Earnings Call Transcript - NEON Q4 2020

Operator, Operator

Hello, everyone. Thank you for standing by, and welcome to Neonode’s Fourth Quarter 2020 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. 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.

David Brunton, Head of Corporate Investor Relations

Welcome, and thank you for joining us. On today’s call, we will review our fourth quarter and year-end 2020 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest. On today’s call is our CEO, Dr. Urban Forssell. CFO, Maria Ek; and Vice President of our HMI Products business unit, Johan Swartz; and Vice President of our HMI Solutions business unit, Jonas Wærn. Before turning the call over to Urban, 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 and may involve or be subject to risks, uncertainties, and other factors that may affect Neonode’s business, financial position, and other operating results, which include, but are not limited to, the risk factors and other qualifications contained in Neonode’s annual report on 10-K, quarterly reports on 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 obligation to update these forward-looking statements. At this time, it is my pleasure to turn the call over to Urban. Urban, please go ahead.

Urban Forssell, CEO

Thank you, David, and welcome, everyone, to our fourth quarter earnings call. I would like to start this presentation with a short summary review of our general strategies and business the last year. So it was a very interesting and busy year for me personally as well as for Neonode. We decided on a new direction for the company and developed radically new strategies that we started executing on. Compared to Neonode’s previous notice of branding, the new strategies include several changes. For instance, 100% focusing on B2B organization of our business activities into three separate business areas and a more outward-focused strategy to leverage existing technology and apply it to new application areas. To support and drive the changeover, we also recruited several strong team members, both to our headquarters in Stockholm and internationally. In parallel to all this change work, we continued to support existing customers and innovate and improve on our different technology platforms, which kept us busy. And then came the COVID-19 pandemic. This has given us some definite headwinds that we had to navigate but also opened up new possibilities for us to use our existing technology and know-how for very attractive, easy-to-use, and value-adding contactless touch solutions. Coming out of 2020 and heading into 2021, we are, therefore, well-positioned to capitalize on current and future opportunities. We have a very good team in place, a strong technology and IP portfolio, a well-recognized brand, an extensive global ecosystem of partners, and an impressive and growing list of customers. Now during 2021, we will continue to execute on our strategies, and we will continue to build our business pipeline. We are very much encouraged by the feedback we have received from customers and partners in our ecosystem. With this as a short opening statement, I would like to hand over to Johan Schwartz, who will give an update regarding our business in HMI Products. Johan, please.

Johan Swartz, Vice President, HMI Products

Thank you, Urban. My name is Johan Schwartz, and I head up one of Neonode’s three business areas called HMI Products. This business area is focused on sales of standardized sensor modules suitable for touch on display or any surface, as well as in-air, i.e., contactless touch and gesture sensing. Our sensor modules are easy to integrate and ideal for both new designs and repetitive solutions. Being placed along only one side of the display or surface enables a high level of design freedom and superior customer experience, and are, of course, completely churn-free. Production is located on the West Coast of Sweden with high-volume capability. Although we have a legacy in B2C and medical industrial segments in B2B, we have, on the back of the pandemic, decided to refocus on two selected main segments with a focus on contactless types. The elevator segment has an installed base of 17 million units globally with an estimated CAGR of 4.5% until 2026. Secondly, interactive kiosks with an installed base of 39 million units globally and an estimated CAGR of 9.1% until 2027. To efficiently address all segments on the market brings you from the broad market at the bottom of the pyramid to the large OEMs at the top. Sales distribution and system integration are managed through a global network of distributors, value-adding partners, and sales representatives along with direct sales. Signing up a new channel partner is not a guarantee for success, but it is certainly a prerequisite to scale. Over the past six to seven months, we have signed up nine new demand-creating value-added resellers and distributors, each one with an active sales force on their own, giving us an extremely strong platform for sales execution going into 2021. On average, each of those partners has four to five salespeople working on somewhere between 15 to 20 opportunities per partner, somewhere between 150 and 200 opportunities in total. For example, FineTek, one of our partners in South Korea, has been prototyping and is currently in final testing with several major elevator OEMs in the South Korean market, with deployment expected to start during Q2 2021. Japan Aerospace, one of our partners in Japan, has completed several proof of concepts associated with both self-check-in, self-baggage drop kiosks at airports, and self-checkout kiosks in grocery and convenience stores. Also here, initial rollout is expected during the second quarter 2021. These partners are certainly spearheading the deployment of contactless touch solutions and devices, but Europe and North America are not far behind. For example, a UK-based leading supplier of components to the global elevator market has recently launched a contactless elevator control panel for existing and new elevator installations. This solution is marketed and sold in Europe and beyond from the beginning of 2021. Furthermore, a manufacturer of touch solutions for Burger King and other quick-service restaurants in France has piloted a contactless sales ordering system in Paris. This solution is extremely adaptable, ideal for retrofitting on existing kiosks, and has been marketed and sold in Europe from the beginning of 2021. Finally, a world leader in call handling solutions has announced a contactless self-service solution for under-ten terminals with an NFC reader. This solution is marketed and sold initially targeting the U.S. market.

Urban Forssell, CEO

Okay. Thank you, Johan. A short quick overview of the business area, HMI Products. I now want to introduce Jonas Wærn, who will present an update regarding HMI Solutions. Jonas.

Jonas Wærn, Vice President, HMI Solutions

Thank you, Urban. My name is Jonas Wærn, and I head up the business area called HMI Solutions. We consultatively and strategically work with our customers in delivering highly customized solutions. We focus on owning the relationship with our customers and almost always work directly together with them. Within Neonode and especially within HMI Solutions, we are actively moving to higher-value markets for mission-critical products and systems. The focus is on military and avionics and rugged industrial applications. We engage where our quality and technology fit better with the changed market landscape. In short, we are engaging where we can delight our customers and bring added value to the marketplace. So why are we good? In short, high-quality and rugged design are clear advantages when benchmarking, and the customers are very interested. We enjoy and constantly improve and sharpen the legacy of Neonode’s two decades worth of innovation and technological advancements, counting 120 patents, ensuring high quality and stable operation in demanding environments. We see these two segments here, military and avionics and industrial, as a good complement. Military and avionics are high-margin markets exposed to critical decisions, usually with fairly long sales cycles. As you can see, they have attractive CAGRs and attractive total available markets as well. They guarantee long revenue cycles of five to ten-plus years. Our plan of attack involves obtaining confirmation from the market of this new strategy. Recently, we signed a deal with a major U.S. defense contractor using Neonode’s technology for glass cockpit displays in private jets. About 80% of the market within military avionics is in the U.S. We are very happy to welcome new resources and colleagues from this business area as well as covering major players in Europe. Lastly, Neonode will always maintain room and interest to work opportunistically. We receive interesting ideas from major and minor companies around the world with diverse applications. We evaluate them using the tactic: fail fast or scale fast, implementing better systems and market know-how to quickly assess whether an opportunity is of interest or not.

Urban Forssell, CEO

Thank you, Jonas. I will now provide an overview of our three areas by discussing Remote Sensing Solutions. In Remote Sensing Solutions, we work on driver in-cabin monitoring for automotive, which is a rapidly growing area attracting interest from many new players as well as well-established companies. We are developing an AI-based software platform called multi-sensing, which we currently market towards automotive OEMs and Tier 1 system suppliers. In multi-sensing, our customers can create efficient and cost-effective, yet high-performance driver in-cabin monitoring systems. The main market drivers for these types of systems are safety, and features or systems that increase safety for the driver and passengers are crucial. Many drivers are distracted; they text on their phones, look out the side window, or are simply not paying attention. This is where driver in-cabin monitoring can play an important role. Additionally, we have advanced passive safety features like adaptive deployment of seat belts and airbags. The EU's General Safety Regulation mandates that DMS becomes mandatory by 2024. Similar legislation is also being planned in the U.S., China, and other markets, and we see strong interest from customers about comfort and personalization features, where monitoring persons in the cabin opens many possibilities.

Maria Ek, CFO

Thanks, Urban. You can find our 2020 full-year earnings release and 10-K available for download from the Investors section of our website. I would like to start out with a summary of our revenues. We had a strong fourth quarter 2020 with $2.4 million in total revenues compared to $1.5 million in the previous quarter, and $1.6 million in the fourth quarter of 2019. The increase from the previous year is mainly driven by product sales and non-recurring engineering services within military and avionics. We also see some of the expected rebound in license revenues in the fourth quarter. Total revenues for 2020 were down by 10%, from $6.6 million in 2019 to $6.0 million. A growing part of our revenue is derived from product sales within our HMI Products business area. Our business HMI Solutions generated revenues of $1.9 million in the fourth quarter of 2020 compared to $1.2 million the previous quarter and $1.4 million in the fourth quarter of 2019. The majority of our revenues within this business area is still earned from our print and automotive customers. Our intense work with customers in military and avionics is also starting to yield positive results. Revenues for the full financial year 2020 within the Solutions business area decreased by 17% from $6.0 million in 2019 to $5.0 million in 2020, largely related to the pandemic and the economic slowdown associated with it. Our license customers shipped 1.1 million devices during the fourth quarter 2020 and a total of 5.0 million in 2020. The gross margin for HMI Solutions was 87% for the fourth quarter 2020 compared to 100% in all other quarters of 2019 and 2020, due to considerable non-recurring engineering projects delivered in December. Our business area HMI Products generated revenues of $0.5 million in the fourth quarter of 2020 compared to $0.3 million in the previous quarter and $0.2 million in the fourth quarter 2019. A major part of the products was shipped through our distribution partners in the U.S. and China. Revenues for the full financial year 2020 within the product business area increased by 67%, from $0.6 million in 2019 to $1.0 million in 2020, driven by the demand for contactless touch solutions. We shipped approximately 28,000 sensor modules during 2020. Operating expenses for 2020 were $11.1 million compared to $11.7 million in 2019. This is a decrease of 5% compared to 2019, despite one-time costs in 2020. The net loss in 2020 was $5.6 million or $0.56 per share, compared to a net loss of $5.3 million or $0.60 per share in 2019. Lower license fees during the first half year required us to take actions like reduced working hours for our Swedish employees. However, we have growing interest for our sensor modules and the contactless touch functionality they offer. Net cash used in operating activities during 2020 was $2.2 million higher than during 2019, primarily due to the increase in net loss. Cash and cash receivables stood at $12.2 million as of December 31st, which is a robust position allowing us to continue to execute our business strategy. Now I would like to hand you back over to Urban for some closing remarks.

Urban Forssell, CEO

Thank you, Maria. To summarize and wrap up our presentation here today, I would like to highlight the following: Our patented zForce technologies and enabling technology are ideally positioned to address the lifestyle shift towards contactless touch solutions brought on by COVID-19. There is a high demand for these types of contactless touch solutions, representing an enormous market opportunity to integrate Neonode's technology into both new and retrofitted equipment, such as in interactive kiosks and elevators. We also see significant interest for our zForce and multi-sensing technologies from customers in military, avionics, rugged industrial, and automotive sectors. We feel that we are well positioned to accelerate growth and capitalize on current and future market opportunities. We look forward to providing you with further updates in the upcoming earnings calls, and we thank you for joining us today. Before closing, I’d like to highlight a few other things. First, you can join us again tomorrow for a U.S. webinar. Please sign up on our homepage and learn about our steps towards contactless touch interaction. Participation is free; however, registration is required. Also, we will soon be launching a new website, replacing the current one at neonode.com. Be sure to check in regularly for updates. Lastly, Neonode celebrates its 20-year anniversary this year. Follow us on social media, and visit our website for updates. I will now turn the call over to David for Q&A.

David Brunton, Head of Corporate Investor Relations

Thanks, Urban. We will open the Q&A now from our covering analysts. If you have a question, please proceed.

Tyler Burmeister, Analyst

Hi guys, this is Tyler on behalf of Christian. Congrats on the strong end of the year, and thanks for allowing me to ask questions. First, I was hoping for any color on Q1. Directionally, is that shaping up to possibly be down sequentially after the strong Q4, or could Q1 maintain flattish levels over $2 million in revenue? Any insight on Q1 would be great.

Urban Forssell, CEO

We are seeing a little bit softer sales beginning, especially in January, coming out of the holidays. But the overall activity level is increasing. So I cannot give you any specific guidance for actual numbers in the first quarter, but the activity level is much, much higher than last year. We are quite confident that sales will grow significantly this year compared to 2020.

Tyler Burmeister, Analyst

That is great. That leads into my next question too. You expect 2021 revenue to be up significantly, so we are looking for future growth. Should we expect a material inflection of growth this year?

Urban Forssell, CEO

You have to back up two years to 2019 and check Neonode’s product sales compared to 2020. It was already up a lot. Our aim is much higher for this year. We have been building our business pipeline and strengthening our ecosystem. Several of our value-added partners and demand-creation distributors are very active and managing many opportunities in parallel. We expect to see business develop further this spring and throughout the year. We are confident that 2021 will be a breakout year for us, and we believe it will continue into the next few years, as there is a lot of product development and validation required. We are making steady progress with a good pace and strong traction.

Tyler Burmeister, Analyst

Great. That is very helpful. Lastly, regarding your work with your partner to monetize your patent families related to older smartphone technology, is there any update on that?

Urban Forssell, CEO

The short answer is no. We entered into an agreement with Aequitas Technologies LLC, where we transferred the rights to some of our old patent families to them. They have the option to try to monetize those patents, and if successful, we will share in the returns. We are not part of any litigation or process, as this is being run 100% by Aequitas. I advise you to contact Aequitas for an update, as we cannot provide much information.

Viktor Westman, Analyst

Thank you. I have a question for Johan about purchasing behavior in HMI Products. How much of it is centralized, and how much is decentralized in different segments like retail and airports?

Johan Swartz, Vice President, HMI Products

It varies a lot between segments. In the quick service restaurant market, for example, purchasing behavior can differ drastically, some centralized and some decentralized. In airports, it also depends if the kiosks are owned by the airline, the airport, or third parties, so it is difficult to provide a straightforward answer.

Viktor Westman, Analyst

Thanks. That is helpful. I have another question for Jonas about your military customer—what potential do you see to leverage into other adjacent applications?

Jonas Wærn, Vice President, HMI Solutions

This is an initial prototype project. We plan to ensure excellence there and then take it into a few major projects. While I cannot divulge specifics, we aim for both military and commercial avionics applications, where volumes can be much larger. We will map out and maximize our engagement in these markets.

Viktor Westman, Analyst

Great, just one last question for Urban. How do you prioritize the leads among the many opportunities?

Urban Forssell, CEO

We organized our business into three areas, each working in a structured manner. HMI Products focuses regionally with area sales directors covering specific countries. HMI Solutions relies on direct sales, engaging large account management. Our Remote Sensing Solutions team, with support from a German sales partner, is also making swift market penetrations. Each business area follows clear strategies and execution plans, ensuring that we stay focused and constantly review our progress.

David Brunton, Head of Corporate Investor Relations

Thank you, Urban. That concludes the Q&A session. We appreciate your participation today and encourage you to join our upcoming U.S. webinar. Thank you for joining us today.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.