Neonode Inc. Q2 FY2023 Earnings Call

Hi, and welcome to the Q2 2023 Earnings Call for Neonode. We will start with the company presentation and a walk-through of the financial results by the company's CEO, Urban Forssell; and CFO, Fredrik Nihlen. So then we will have a Q&A session, in which the company's covering analysts can ask their questions. So with that said, I leave the word over to Neonode and CEO, Urban Forssell.

Thank you very much, Jesper. And from me and Fredrik here, welcome to this earnings call. I don't see the presentation now, so I don't know where we are. Thank you. Today's presenters are me, Urban Forssell, I'm the CEO of Neonode, and with me here today, Fredrik Nihlen, our CFO. Before we go into the main part of the presentation, I would like to summarize the following legal disclaimer. This presentation contains oral and written statements of Neonode Incorporated, 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, sales growth, financial results, use of cash, product development 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, level 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. Some 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, we move on to the presentation. We have a short agenda. Today, we're going to keep this call fairly short. I will start the presentation with a summary of the main points from the second quarter. After this, I hand over to Fredrik, who will summarize the financial results for the second quarter. After this, I will take you through a short business update before Jesper comes back and leads a Q&A session. So with that, I go into the summary slide. A summary of key points in Q2 for Neonode. Licensing revenues were stable. We clearly saw that the previous supply chain issues with semiconductors have been resolved or at least the situation has improved greatly worldwide. This is a factor, and another factor is that our printer and automotive customers' sales have been strong or at least stable. This is very good for us, and hence, our licensing revenues were stable in the second quarter. Product sales revenues were low and clearly below targets and also below expectations, I can admit. Overall, there is weaker customer demand but also in some cases, where we actually have a good relationship with customers who are developing or have developed new products incorporating our sensor modules, several of these projects have been pushed out into the future, which, of course, affects our sales in that quarter. As a consequence of these results and also the sales results in the first quarter of the year, we are adjusting our strategies and tactics to improve sales in the coming quarters. We have started to focus more strongly on certain key geographical markets and segments. We are also intensifying our marketing efforts and fine-tuning our product portfolio and our customer offering to deliver more customer value. We believe this will clearly improve our sales performance in the coming quarter. Even though the product sales in the second quarter were slow, I still believe we can turn this around and that this is a very interesting business for the future. With these summarizing points, I would like to hand over to Fredrik.

Thank you, Urban. You can find our 10-Q and earnings release on our website, neonode.com, under the Investors section. In this presentation, I will summarize the key points. Revenues for the second quarter of 2023 were $1.2 million, which is a decrease of 5% compared to the same quarter last year. Revenues from licensing were $1.1 million, an increase of 15% compared to the second quarter of last year. As Urban said, this is thanks to the demand for our customers' products within the print and automotive industry still being strong. Our revenue from products was $0.1 million for the second quarter of 2023, a decrease of 60% compared to the same quarter last year. This decrease is also due to low demand from customers and delayed launches. Low volumes yielded a high gross margin for products, 67% for Q2 2023, which is 11 percentage points higher than the last year. With increased volumes, the gross margin will decrease. Operating expenses were $2.8 million for the second quarter of 2023, a decrease of 2% compared to the same quarter last year. The main reason is lower personnel and related costs. Net cash burn from operating activities was $0.6 million for the second quarter of 2023, an improvement of 79% compared to the same quarter last year. This is mainly due to lower purchases of components and the timing of customer payments. As of June 30, 2023, we had $21.6 million in cash and accounts receivable. With that strong cash position, we will continue to execute our strategy. With that, I will leave the word back to you, Urban.

Okay. That brings us to a short business update. Those of you that have followed us for some time know that in our product business, touchless solutions exemplified by a holographic control panel for elevators are one of the key focus areas for us. We see quite some interest here, not least in Asia—mainly China, Japan, and South Korea—where we have the most activity, customers, and partners. In Europe, here is an example of a recent installation together with our partner Dewhurst from the UK. We see that this type of touchless elevator control panels are gaining traction and drawing a lot of attention. For instance, a luxury hotel, the Maybourne Riviera, has installed contactless controls from Dewhurst in all of their elevators, which have reportedly been very well received. Recently, we also joined the World Elevator Expo in China, and together with various partners, our booth was very well visited, and the feedback we received from several large and medium-sized OEMs who came to explore our solutions has been very positive. For elevators, we clearly see a market for this type of touchless or contactless operating solutions that we can offer with our touch sensor modules. The other main segment or sector that we focus on is interactive kiosks. Here is one example of a new cooperation with a French company, MyScript, experts in handwriting recognition. They have developed solutions incorporating our touch sensor modules, in particular for handwriting recognition solutions, including a holographic display where you sign in or out of a hotel by writing your signature on the holographic image. They also have other solutions related to normal displays, not just holographic displays. This is just one type of kiosks, and we have examples of other customers and partners doing similar solutions for retail, transportation, ticketing, and vending machines. There is still quite a lot of interest in this, especially in Asia, but also in Europe, where we see considerable demand for our solutions. I want to highlight NXO, a large electronics company from South Korea that has been a customer for the last couple of years. Earlier this year, in Q2, we signed a new value-added reseller agreement with them. They work with smart home products like the mirror we see here, but also other types of kiosks and retrofit kits for various products. We are very happy with this collaboration and believe it will help us grow our market share and sales volume, particularly in South Korea. We are also working a lot today on rugged touch solutions, using our touch sensor modules, allowing operations even while wearing thick gloves for protection. We see much interest here in Europe and other markets for this type of solution. There are customers interested in our touch sensor modules to create both retrofit and new equipment solutions, as well as customers wanting to license our technology for bespoke solutions. I would say roughly 50% interest is from customers wanting rugged touch solutions and the other half is for licensing our technology. Another area we are focusing on is MedTech, where advanced machines are increasingly needing robust interfaces suitable for doctors and nurses in surgery rooms or clinics. Our infrared technology allows us to replace physical buttons with virtual ones, greatly reducing costs while maintaining robust interfaces. We propose to many MedTech companies the option of touchless interfaces, which has been well received. Clearly, MedTech will remain one of our focus segments moving forward. Additionally, we have considerable interest from commercial vehicle and off-highway customers. Operators in trucks or construction sites often have thick gloves on while wanting to operate touch displays. This presents a compelling case for our technology. We have participated in various events showcasing these solutions and have generated many leads that we are now working to convert into business. Moving to our licensing business, we have talked before about our strong focus on object detection. An interesting application area is head-up display obstruction detection. Foreign objects in the cabin may obscure the projected image of critical information for the driver, which can lead to serious issues. Automotive manufacturers are increasingly considering head-up displays over traditional instrument clusters for better ergonomics and safety. We believe that the head-up display market will explode in the coming years, especially with strict safety requirements in automotive. We are collaborating with several Tier 1 suppliers now, and we hope to win our first major businesses in this segment soon. Another important area we are working on is driver and in-cabin monitoring, where we have developed an innovative software platform that can create both driver monitoring features and other monitoring capabilities efficiently. We have received excellent feedback from the market, and we anticipate achieving major breakthroughs shortly. Both driver monitoring and head-up display obstruction detection remain key focus areas in our licensing business, with the automotive sector being our main target. To wrap up this overview, we are currently increasing our marketing efforts. I wanted to show you some of the physical events we attended in Q2 across China, Europe, and North America. These events have generated valuable prospects and leads that we are working to convert into new businesses. For Q3, Q4, and further into next year, we will certainly continue to intensify this work. We look forward to meeting new customers at various events in Europe, North America, and Asia, and we will be attending the CES 2024 show in Las Vegas in January. We hope to see you there and show you our innovative solutions. Thank you very much. This concludes our presentation, and we are now heading into a short Q&A session with our analysts. Over to you, Jesper.

Great. Thank you so much for that presentation, Urban and Fredrik. I’ll start with some questions from my side. First, an update on automotive. It seems like you’re seeing some strong traction, especially in the head-up display offering. I want to ask about competition there because I know some of the DMS suppliers, but what do you see as the main competitors for your head-up display offerings? Do they have similar technology as you, or is it a different one?

In that area, competition mainly comes from the Tier 1s, meaning the head-up display manufacturers. Some of them have prepared similar solutions based on infrared technology, while some have tried to use time-of-flight sensors and cameras. The downside is the performance of those solutions is very poor, and some of the OEMs leading this new focus on head-up displays have disqualified these alternatives due to their subpar performance. Therefore, we are well-positioned here with an advanced yet cost-effective solution. The primary competition would come from camera-based solutions. In the future, we may see more competition, but it will depend on whether vehicle manufacturers and Tier 1 suppliers want to add that level of complexity for a single application. We are in a strong position, competing with our customers—the Tier 1 suppliers—and head-up display manufacturers.

Is it only the premium segment that you’re seeing interest from, or is it also the volume segment?

Currently, this is primarily in the premium automotive segment. It's about timing; as manufacturers evaluate the economics, they will see a clear cost advantage in using only head-up displays versus traditional, larger displays for dashboards. Therefore, we are excited about this opportunity. However, I want to emphasize that we have equally high hopes for our driver and in-cabin monitoring software platform. Despite being a latecomer to this market, the feedback and resonance we have received from customers are very encouraging, and we hope to surprise both our competitors and customers unfamiliar with our offerings in the future.

Regarding product sales, this is obviously a continuous disappointment for you, yet you continue to invest additional efforts, which is negative for the burn rate. How do you think about capital allocation in general? How long can you permit prolonged efforts in this area without results?

Yes, I see your point, and I can confirm that this has been a topic of discussion for us for several years. We have been diligently trying to establish and build up a new business here for touchless interfaces. While we possess good technology for this, it is a challenge to navigate a new market where we may be key drivers. Thus, we need a balance—being persistent while also seeing results. We cannot do this indefinitely; hence we are taking steps to adjust our capital allocation. We are shifting more towards the licensing business, which we have already started doing. We will continue to refine our strategies in this regard and discuss updates in the next earnings call. I assure everyone that we are highly conscious of the need to see profitability and are actively working to address this issue.

Thank you so much. That's all from me, and I’m checking to see if we have any other questions from the other analysts. Let me see for a few seconds. Nope. We do not. I am very satisfied with all the answers, so I leave the word back to you, Urban, for some closing remarks.

I will be very brief. Thank you for joining this earnings call, where we presented the financial results for Q2 for Neonode and reviewed strategic highlights and a short business update. Thank you very much and have a nice day.