Earnings Call Transcript - NEON Q1 2022

Operator, Operator

Hello, everyone. Thank you for standing by, and welcome to Neonode's First Quarter 2022 Earnings Conference Call. [Operator Instructions]. At this time, for opening remarks and introductions, I would like to turn the call over to Urban Forssell, Neonode's CEO. Urban, please go ahead and start the conference.

Urban Forssell, CEO

Welcome, and thank you for joining us. In today's call, we will review our first quarter 2022 financial results and provide a corporate update. Our update will include details about our business strategies, customer activities, and other items of interest. Joining me on today's call is our CFO, Fredrik Nihlen. Fredrik will present the financial results of the company for the first quarter of 2022. After this, I will come back and comment on overall strategies, customer activities, and other operational topics. Before we proceed with the main part of the presentation, I'd like to read the following legal disclaimer. This presentation contains and the related oral and written statements on Neonode Inc. and its management may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 introductions, regulatory matters, and sales efforts. Forward-looking statements are based on assumptions, expectations, 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. These uncertainties and risks include, but are not limited to: our ability to secure financing we need on acceptable terms; risks related to new product development; our ability to protect our intellectual property; our ability to compete; general economic conditions, including, as a result of the ongoing COVID-19 pandemic or geopolitical conflict such as the war in Ukraine; as well as other risks outlined in the filings of the company with the U.S. Securities and Exchange Commission, the SEC, under the Securities Exchange Act of 1934 as amended, including the sections entitled risk factors and management discussion and analysis of financial condition and results of operations. 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 undertakes 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. At this point, I would like to turn the call over to Fredrik, who will review the financial results for the first quarter. Fredrik, please go ahead.

Fredrik Nihlen, CFO

Thank you, Urban. You can find our first quarter 2022 earnings and 10-Q with the details of financial performance during the first quarter of 2022 available for download from the Investors section on our website, neonode.com. In the interest of time, I will only summarize the key comments here. Our total revenues for the first quarter of 2022 reached $1.3 million. That is a decrease of 21% compared to the same period in 2021. License revenues for the first quarter of 2022 were $1.1 million compared to $1.3 million for the same period in 2021. The decrease is primarily the result of component shortages within the printer and automotive markets related to the COVID-19 pandemic, which, in turn, impacted our license revenues for the first quarter of 2022. Product revenues for the first quarter 2022 were $147,000, an increase of 20% compared to the previous quarter. In the first half of 2021, we saw an increase in product sales. In the second half of 2021 and continuing into the first quarter of 2022, our sales were negatively impacted due to COVID-19-driven lockdowns in Asia. Our elevator and kiosks customers in Asia have been first adopters of our contactless touch technology and, as expected, most of our initial TSM sales are related to retrofit solutions technology and are more limited. New customer equipment launches can take 6 to 18 months or even longer before a customer is ready to begin mass production. Our gross margin of products was 65% for the first quarter of 2022, which is an increase of 41 percentage points compared to the same period last year. If we look at the gross profit and gross margin only for TSMs and adjust for the one-time effects, we can see a positive trend for the gross margin with 62% from the first quarter of 2022. Long term, as volumes continue to increase, we will probably see pressure on the margin. But short and medium term, we are confident that our margins in the product business will be around 40%. Operating expenses for the first quarter of 2022 decreased by 12% compared to the same period in 2021. The decrease is primarily due to lower professional fees and lower depreciation and amortization. We continue to invest in marketing, product development, and hiring new company team members. These investments are strategic and will strengthen our position in the medium and long term. These investments are fully in line with what we communicated regarding how we intend to use the net proceeds from the registered direct offering we conducted in October 2021. Summarizing the results of the first quarter of 2022, the net loss attributed to Neonode Inc. was $1.4 million compared to $1.6 million for the same period in 2021. Net cash used in operating activities during the first quarter of 2022 was $2.3 million. Compared to the previous quarter, net cash from operating activities has increased by 16%. In the first quarter of 2022, we purchased component products to secure future production of our TSMs. I will now hand the call back to Urban.

Urban Forssell, CEO

Thank you, Fredrik. And at this point, I would like to go into our strategy and business update. Our vision is to transform the way humans interact with machines. We strive for this by offering innovative touch, contactless touch, gesture sensing, and scene analysis solutions. Our business model rests on two pillars: technology licensing and product sales. We combine this based on nonrecurring engineering services. Our licensing offers are for our technology platforms, zForce and MultiSensing. Our product offerings currently are our touch center modules, or TSMs. The new strategy we launched in 2020 is 100% focused on business to business and on revitalizing and growing our licensing business in parallel to growing our product business. In our product business, we mainly target customers in the elevator and interactive kiosk segments. We also see potential and are working with some customers in the industrial automation, digital signage, and medical equipment segments. Our licensing business has historically focused on e-readers, printers, and automotive customers. Currently, the main license revenues from legacy customers come from printer manufacturers and automotive Tier 1s. Going forward, we see the largest potential to grow in the automotive segment, but we also believe we can grow significantly in the military & avionics and the industrial automation segments. The potential in retail segments is also apparent with our MultiSensing software, as I will describe in more detail later. zForce is a technology platform that comprises IP-related optics, electronics, software, and algorithms for advanced IR-based touch, gesture sensing, and object detection features. The zForce platform is well-proven. We have sold over 85 million zForce licenses to customers worldwide in the last 10 years. We continue to sell every month a number of licenses to existing customers, and the current customer base includes some of the world's largest printer manufacturers and automotive Tier 1 suppliers. zForce also underpins our products, the TSMs, which are ideal for contactless touch applications. MultiSensing is a scalable AI platform that can be used to create advanced scene analysis applications, driver, and in-cabin monitoring features in vehicles as well as retail analytics features. We offer bespoke customer applications tailored for each customer's specific needs. Thanks to the flexibility of the MultiSensing software platform and the efficiency of the underlying machine learning algorithms, the applications require a very different footprint and work well even with low-res cameras, hence offering a lot of customer value. To give some insights into our ongoing business development work to secure new development projects that can help us grow our licensing business in the future, I'm sharing a snapshot of our business development portfolio directed towards licensing customers. As you can see, we have several ongoing engagements with automotive OEMs, Tier 1s, as well as with several avionics companies and indeed one major printer manufacturer as well. Automotive DMS, DMS stands for driver monitoring system. This opportunity is obviously related to our MultiSensing platform. The others that we show here and that we are working on are related to the zForce platform. The first group is concerning applications of zForce to detect foreign objects obstructing the projector in head-up display units, which is an area drawing a lot of attention in automotive these days. We are working with several Tier 1s, and we have come quite far with a couple of them in the development of prototypes and proving the concept. This is a super interesting new application area for our zForce technology. With avionics companies, we talk about rugged touch and touching demanding aircraft applications with typically professional pilots or other personnel in the cockpit or in the passenger state of the aircraft. Of course, printer touch is more or less a straightforward touch application similar to what we have done for HP and other printer companies for more than 10 years. It should be noted here that the sales and development cycles are fairly long when we indicate here what we can expect. If we are nominated to any of these automotive projects that we indicate, we can expect an application development for 2 to 3 years to come. Only after this, new royalty revenues will start to come from these customers. This relates to a long development cycle in automotive for new models or new platforms. Here, we are no different than any other Tier 1 or Tier 2 suppliers working in the automotive space. The breadth and width of this portfolio make us very optimistic about the future of our licensing business and what it can grow. I want to underline that during the development phase, even in the prototyping phase, we can earn actually significant NRE revenues, nonrecurring engineering. We also have opportunities to sell prototypes during that period that can bring additional revenues to us. Moving on to our product business. Currently, we offer commercial off-the-shelf touch sensor modules, TSMs. Based on the reflective variance of our zForce technology, we manufacture these TSMs at our subsidiary, Pronode Technologies in Kungsbacka on the West Coast of Sweden and offer them in 11 different lengths from 101 millimeters to 374 millimeters and 2 main variants distinguished by the direction that the light is emitted and received from the sensor unit at 0 or 90 degrees. The TSMs are ideal for contactless touch applications and can be used in 2 main configurations to create such features: either in what we call the parallel plane configuration, where our TSMs are used to project an invisible interaction area or curtain above or in front of the display, keypads, or other surfaces; or the other main variant uses our TSMs together with our holographic display technology, where our sensor should be positioned and aligned with the interaction area from our sensor overlapping the projected image in free air. We tried to illustrate that here. If you have good sight, you can see in the right picture, below that tinted glass is an illustration of our sensor module sitting below and pointing up. When the user extends their finger into that projected image, they can actually interact with it. It's very futuristic and creates a lot of attention whenever we or our partners showcase that type of solution. As we have described in earlier earnings calls, there are numerous examples of applications where contactless touch is the way to go and has significant potential to offer new and extended customer value. For instance, different types of vending machines, coffee machines, self-service kiosks, quick service restaurants, airports, self-checkout, point-of-sale terminals in supermarkets, for elevators, or other user terminals and medical kiosks and medical equipment where, for various reasons, the users do not want to touch the display or buttons and want to experience a new way of interacting with the machines. Contactless touch is possible with our TSMs for all these types of applications. Why then would anyone consider contactless touch, and why is it important? The first argument we give is that it's contactless or touchless, as some also call it. You don't have to touch the display, keypad, or buttons to interact. In a machine and elevator or kiosk in a public space where many users use the same machine, it can be a significant risk for the transmission of different pathogens or may simply give an unpleasant user experience. Here is where contactless touch adds value for customers. We can interact with the machine without touching it, avoiding bacteria or viruses on hands. We preserve a familiar touch interface, or in elevators, as you extend your fingers normally today to press the button, our technology highlights the button before the finger even reaches it. It's very automatic and convenient. In other applications, like in medical or rugged industrial environments, users may have gloves on their hands, and other touch technology, such as capacitive touch, will not work. Here, we have a solution that works even with gloves, or if you want to interact with a pen, key, or the corner of your cell phone. With our TSMs, which are commercial off-the-shelf products, you can buy them online or directly from us or from some of our partners. We offer free use and a smart SDK that allows you to develop your own software applications, and they fit very well for both new installs and retrofit solutions. As described in earlier earnings calls, we utilize a hybrid go-to-market strategy combining direct sales and indirect sales via partners. We also have significant sales through our online distributors, mainly Digi-Key, which is an American company covering the whole world. We work with another distributor in China called Serial and, in Japan, we work with a company called NEXTY Electronics, all sizable, well-known online distributors. We collaborate with partners to penetrate otherwise difficult markets, like Asia. It has become a success story for us with our value-added resellers and partners in Japan, Korea, China, and other parts of Asia. The same is true in Europe, and we're working to create similar partnerships with companies in North America. Describing our markets as a pyramid, we believe we have more substance to our arguments that both the elevator and kiosk markets can be depicted this way. For instance, as discussed in our earnings calls in 2020 and 2021, the innovative market is dominated at the top by approximately 10 major OEMs, often multinational companies that fully dominate the new equipment market. Below them, there is a segment of midsized companies working regionally or nationally. And below that, there are numerous smaller firms in the hundreds or thousands that cater to interactive kiosks. The kiosk market is much more apparent and visible in terms of segmentation. Interactive kiosks span various subsegments, such as vending machines, self-service kiosks, ATMs, etc. In each market, there are many manufacturers offering various product types. The kiosk market can still be described within this pyramid structure. Our goal is to move upwards to reach the major OEM players, which can lead to high order volumes per order and per year. This aligns with the reality of our sales cycles. Typically, the sales cycle begins with retrofit opportunities where we and our partners introduce the concept of contactless touch and TSM solutions. We work hard with partners who develop different solutions for the market. Hence, our target customers are integrators, tech companies, and, to some extent, OEMs interested in their own retrofit solutions. OEMs are motivated by brand application, quality, and the desire for profits to maintain the financial aspect of their products while restricting third-party gains. In the second phase, as awareness and demand mature, kiosk and elevator OEMs show growing interest, intending to examine retrofits or new equipment solutions. Here, we aim to collaborate directly with OEMs, who generally prefer to work with us directly. Sales cycles may be longer, but the potential per customer and order is more significant. The final step in this sales cycle is designing solutions from the outset, referring to our experiences with HP, Lexmark, and other printer customers, where we are prominently featured with our touch technology in nearly every model they release and have been for several years. We're striving to achieve this same status in the TSM business, evolving from product sales to licensing. We consider our dual business model a strength, enabling us to serve customers seeking to purchase low to medium-high volumes while facilitating a shift to licensing when volumes increase, ensuring we effectively support them. Essentially, in the sales cycle, we aim to penetrate this upside-down pyramid from the top down while additionally penetrating the market from the bottom up. Retrofit typically targets small- and medium-sized companies with the same approach in mind. Our direct sales strategy focuses on medium and large enterprises interested in new projects and retrofit solutions. Both approaches assist us in establishing strong market footholds. In the last two years, we have expanded and developed our partner network, mentioning our distributors. We have numerous value-added resellers such as HY-LINE in Germany, MZ Technologie in France, Holo Industries in the U.S., and more notably several partners in Japan, Korea, China, and other parts of Asia, who are highly professional and active in assisting us with market penetration. In North America, we established our manufacturer representatives network last year to help us reach customers in the U.S. and Canada. North America, particularly the U.S., represents a vast ICT market with substantial volume potential for the future. Regarding progress in the elevator segment, we've secured business with several elevator control panel companies, including Finetek in Korea, and we are currently engaged with multiple elevator OEMs worldwide. However, we cannot disclose names due to strict NDAs. We're optimistic about this as it indicates our entrance into a series wave of the second phase where we discuss with OEMs to develop new equipment solutions. With kiosks, our situation mirrors that of the elevator segment. We have secured business with various kiosk manufacturers, often offering both retrofit and new equipment solutions. However, many of these agreements are confidential, ranging from major interactive kiosk companies to smaller ones. This underscores the interactive kiosk market that we have begun tapping into. This snapshot of our business development pipeline for interactive kiosk solutions represents just the tip of the iceberg. We have numerous additional opportunities underway, particularly in Japan, Korea, China, and other parts of Asia, as well as interesting engagements in Europe and North America. In Europe, we are collaborating with a company producing kiosks for transportation, such as ticketing machines for train stations, and another focusing on vending machines, both offering significant and sizable opportunities. We are genuinely excited about this, which illustrates just a fraction of the opportunities our partners are pursuing in APAC and EMEA in North America. However, the expected duration for a typical sales and development project reflects that these developments are not immediate. Generally, larger corporations are slower in their decision-making processes, which can delay product development and marketing strategies for product launches. Many of these projects, as highlighted in our last earnings call, are complex, like a project with 7-Eleven Japan, involving a consortium of seven companies collaborating on a solution for the retail chain, now installed in some stores in Tokyo. Such supply chain complexities also contribute to the slowdown. Nevertheless, we remain encouraged by the increasing interest and growing maturity of several ongoing development projects and engagements, confirming that we are on the right track and can substantially grow our kiosk segment business. This concludes our formal presentation today. We observe an increasing interest in our TSMs and solutions for contactless touch. Our business development pipelines for both elevators and kiosks display this progression, along with insights into our existing customer base. Japan is leading, with Korea and Greater China following suit, along with significant opportunities in North America and Europe. We also appreciate the growing interest in our zForce and MultiSensing technologies from automotive and avionics customers. Notably, we have initiated a development project with a European OEM for driver monitoring systems and are involved with several automotive Tier 1s regarding head-up display object detection via our zForce platform. We have mentioned in our report that COVID-19 continues to present challenges for our sales and business development. Firstly, we must account for lockdowns and travel restrictions, particularly in China, where they face stringent measures due to COVID outbreaks, such as the Omicron variant. Cities like Shanghai and neighboring areas are shut down, while Taiwan also imposes strict lockdowns. On a more positive note, Japan and Korea are gradually reopening. While COVID-19 is still affecting us, we are not directly impacted by semiconductor shortages; however, our customers often encounter struggles with sourcing adequate components to scale production or introduce new products. Additionally, there are elements of caution due to geopolitical situations and general economic uncertainties, including the effects of the war in Ukraine, rising interest rates, and increasing oil and gas prices, impacting us indirectly. Overall, we believe we are well-positioned and financed to grow our product business and to revitalize and expand our NRE and licensing business. We are diligently working on these fronts every day and are optimistic about the traction we are witnessing in our development work in Japan, Korea, and other Asia regions, along with several opportunities in the automotive sector and Tier 1 manufacturers. We wholeheartedly believe we are on the right track and are set to see substantial top-line growth in the coming years.

Operator, Operator

[Operator Instructions]. Our first question will come from Jesper Von Koch with Redeye.

Jesper Von Koch, Analyst

So let's start with products. You have three major ongoing projects that we view as the main revenue drivers for 2022: 7-Eleven, the elevator OEM, and the Japanese sushi chain. Could you elaborate on the progress of these?

Urban Forssell, CEO

Yes. First of all, I'm not sure I fully agree that these three projects are the main revenue drivers this year, but they are indeed significant wins for us, and we are very happy with them. Starting with the elevator company, we announced our collaboration in the fourth quarter, with an elevator OEM deciding to use our TSMs and contactless touch solution in their new elevators. They have begun developing solutions and launched them in a limited capacity in the market. They are gradually revealing more marketing materials publicly. Our local team in that market has shared photos of this, and I am confident we will continue that rollout. Additionally, the feedback we have received from 7-Eleven Japan has been very positive, as they aim to expand this system across more of their stores in Japan. Personally, I don't have immediate updates on the pace of that rollout, but there is no indication of them backing away from this initiative. Concerning the sushi chain, one of Japan's major sushi chains has already installed our contactless touch interface in all self-service kiosks at all restaurants across the country. Customers can reserve tables and preorder food using their kiosks outside main dining areas. They are actively used every day. We're also collaborating with other quick-service restaurant chains in Japan and other countries, hoping to create a snowball effect as more chains see the success of this first chain and how effectively our solutions operate.

Jesper Von Koch, Analyst

All right. So in light of all the uncertainty factors playing an important role at the moment, what's your view on a potential ramp-up of revenues during 2022?

Urban Forssell, CEO

It's apparent that we are indirectly under pressure from COVID pandemic lockdowns and the strain on semiconductor supply chains. We've noticed this with some of our licensing customers in automotive and product customers. Although it's not a significant problem or risk, it does slow our growth slightly. Overall, we remain encouraged with the trend. Our suppliers, specific to our licensing customers, purchase specialized circuits, ASICs from Texas Instruments, to implement touch features in their products for printers and automotive applications. Texas Instruments has confirmed that the situation is under control, reassuring us that all our customers will receive the ASICs required for their production. While this is a tough situation for many, we are collectively working with our partners to mitigate any arising problems.

Jesper Von Koch, Analyst

Okay. Good. And so my last question. Since the Q4 report, you haven't announced any major customer deals. You talked a little bit about it, but how do you experience the underlying customer activity and interest?

Urban Forssell, CEO

We remain positive. We are working diligently on securing new business wins with customers worldwide. We have a broad and deep pipeline, and we shared insights into that today. We expect to receive positive feedback from several of the automotive OEMs, Tier 1s, and elevator and kiosk companies mentioned during this call. We remain optimistic about that development, although we also look forward to faster sales revenue growth and increased volumes.

Operator, Operator

Our next question will come from Valter Lindhagen with Pareto.

Valter Lindhagen, Analyst

My first question is regarding your input costs. An important topic right now among manufacturing companies is increased input costs. I wonder, how much have you been affected? And kind of what's your ability to raise prices? Are you able to do that instantly when you experience increased costs or will there be a lag?

Urban Forssell, CEO

For our production of TSMs in Pronode Technologies, we secured a significant component stock from last year. Even when acquiring more recent components, we have not experienced major cost increases, maintaining stability in our situation. Despite this, we have reviewed and updated our pricing strategy, enhancing our margins in the product business over the last 18 months. As referred to earlier, we witnessed satisfactory margins. While we're aware about raw materials and components driving costs upward, this indirectly affects our kiosks and elevator customers without halting their operations completely. I cannot comment on their challenges with cost increases or the feasibility of raising their product prices; instead, this presents an indirect effect for us, rather than directly against our operations.

Valter Lindhagen, Analyst

All right. And then just another question related to the gross margin there. As you mentioned, you showed on one slide that you have had to constantly improve the gross margin for more than a year. Could you just remind us a little bit about what has been driving this development?

Urban Forssell, CEO

I'll let Fredrik respond to that.

Fredrik Nihlen, CFO

Yes. Over the years, we examined our costs and have successfully incremented our price list. You can see in the presentation that we've provided a table showcasing one-time effects. Those effects were accounted for before this quarter, predominantly in the fourth quarter last year and even before then. As we move forward, we believe we have cleansed the books of these one-time effects, projecting a more stable situation ahead.

Urban Forssell, CEO

With Fredrik's statement in mind, it's beneficial that the report contains further details on the resolved one-time effects. Moving forward, our aim is to establish a more stable gross margin situation.

Operator, Operator

Thank you. This concludes today's Q&A. I will now turn the call back over to our presenters for any additional or closing remarks.

Urban Forssell, CEO

We want to thank you for taking the time to join this call today, and we wish you a good day. Thank you very much.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.