Neonode Inc. (NASDAQ:NEON) Q4 2023 Earnings Call Transcript

Neonode Inc. (NASDAQ:NEON) Q4 2023 Earnings Call Transcript February 29, 2024

Neonode Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Jesper Von Koch: Hi, and welcome to Neonode’s Q4 2023 Earnings Call. Today, we’ll start with a brief company presentation and a review of the Q4 results by the company’s CEO, Urban Forssell; and CFO, Fredrik Nihlén. And then we’ll move over to a Q&A session with me and the company’s other analysts participating. So with that said, I leave the word over to CEO, Urban Forssell. Welcome.

Urban Forssell: Thank you very much, Jesper. And also from my side, welcome to this Q4 and full year 2023 earnings call. Today’s presenter will be me, myself, Urban Forssell, CEO; and with me here on stage in just a few minutes, Fredrik Nihlén, our CFO. We have a pretty short agenda today. We have a brief, brief introduction and then I will go through two slides summarizing strategic and operational developments in 2023. Next, I will give the word to Fredrik who will summarize the financial results for 2023. And then I will come back and give you a strategy update, which also would include current status update and some comments about the rest of this year. So with that said, as part of the introduction, I would like you to take a minute to read this legal disclaimer.

And while you read, I will summarize this disclaimer in the following way. 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 and 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 an 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 that said, I move directly to the next point, summary of 2023. So throughout 2023, we continue to operate in our two business areas that we have been operating in the last few years. Namely, one, focusing on Technology Licensing and the other one focusing on Product Sales. We illustrate these with a green color on the left for the Licensing business and the blue color on the right for the Products business. As we show here, the main target sectors in our Licensing business is and has been printers and different types of automotive customers. We offer solutions based on two technology platforms, zForce and MultiSensing, and the business we employ in our licensing business is to work with the customers to integrate and adapt our solutions to their platforms.

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Q&A Session

Here, we have an opportunity to get NRE revenues, and when the underlying product goes into mass production, we typically get a royalty per produced unit as a license fee. So this is about the Licensing business, illustrated here on the left, in the Products business. We have targeted customers mainly in the elevator and interactive kiosk sectors. We also done some inroads into industry automation and Medtech with our products there. We have and are offering, we have been and are offering what we call Touch Sensor Modules or TSMs, for short. In fact, these products are a special realization of our zForce technology that we also license in the Licensing business. But these Touch Sensor Modules we have packaged and they need physical package.

We produce these modules in our production unit in Kungsbacka in the West Coast of Sweden. And we sell directly to end customers and indirectly via value-added resellers and distributors. The main business model is simply here product sales of these commercial off-the-shelf sensor module products. We have continued to operate on this strategy throughout 2023. There has been a lot of activity in the company with marketing, with sales, to reach new customers to create demand and to land new deals for our Licensing offerings and our Products. We also have strengthened the organization in different ways. In particular, we have during the second half of the year, recruited some very senior persons that have strengthened our team, both in engineering and in marketing and sales.

We have improved our operational efficiency. We have improved our Cybersecurity and in general, strengthen our IT environment in the company. Nevertheless, 2023 was a tough year for us. And the outcome and the results that we managed to achieve in terms of sales were, I would say, below expectations. And actually, as we write in the 10-K and in our earnings release, we are disappointed about the decrease in sales revenues. Taking this step by step in our Licensing business, what we can say for our Automotive Licensing business, our license revenues from legacy customers was stable throughout 2023. In Q4, we announced also a breakthrough driver monitoring software award from a leading commercial vehicle manufacturer. This is the result of actually several years, hard work with product development, marketing and sales.

And as I will come back to in the second half of the presentation. This is a very, very important stepping stone for us and gives us momentum for 2024 and beyond. In general, we see with automotive that our different product offerings are generating a lot of interest from customers. So we have a strong sales pipeline, and we are working to sign new deals and also fill up the pipeline even further in automotive. In our Licensing business, we also have a substantial license revenues from printer manufacturers. They were stable during the first half, but starting to weaken in the Q3 and especially Q4. These royalty revenues fell in some cases. This has obviously to do with underlying product sales of these customers of ours. And also in one or two cases about inventory that they wanted to reduce at the end of last year.

Anyway, that impacted the sales of new printers and hence decreased our license revenues. In our Products business. Unfortunately, we were struggling to sell more TSMs as we have projected and as we have targeted and planned for. Instead, we saw that the sales volumes decreased, and we feel that, the main reason for this is simply weak demand. Now when the COVID-19 pandemic has sort of blown over and people move back to old habits of how they operate different types of kiosks and elevator controls and so on. This led us to a big decision internally that has been carefully considered for some time, but we announced it in December that we are phasing out our Products business, and we’ll instead offer key customers in that business to license the technology and produce these Touch Sensor Modules on their own.

I will come back to this as well in the second part of the presentation. But let me end this first part by saying that we are, and I am not happy with the sales revenues that we managed to achieved in 2023. We have taken a consequence for this, and we make a big strategic change and launching a new sharpened strategy, which takes 100% focus on technology licensing, and we believe this is a very important move for us and strengthen us as a company going forward. More on that in the second part of the presentation. Now to summarize ’23, from a financial point of view, I would like to invite Fredrik Nihlén, our CFO, up on stage here to take us through the financial results for the previous year. Fredrik?

Fredrik Nihlén: Thank you, Urban. As always, you can find our 10-K and earnings release on neonode.com under the Investors section. I will in this presentation only summarize the key points. Total revenue for 2023 was $4.4 million. That is a decrease of 22% compared to 2022. License revenues decreased with 15% to $3.8 million in 2023, and this has to do with surplus in inventory and volumes at our customers, the sales volumes at our customers, as Urban said before. Product revenues was $0.6 million, a decrease of 38% compared to 2022. This is due to low demand for our products. And as Urban said, we made an announcement in December to phase out the Products business. Operating expenses increased to 5% to $10.7 million in 2023 compared to 2022.

The major things here is that we increased marketing spend, as Urban said before, and also some increase in payroll and related costs. Summarizing the financial result in profit and loss. We had a net loss of $10.1 million in 2023 compared to $4.9 million in 2022. What you can see here, what stands out is the cost of revenues. It is impacted by onetime costs, due to the phase out of the Products business. I will come back to that in a later slide. Even though we had a net loss of $10.1 million, our net cash burn, operating activities for 2023 was $6.3 million, a decrease of 7% compared to 2022. And we had $17.1 million in cash and accounts receivable as of 31st of December 2023. It’s $0.8 million more than the year before. And some more information on the phaseout of the Products business and what has happened in the cost of revenues.

So inventory P&L effects, we had an impairment loss of $3.6 million in 2023. And we had also a loss in purchase commitment. We had components that we had to buy in the future that we canceled and had to pay a fee for. Both of them impacts the cost of revenues in 2023. The $3.6 million impairment loss has no cash flow effect. And there can be some efforts here to recover this loss by selling components to potential license customers. The plan for 2024 is to produce and sell TSMs during the first half, and during the second half, we will wind down the production unit in Kungsbacka and the rent agreement will end at the end of September. And with that, some more strategy update from Urban.

Urban Forssell: Thank you, Fredrik. So as I said and also that you heard from Fredrik, it’s big strategic move that we are making in phasing out our Products business and closing our production unit in Kungsbacka, Sweden. This will affect obviously, the staff in that production unit. And we have in our P&L, taking some impairment losses and other things, which explains the bulk of the sort of negative result compared to, for instance, 2022. And they are sort of onetime effect. Cash effects are much, much smaller and we would rather say that they are almost negligible. Let me summarize and explain the new Sharpened strategy that we launched on December 12. This strategy focuses 100% on technology and software licensing. The actual consequence of this in our company means greatly reduced operational complexity.

We have been running a Licensing business and a Products business in parallel. They are intrinsically quite different. For instance, in marketing and sales of the TSM products, we have been as you that have followed us during the last three, four years, we have been working with both direct sales and indirect sales through value-added resellers and distributors. A lot of this network now will be dismounted and all these customers and the partners that we worked on in the products business are offered to license the TSM technology instead of buying the products from us in the future. And we are happy to say that actually, more than a handful of these bigger customers and valued resellers are seriously interested and we are currently negotiating licensing agreements with these and supporting them to investigate how to best set up their own production of these type of sensor modules.

And as Fredrik said, regarding the impairment loss for component inventory that we have. We also have quite good hopes to recover a substantial part of that by selling these components to customers licensing technology. Some of them are standard electronic components, but some of the key components are fairly unique for these sensor modules, and we can offer to sell them to these new licensing customers. The focusing on technology licensing also means that we get a better market fit. For instance, in the Products business, we have been offering Embedded Complex Sensor Module produced in Sweden by Neonode, a fairly small company in the global scale. And in many cases, the customers are big electronics companies that themselves are experts in manufacturing.

By offering them to license our technology, they can leverage their supply chains and their manufacturing footprint. So it’s a much better fit. Also, it’s a better fit for Neonode given our strong licensing DNA. So we are 100% convinced that this is the right move. You can always debate whether we should have made this decision earlier or later. But we have come to the conclusion end of last year to make this move, and now we are operating according to the new strategy. Also to explain what we are doing. We continue to work in the two application areas of Human Machine Interaction or HMI. In our case, that means touch less interaction with displays, with keyboards and so on, but also gesture, control and similar technologies in midair. That’s the one application area that we are focusing on.

And the other one is Machine Perception or Computer Vision. Notably, this is no change from before, but I just underline that with our new focus, we are continuing to work in these application areas, and we are continuing to use our two patented and well-proven technology platforms, zForce, which underpins Optical Touch and Gesture Sensing applications and MultiSensing which we use for driver in-cabin monitoring computer vision applications. So licensing is the one and only focus going forward. We continue to work in the areas that we know, Human Machine Interaction Machine Perception, and we base our offerings on the two technology platforms that we have and that are protected by several patents. Going forward, as of this year, we are in our marketing and sales operating in two business areas, one that we call IT and Industrial and the other one, simply we call Automotive.

And in IT and Industrial, we focus on sectors, printers, interactive kiosks, Medtech and industrial automation. And in Automotive, we focus 100% on the automotive sector. But on the segments commercial vehicles, light vehicles and off-highway vehicles. Common to both business areas now is that the key business model is based on technology and software licensing. We also offer engineering services to integrate and adapt our offerings to the customers’ underlying products. And we see a big potential to generate some substantial revenues also from sales of demonstrators, prototypes and similar projects that we can do with large vehicle manufacturers or large electronics companies. So we are unifying the business model, but we are, for different reasons, continue to work in two business areas with their own foci.

And we believe very much in this split where we have a lot of commonality in the two technology platforms, the two application areas we work and the business model, but where we focus exclusively on the different sectors that these business areas are designed to work on. To illustrate our offerings, our products and how they can be used and how they add value to our customers’ products. I just want to share a few pictures here about product examples. So in IT & Industrial, we worked with printer manufacturers to create robust, easy-to-use touch features for their control displays. This has been an important business for Neonode since 2010. And it continues to be a very, very interesting revenue stream from these customers. Currently, we are working with some of the leading printer manufacturers in the world, and we see also potential to upgrade our offerings to these customers.

And indeed, we are working with some of them now to see if they should increase the use of Neonode technology also in other printer families. But overall, printers remain an important sector for us. We work with touchless features for interactive kiosks, touchless features for elevators. So far, we have been selling touch sensor modules directly to such manufacturers or indirectly via value-added reseller distributors. Going forward, we will be offering to license this technology to companies interested in producing both the sensor modules and these underlying products. And for us, both interactive kiosks and elevators will be important going forward. We have other customers that are in the Medtech area, where we can support with technology that supports touch and touchless features for medical systems and types of displays and keyboards.

For instance, in sterile operating rooms and other clinics, it could be either touchless to avoid any risk for contamination at all or rugged touch where nurses and doctors have gloves on their hands and still want to operate a touch panel. And in automotive, — those that have followed us during the last couple of years, I’ve noticed that we have a stronger and stronger focus on automotive and in automotive on driver and in-cabin monitoring. And indeed, the breakthrough order that we announced in December is a very, very important stepping stone for us and has opened many doors that we had previously opened, but that were lingering on and also made us interesting for new customers. We feel here that we have a very, very strong offering, even though we are sort of a late incumbent in this market, but we have a very, very strong technical offer and also a lot of experience with several million vehicles on the road with Neodent’s technology already in them and at least 12 years legacy of working with automotive Tier 1s and manufacturers.

We are also sensing that are very scalable and flexible software platform is attracting now both vehicle manufacturers and Tier 1s that have maybe integrated sort of first-generation driver monitoring systems and now want to upgrade to more future-proof, scalable solutions, and then they come to us and ask for proposals. And we are quite busy now answering up to this and developing this business as we speak. Another very interesting application area that we are targeting is head-up display obstruction detection. Head-up Display penetration in automotive for light vehicles is increasing rapidly. We also see some OEMs simply removing the standard classical instrument cluster and will rely exclusively on Head-up displays going forward. For different reasons, it is important to know if there are any foreign object sitting on the top of the Head-up Display projector.

It’s both that they may obstruct the image, including warning messages that you are projecting on the windshield and they may also have other technical problems with objects sitting on the top of the Head-up Display causing overheating and other types of problems in the units. This is a fairly unique offering from Neonode, and we are now exploring how we can best exploit this, but this is a very interesting second market opportunity for us in automotive. And we continue to work on touch solutions for infotainment displays and other types of displays and control panels in vehicles. We also have some discussions ongoing about Holographic Displays, for infotainment systems in vehicles. And there, we will probably work through other partners, but also touch and touchless features is important.

And I want to underline here that in automotive, with our current touch solutions, we are around 8 million vehicles on the road with this technology, very, very good quality, very, very satisfied customers. And this, of course, strengthen us also when we talk about other offerings that we have today, like driver and in-cabin monitoring and Head-up Display Obstruction Detection. This track record and this legacy of working with different vehicle manufacturers and Tier 1 suppliers is very, very important for that. We feel that we are entering 2024 with momentum. We are well positioned for future growth. Our breakthrough Driver Monitoring Software win has really triggered an increased interest from both other vehicle manufacturers and Tier 1 system suppliers.

And also, we feel that we have strong interest in our Head-up Display Obstruction Detection and Human Machine Interface Solutions from other automotive customers. I would also say that customers that previously were buying our TSM products or our value-added resellers and distributors. Some of the larger of these have shown strong interest in licensing technology, as I mentioned upfront. And this is also adding to this feeling that we are well positioned for future growth. We are taking out a lot of complexity of our internal operation, and we will focus on fewer but larger customers. And the new strategy, in addition, it taps into our licensing DNA, which is very, very strong in Neonode since actually more than 20 years. So even during the first era of Neonode where the company was focusing on mobile phone business, Neonode license technology to Samsung and other large companies in the world.