Neonode Inc. Q3 FY2023 Earnings Call

Hi. And a warm welcome to the Neonode Q3 2023 Earnings Call. So, we’ll start with a company presentation by the CEO and CFO of Neonode, followed by a Q&A session by the Company’s analyst. So with that said, I welcome Urban Forssell, CEO of Neonode. Please take us through.

Thank you, Jesper. And welcome to our Q3 earnings call. Today’s presenters are myself, Urban Forssell, and our CFO, Fredrik Nihlén. Before we go into the main part of the presentation, please take a moment and read this legal disclaimer. I will read aloud a summary of the disclaimer. This presentation contains oral and written statements of Neonode Incorporated, the Company and its management, and 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 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. And with this, we move into the main part of our presentation. Today, we have a fairly short agenda, and we will jump right into it with a summary of the key points of this third quarter and of today’s presentation. After this, Fredrik will take us through the highlights of the financial results for the quarter. And after Fredrik’s presentation, I will give a strategy and business update. As Jesper mentioned in the introduction, he will join us again and chair a short Q&A session. Summary of key points for the third quarter and also year-to-date: Our licensing revenues in the third quarter decreased somewhat. This is due to certain customers reporting lower sales volumes for this quarter. However, year-to-date, we are on par with the same period last year. So, that’s why we say that license revenues for the full year so far have been stable at the same level as last year. Product sales improved in the third quarter, and we are obviously grateful for this, as it proves that our increased level of activity and focus on pushing through sales and closing deals is paying off. However, the slow start in the first two quarters this year means we are below targets for the first nine months. As we have discussed in previous earnings calls, we continue to adjust and sharpen our strategies and tactics to improve our sales performance. We are not satisfied with our performance to date, and we are working hard to improve on that. We are also encouraged by the interest level we get from new and existing customers. So, although this quarter was similar to the previous quarter, we have a very optimistic view of the future. We continue to believe that we are on the right track and that we have a team in place that can turn this business around and create growth and also improve our cash flow significantly in the coming years. With these three points as a summary, I will hand over to Fredrik, who will take us through the financial results summary for this third quarter.

Thank you, Urban. You can find our 10-Q and earnings release on our website, neonode.com under the Investors section. I will just summarize the key points. Revenues for Q3 were $1 million, which is a decrease of 18% compared to the same quarter last year. License revenues were $0.8 million for the third quarter, a decrease of 20%. This is due to lower sales volumes at our customers. Year-to-date, license revenues are at the same level as 2022, as Urban said. Revenues from products were $0.2 million in Q3, an increase of 5% compared to the same period last year. We maintain our focus on certain sectors and increased activities within sales and marketing. The gross margin for Q3 2023 for products was negative 39%. This is due to a one-time effect of costs in Q3 2023 from some customer claims. If we adjust for that, we are at 48% in Q3 2023, which is at the same level as the same quarter last year. Operating expenses were $2.2 million for Q3 2023, an increase of 6% compared to the same period last year. It’s mainly due to increased activities within marketing and sales. We had $1.8 million in net cash burn from operating activities for Q3 2023, an increase of 272%. We have two explanations for this. In Q3 2023, we purchased components for our production unit, and we didn’t do that in Q3 2022. Additionally, Q3 2022 is exceptionally low due to a currency effect we accounted for in that quarter. We have $19.4 million in cash and accounts receivable as of September 30, 2023. This is an increase of $3.1 million from the year-end of 2022. So, we are still stable on the cash front. With that, I will hand the word back to you, Urban.

Thank you, Fredrik. Let me first talk about what we do with the interactive kiosks, particularly holographic display applications, which are very interesting. Shown here in the picture is a type of queuing kiosk deployed in a government office in Seoul, South Korea. This kiosk is manufactured by our customer, Marketon, which also has a whole range of similar products that allow people to sign up for a queue and receive a ticket while waiting for the next clerk to become available in a touchless manner. This is just one example. We want to highlight that interactive holographic displays are a notable application where our touch sensor modules fit very well. The combination of holographic display and our touch sensor module technology is a perfect one, allowing us to make these types of holographic images interactive using our touch sensor module technology. We have many customers, especially in Asia, but also in France, who are very active in this space, working with information kiosks, ticketing kiosks, payment terminals, ordering terminals, and other types of interactive kiosks. We continue to be very active here and support our partners in China, South Korea, Japan, and France. Another interesting area where we have considerable efforts is MedTech, where touchless interaction for MedTech devices is something we are promoting. An example of a machine we retrofitted with a touch sensor module unit allows for touchless interaction with the control panel. For this type of industry, it’s very interesting as it avoids any risk for cross-contamination. The machine shown here is used for DNA testing, for instance, to check for various diseases or doping controls. In these laboratories, cross-contamination is a significant problem that costs considerable amounts each year to manage. Here, we offer them a completely different and intelligent solution to avoid any risk for cross-contamination with operators of these machines. We have presented this at other events and during direct customer meetings, and it has been very well received. We continue to push in the MedTech sector, starting with analytical instruments, but we also see potential for our touchless solutions in other MedTech devices. Our technology supports rugged touch, enabling operation with gloved fingers or stylus pens, which is appreciated in clinical and hospital settings. Our optical touch technology, zForce, also supports touch on any surface. Combining interactive kiosks and MedTech with touch on displays, we can uniquely offer the ability to touch outside or beside the display surface. In a vehicle example shown here in the center console, you have a traditional infotainment screen above, with a touch panel below. Our optical touch technology fits well for applications that allow you to use your finger to input commands such as writing an airport name, enabling the navigation system to guide you appropriately. We are active in these areas and see significant potential for this technology. Furthermore, the same basic technology can be applied for passive or reactive object detection, particularly in Head-Up Display (HUD) Obstruction Detection. We observe market trends where more vehicle manufacturers are changing the interiors of vehicles and may remove traditional instrument clusters, instead opting for head-up displays as the primary information display. HUDs project an image onto the windshield, showing essential information in front of the driver, which holds safety advantages by allowing the driver to keep their eyes on the road. However, if there's no backup of a traditional instrument cluster, it’s critical to avoid obscuring the displayed information. Thus, we are developing solutions to detect foreign objects that may fall onto the head-up display surface, which is generally located low on the dashboard. As a driver, objects such as parking tickets may become invisible, potentially obscuring critical information like speed readings or warning signs. This application area is very interesting for us, and we are seeing positive responses from several Tier 1 suppliers offering head-up displays to OEMs, particularly premium manufacturers in Europe. We are excited about our opportunities here. Additionally, we remain optimistic about our prospects in the expanding driver monitoring market. Our solution is very generic, addressing both driver and in-cabin monitoring, offering a flexible and scalable platform with efficient algorithms. We are in advanced negotiations with several customers; some have previously chosen other DMS solutions but are now refocusing and interested in our flexible platform. We believe we have a good chance to enter this second wave and offer our solution to both existing DMS customers and new entrants. These solutions could encompass features such as comfort adjustments, safety measures, and controlling augmented reality HUD systems based on driver behavior. Our platform is ideally suited for this type of scalable architecture and continuous feature growth, supporting over-the-air updates. We have increased our marketing and sales activities over the last two years, emphasizing our efforts to improve sales performance. Within the last quarter alone, we participated in several automotive and MedTech events, some as exhibitors and others with partners. An example is the solution from our French customer, MZ Technologie, which we showcased at the Vendtra show in Munich. This touchless solution for displays and buttons was very well received. Looking ahead, we are preparing for events like the CES show in Las Vegas in January and the World NRF Show in New York for the retail industry. If you are around, please join us at our booths, or stay tuned for online content from the events. We have many exciting developments underway and hope to announce some new business wins soon. This concludes our presentation, and now we will transition to the Q&A session.

Great. Thank you so much for that presentation. So, we’ll start with the automotive industry and what’s happening in the procurements around DMS and the HUD offering. In the last conference call, you didn’t promise, but you sounded very optimistic about being able to announce perhaps a design win before the end of Q3. Could you just talk about the development and what you see?

We are still optimistic. To be honest, we have experienced slight delays in a couple of cases. It’s not our fault; these are complex deals that are also multiyear in nature. In some situations, we deal with large OEMs that have multiple brands and global operations. There are many interested parties involved, and thus, these processes can take longer than expected. In some cases, we are working with even larger Tier 1 system suppliers, where decisions may be centralised in Germany or Japan, depending on where their headquarters are. These corporations are substantial and require time to process decisions.

Okay. So we shouldn’t interpret this as having been won by any other player?

No. Our main opportunities in this space are still in play, and we believe we are in a good position. I want to clarify that we are addressing passenger car OEMs, commercial vehicle OEMs, and Tier 1 system suppliers. We have a global reach, with interesting discussions occurring in Europe, North America, and in specific cases in Japan, South Korea, and China. These dialogues are in various stages, but we remain very optimistic about entering this dynamic market. I know you are an expert in following different companies active in this area. We are executing our strategy differently; some customers are entering a second round of sourcing and have gained experiences from their initial projects. In some cases, they may not have had a perfect experience with other solutions or suppliers, which provides us a chance to enter in this phase.

How would you compare the feedback from the OEMs or the interest from the OEMs and the Tier 1s regarding the HUD offering versus DMS? Do you see any difference?

One significant difference is that DMS is driven by regulatory requirements in Europe, while in other markets, it’s often driven by comfort or branding. We anticipate similar DMS regulations will also arise in the U.S. and China, though they may not be identical to European standards. Some manufacturers in these markets want to implement strong solutions before, for example, NHTSA releases new federal safety standards related to DMS. The head-up display, however, is not directly influenced by legislation. As I mentioned, without a backup such as a traditional instrument cluster and relying solely on the head-up display, manufacturers cannot sell their vehicles without safety assurances that critically important information is displayed to the driver. This is where we see our opportunity. Some OEMs are moving in this direction, aiming for a different look and feel for vehicle interiors, which aligns with the ongoing trend of electrification. The design choices have been influenced by companies like Tesla, prompting a rethink about traditional automotive interiors. A long-standing trend has pushed for larger and larger screens, but there’s a growing realization that significant cost savings could be achieved by relying more on head-up displays. This could ultimately lead to a reduction in design complexity and costs. Automotive is a dynamic industry, and while the sales cycles are lengthy, developments take time. The last two to three years involve a development phase, followed by new solutions entering production, which is when we can start to earn royalties. Automotive remains a vital sector for us as we've been active in this field since 2012, and have licensed our technology to over 7.5 million vehicles, soon approaching 8 million. We aim to significantly increase this figure through DMS offerings and other initiatives such as Head-Up Display Obstruction Detection.

One question for you, Fredrik. It seems you are shifting focus more toward the automotive industry, possibly less on product sales. How does this affect your cost base now and in the future? What do you foresee?

We see that we’re refocusing our current business toward automotive. It’s not that we are expanding our cost base; rather, we are re-aligning it with our future objectives. However, if we receive positive news, we will need to expand accordingly.

Yes, for the engineering part of the implementation.

That’s all of my questions. Do we have any other questions from other analysts? No, we have no other questions. Thank you so much for coming here, and good luck going forward.

Thank you.

Thank you.