Neonode Inc. (NASDAQ:NEON) Q2 2023 Earnings Call Transcript

Neonode Inc. (NASDAQ:NEON) Q2 2023 Earnings Call Transcript August 10, 2023

Jesper Von Koch: 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.

Urban Forssell: Thank you very much, Jesper. And from me and Fredrik here, welcome to this earnings call. And I don’t see the presentation now. So I don’t know where we are. Thank you. Today’s presenters is 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 go through and summarize the following legal disclaimer. This presentation contains and related 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.

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, we move on to the presentation. And 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 go through and summarize the financial results for the second quarter. And 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. And a summary of key points in Q2 for Neonode. Licensing revenues were stable. We saw clearly that the previous supply chain issues with semiconductors has been resolved or at least the situation has improved greatly worldwide. This is a factor. And another factor is also that our printer and automotive customers sales have been strong or at least stable. So that’s 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, weaker customer demand but also in some cases, where we actually have a good relationship with customers and they 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 since some time to focus more strongly on certain key geographical markets and segments. We also are intensifying our marketing efforts and we are also fine-tuning our product portfolio and our customer offering to be more sharp and to deliver more customer value. We believe this will clearly improve our sales performance in the coming quarter. And even though, the product sales in the second quarter was slow, I still believe we can turn this around and that this is a very interesting business for the future. So with these three summarizing points, I would like to hand over to Fredrik.

Fredrik Nihlen: Thank you, Urban. You can find our 10-Q and earnings release on our website, neonode.com, under the Investors section. I will, in this presentation, just summarize the key points. Revenues for the second quarter of 2023 was $1.2 million. That is a decrease of 5% compared to the same quarter last year. Revenues from license was $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 is still strong. Our revenue from products was $0.1 million for the second quarter of 2023. It’s a decrease of 60% compared to the same quarter last year. And also here, as Urban said, it has to do with low demand from customers and delayed launches.

Low volumes give high gross margin for products, 67% for Q2 2023, 11 percentage points higher than last quarter – last year. With increased volumes, the profit – gross margin will decrease. Operating expenses was $2.8 million for the second quarter of 2023. It’s 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 but also the timing of customer payments. As of the 30th June 2023, we had $21.6 million cash and accounts receivable. And with that strong cash position, we’d continue to execute on our strategy.

And with that, I will leave the word back to you, Urban.

Urban Forssell: Okay. That takes us to a short business update. And those of you that have followed us for some time know that in our products business, touchless solutions here exemplified by a holographic control panel for elevators is one of the key focus areas for us. We see quite some interest here, not least in Asia. And when I say Asia, I mean mainly China, Japan and South Korea, where we have the most activity, we have most customers and also the most partners. But also in Europe, here is an example of a recent install together with our partner, Dewhurst from UK. We see that this type of touchless elevator control panels is gaining traction and drawing a lot of attention. So this is the luxury hotel, the Maybourne Riviera who has installed contactless controls from Dewhurst in all of their elevators, which reportedly have been very well received.

Recently, we also joined World Elevator Expo in China and together with some different partners. And our partners’ booths and our booth were very well visited and the feedback we got from several large and medium-sized OEMs that came to explore and experience our solutions were very, very positive. So four elevators, we clearly, I think there is 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. Actually, there is a very broad sort of segment that we talk about. Here is one example. We have a new cooperation with a French company, MyScript, experts in handwriting recognition. And they have developed some different solutions that incorporate our touch sensor modules, in particular for handwriting recognition solutions.

Copyright: dolgachov / 123RF Stock Photo

Here shown a holographic display where you sign in or sign out to a hotel using your fingers and you write your signature on the holographic image. They also have other solutions more related to normal displays, so not holographic displays. So this is just one type of kiosks, and we also have examples of other customers and partners doing similar solutions for retail, for instance, transportation, ticketing and vending machines. Still quite a lot of interest in this, again, especially in Asia, but also in Europe, we see still quite strong demand and interest for our solutions. NXO, I want to highlight here is a very large electronics company from South Korea, and they have been a customer for the last couple of years. And earlier this year, in Q2, we signed a new value-added reseller agreement with them.

They work both with smart home products like the mirror we see here, but also other types of kiosks and retrofit kits or solutions for various different products. So we are very, very happy of this corporation, and we think this will help us to grow our market share and our sales volume in South Korea, in particular. We also work a lot today on rugged touch solutions, both using our products that touch sensor modules as this illustration shows. Here, the touch sensor module integrated in the bar sitting on top of the display and allows an operator here illustrated work having rather thick working gloves for protection to operate either directly on the touch screen or in front of it using a touchless interface. We see quite some interest here, both in Europe and other markets for this type of solution that we can offer.

And it’s about 50/50 percentage between customers are interested in our touch sensor modules for this to create both retrofit and new equipment solutions and customers that want to license our technology to create their own bespoke solutions. So rugged touch, I say on behalf of both our licensing business and our products business. And here’s another example of rugged touch, MedTech. And as illustrated here, doctors and nurses in the surgery room or in other clinics and so on, they often have gloves on their hands. And there are also more and more controlling very advanced machines using their fingers like shown here. To be able to do this with a rugged touch feature on that display is very valuable. And with our infrared technology, we can also do things like replace the buttons that you see directly to the right of the display in this picture.

So we can make those virtual buttons saving a lot of cost for the manufacturer and still providing good robust touch interface. Or we are proposing to many MedTech companies today that rather than using rugged touch, they can also consider touchless interfaces for some of these systems. And these are the ideas are fairly new to them. But we feel that we have a good resonance and a lot of positive feedback for our ideas and the prototypes and demos that we are showing them. So MedTech will continue to be one of the focus segments or areas that we will work on in the future, clearly so. Rugged touch, we also have quite some interest today from automotive commercial vehicle and off-highway customers, which is very close to industry customers. I would say, in a truck or in an off-highway machine on a construction site, the drivers and operators it’s very common that they have thick working gloves for protection and for other reasons.

And still, they want to operate touch displays inside their vehicles and that’s not trivial to do with other touch technologies than ours. So we have been joining some different events showing our solutions and presenting what we can offer. And we have got a lot of leads from that that we are now working to convert into new businesses. It’s quite interesting area and some of these customers have products that run in high volume, so we are also quite excited for this. Moving over to our licensing business. We had talked before and we still have a strong focus on object detection. And one application in particular that’s interesting is head-up display obstruction detection. As illustrated in this picture, foreign objects like coins, keys, parking tickets, credit cards and other loose objects in the cabin or sitting on the dashboard that may fall on top of the head-up display projector.

They will obviously obscure the projected image. And if that projected image is showing an important symbol, warning message or other type of critical information for the driver that can lead to obviously very serious problems and even accidents. And a trend in automotive is that more and more vehicle manufacturers are considering to have only head-up displays and not keep the traditional instrument clusters in front of the driver. This has several advantages both from an ergonomics point of view, but also safety point of view. And we have seen at recent auto shows also concept vehicles and other prototypes with new types of head-up displays being presented. So we believe that the head up display market will actually explode in the coming years.

And with the very, very strict requirements for safety in automotive, we think that this type of solution that we can offer at low cost and with very great robustness and performance will become more and more interesting for vehicle manufacturers and also their Tier 1 suppliers. And indeed, we are working together with several Tier 1 suppliers now, and we hope that within this quarter we can win our first major businesses in this segment. Another super important and very, very interesting application area that we work on is driver and in-cab monitoring, where we have developed and launched an innovative and quite novel software platform, which is a generic platform that can be used to create both driver monitoring features and other in-cabin monitoring features in a very, very quick, efficient and controlled way.

So the platform itself is super powerful and they can be used with different types of cameras and also easily incorporates other sensor inputs in a way that we haven’t seen anyone being able to do. And we are getting very, very good feedback from this when we started to market this early this year. And we are today also here hoping that within this quarter to win our first major breakthrough businesses with this offering of ours. So both driver and in-cabin monitoring and head-up display obstruction detection, they remain key focus areas for us in our licensing business and in general, the automotive sector is our main target now and will be so also in the future. And just to round this overview of and also to link to what I said earlier on in the presentation, that we are increasing our marketing efforts.

I just wanted to show the physical events we joined in Q2 and they were in both China, Europe and actually North America. And you can see that it was a mix of automotive and other events. And this has been very, very good for us and very successful, I would say. We have a lot of new prospects and leads that we are currently working on to convert to new businesses. And for Q3, Q4 and also into next year, we will certainly continue this work and actually intensify it and we look forward to meeting with you and also other new customers in different events in Europe, North America and Asia. I also want to mention here that we are joining the CES 2024 show in Las Vegas in January, and also the week after the equally interesting NRF show in New York later in January.

So if you happen to be in Vegas or in New York around that time, come and see us and we will surprise you with several value adding and innovative solutions that I’m sure you will like and want to incorporate into your products. Thank you very much. And this concludes our presentation and we are now heading into a short Q&A session with our analysts. Over to you, Jesper.

Q – Jesper Von Koch: Great. Thank you so much for that presentation, Urban and Fredrik. All right, I’ll start with some questions from my side. So first an update on automotive. It seems like you’re seeing some strong traction perhaps especially in the head-up display offering. And I just want to ask regarding 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? And do they have like similar technology as you or is it a different one?

See also Mason Hawkins: Net Worth, Performance and Portfolio and Larry Robbins’ Net Worth, Performance and Portfolio.

Q&A Session

Urban Forssell: In that area competition mainly comes from the Tier 1s, meaning the head-up display manufacturers. And some of them have prepared similar, you can say similar solution based on infrared technology. Some have tried to use time of flight sensors and cameras. The problem with that is that performance is very, very poor and some of the OEMs leading this new focus on head-up displays have at least in a couple of cases that we are now engaged in, they have disqualified these other solutions, although they were quite simple and cheap. The problem is that they had also quite poor, poor performance. So we are well positioned here with a fairly advanced yet cost effective solution. And I would say that the main competition would come from a camera-based solution and maybe we will see that in the future.

But this is non-trivial. And the question is, if the vehicle manufacturer and the Tier 1 really want to add this type of complexity just for this application alone or this feature alone. So we are well positioned and we are mainly competing here with our customers, the Tier 1 suppliers or the head-up display manufacturers.

Jesper Von Koch: All right. All right. And is it only the premium segment that you’re seeing interested or is it also the volume segment that you’re seeing?

Urban Forssell: Currently, this is – usually it’s in automotive. It’s mainly something that’s driven by premium vehicle manufacturers. And this is a question about timing I think. And when you do the math and develop the business case, you will also see a clear cost advantage with having only head-up displays compared to having these modern, large normal displays that many manufacturers are now working with for their dashboards. So I think that this will be both for premium for some OEMs that prefer this type of interior design, but also that it can be like a cost advantage for the volume manufacturer. So this is why we are super excited about this opportunity. But let me underline, Jesper that we have equally high hopes for our driver and in-cabin monitoring software platform.

And even though we are a late incomer to this market and we have some strong competition, we know this. The type of feedback and that the resonance with many customers is very stimulating and good for us to see. And we hope that we can surprise both our competition and also customers that haven’t met us before in the future with what we can offer here in driver and in-cabin monitoring.

Jesper Von Koch: All right, good. And then regarding product sales this is obviously a continuous disappointment for you as you, as you state. Yet – I mean, you continue to invest additional efforts, which is obviously negative for the burn rate. So how do you think about capital allocation in general? And for how long can you permit prolonged efforts in this area without results?

Urban Forssell: Yes. I see your point and I can also confirm that this is something we have been discussing actually for several years and we have kept a close eye on this. We are trying to establish and build up a new business here for touchless or contactless interfaces. And we have a good technology for this, but this is a new market that we are maybe one of the key drivers that are establishing this new market. And that’s always a tough challenge. So it’s a balance. You have to be persistent and you have to invest. But as you say, we cannot do this forever. And indeed we are now taking steps and we will take further steps so that we not only pump in new capital into this without seeing any results. So we are sort of honing and sharpening our strategies here.

And we will – within the products business area, we will shift the capital allocation. And clearly during the last quarter also we shifted more into the licensing business. So we have already taking steps in line with what you sort of suggest here. And we will continue to work on those details in the strategy. And we will present updates on this in the next earnings call and also probably we will continue to evolve both regarding our strategy and tactics into next year. So we get the point. We agree. You should never continue blindly to invest in a profit – non-profit business. Of course, we are here to make money and we are very conscious of this. So I ask everyone to stay tuned for updates and I will also want to reassure you and every other person listening in that we are very much aware of this and really working hard on this issue to turn around the products business.

And if it doesn’t succeed, yes, we have to think about doing something else clearly. And we certainly appreciate that and we are discussing it in the company and we will get back to you with updates shortly.

Jesper Von Koch: Perfect. Thank you so much. That’s all from me and I’m just going to see if we have any other questions from the other analysts. So let me just see for a few seconds. Nope. We do not. So I think with that I’m very satisfied with all the answers. So I leave the back – leave the word back to you Urban for some closing remarks

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