previous quarters. Product sales in Q1 were below our targets. We regret it, but that is just the fact. We’ve had a slow start to the year, and we see in many markets that indeed, after the Christmas holidays and the Chinese New Year, businesses were slow. In our case, Q1 product sales were also held back because some of our key customers stocked up on a lot of products at the end of last year. They were left with high inventory levels after the fourth quarter of last year. Thirdly, we continue to execute on our strategy. The focus is to establish beachheads in the key segments we have identified, and I will elaborate more on that later. There are no major deviations or changes in strategy. We continue to execute on our strategy and the plans we laid for the year. We are currently recruiting to add talent and experience to our sales and engineering teams, and I’m glad to say that the market for recruiting new talent is quite good right now, both in Sweden and also internationally. We have made some strong recruitments recently, which we are very glad to bring on board with the team. These were the four key points I wanted to highlight here at the beginning of the presentation. And now, without further ado, I give the word to Fredrik, who will come up here and go through the Q1 financial results.

Thank you, Urban. I will summarize the financial results in this presentation. You can find more details in our 10-Q and earnings release. Total revenues for Q1 2023 reached SEK1.3 million. That is a decrease of 5% compared to the same period last year. License revenue reached SEK1.1 million. That is an increase of 4% compared to last year. As Urban said, the issue with semiconductor shortages within our customers in automotive and printer sectors has improved, and so have our revenues. Revenue from products was $0.1 million, a decrease of 31% year-on-year. Q1 is a slow quarter for us, but the customers we have have also stocked up, as Urban mentioned, in Q4 2022 when we delivered TSM student. Gross margin for Q1 2023 for products was 54%. It’s a decrease of 11 percentage points compared to the same period last year. The gross margin for products varies with the product mix, but we think the level is quite good. Operating expenses were NOK2.8 million in Q1 2023. It’s an increase of 5% compared to the same period last year, mainly due to an increase in professional fees. Net cash burn for operating activities in Q1 2023 decreased by 25% and reached NOK1.7 million. It is a combination of having bought fewer components offset by higher accounts receivable due to the timing of customer payments. As of March 31, 2023, we have a healthy cash and accounts receivable balance of NOK22.9 million. It’s an increase of $6.7 million from year-end 2022. As we disclosed in the previous earnings call, we used the ATM in January. And with that, I will leave the word back to you, Urban.

Thank you, Fredrik. And of course, as usual, you will find our detailed earnings release on our website and also through the EDGAR system at the SEC. Excuse me. Next, a brief business update. In passing, I will just mention that our vision is to transform the way humans and machines interact. We do this by licensing technology and selling sensor products. In our licensing business, we focus on printer customers and automotive customers; in our products business, we focus on elevator and interactive kiosk customers. Our key application areas that we work in are primarily driven by cabin monitoring. We also work on object detection, particularly applications for head-up displays, where we can demonstrate that our solution to detect objects sitting on top of the head-up display is very efficient, cost-effective, and in general, a good alternative for OEMs who are scaling up and prioritizing head-up displays. We are also continuing to work on touch and gesture sensing. Currently, a lot of focus is on rugged touch applications where customers have special requirements for their touch features and, for instance, require that users can operate these using gloves, even thick work gloves or similar. In our products business, we mainly discuss contactless touch today, which comes in our case in two forms: touchless interaction on displays and in front of keypads, keyboards, etc., and the other one that we call holographic touch, making holographic display images interactive. For this, our sensor products are ideal. We are also continuing to work extensively in human-machine interaction (HMI), but as we have mentioned in several earnings calls before, we are also heavily involved in machine perception. This includes camera-based software solutions to detect and track humans in video streams, underpinning our driver and in-cabin monitoring offers. We are increasing our focus on this, and we have received great feedback from several customers. We are currently collaborating with a major OEM and hope to present important news there later this year. Additionally, we have ongoing work together with a couple of Tier 1 suppliers. Our differentiator in this area is a highly scalable and flexible software platform that targets the scalability of features in vehicles. The first and current wave of RFQs focuses on driver monitoring. We can address this efficiently, and the strength of our offering is that it scales well to other types of in-cabin monitoring applications and their requirements. These include safety features and other types of features that OEM customers or Tier 1 customers want to realize. For this, our software platform is ideal. We aim to increase our efforts in marketing, sales, and engineering in this area. Recently, we launched a rugged touch product with Structube, a Swedish company making taxi meters. We have previously collaborated with them, but at the end of last year, they launched a new product line for taxi meters, which incorporates our infrared touch technology. This has been well received, and we hope to scale this up going forward. Just one example of our contactless touch technology is spreading slowly but steadily. Here is a recent implementation at Clarges, a luxury hotel in London, where now you can operate it without touching anything; for example, going to your desired floor with a wave of the hand or a finger. Please check for our marketing communications around this; there’s some very nice content. Speaking of marketing, I want to illustrate with a snapshot from our so-called Imagine Video, available on our YouTube channel. We continue to do a lot in digital marketing, with various campaigns in social media and other channels, as well as content production in both still media and live media through videos and interviews. We are also much more active in physical events compared to two years ago, especially with travel restrictions and lockdowns being lifted in China and elsewhere. In Q1, we visited various events in Asia, Europe, and North America. We focus our attendance at events closely related to our key segments: elevators and interactive kiosks for our products business, as well as automotive events for licensing. In Q2, we have several events planned in June, and for the second half of the year, we are preparing for CES and NRF shows in January in the U.S. So if you have a chance, please come and visit us at these events. We look forward to introducing you to our technology and our company. And with that, we are quickly at the bottom of the presentation. Thank you for your attention, and I invite Jesper up for a short Q&A session.

Perfect. Thank you so much for that presentation. We will move into the Q&A and first, regarding your statement that you are working with an OEM that you can’t really mention in the automotive industry. Do you work directly with this OEM customer, or is it always through the Tier 1s?

That’s a very good question. In this case, we actually work directly. I think that’s a trend we’ve been observing for several years, as you know. Nowadays, the trend of software-defined vehicles and vehicle manufacturers wanting control over software features in the vehicle is quite apparent. In this case, we are working directly. However, in other instances, we may work through Tier 1 suppliers. We also have some interesting discussions on the Tier 1 side too. Being a small company, teaming up with one or two Tier 1s would benefit us significantly due to their better relationships and resources to support different customers in parallel.

Is there a specific market of the OEMs that you target?

Yes, we have a specific plan and targets we are following, but I won't disclose them here. Being headquartered in Stockholm, Sweden, we first look primarily in Europe, then North America, and lastly, Asia. This gives you some idea of where we are focusing our efforts.

Alright. Then could you provide an update on some of your largest accounts in the products business, where they are currently at and what we should expect?

The products business is entirely different from the licensing business, as we’ve explained in previous earnings calls. We work with a large number of customers, selling standard products. While our goal is to win bigger orders, we currently receive fairly small to medium-sized order volumes, even from very large customers. This suggests that several accounts are ongoing or haven't progressed quickly, but it’s a gradual process. Expect the trend to continue; we will increase this business steadily. Don’t expect one or two big contracts to change everything abruptly. It will take hard work, and we are keen to speed this up. That's why we are making adjustments to our organization, strategy, and continuing to enhance our marketing efforts. We also work closely with partners, and a significant portion of our marketing is through collaborations with partners. However, we recognize that it can never be enough, so we continue to push forward.

Alright. I don’t have any more questions for today. So, that concludes today’s presentation.