Neonode Inc

NASDAQ:NEON

Earnings Call Transcript 2023-Q3

[Jesper Henrikson, analyst]

Hi and a warm welcome to the Neonode Q3 2023 Earnings Call. So we'll start with a company presentation by the CEO and CFO of Neonode, followed by a Q&A session by the company's analysts.

So with that said, I welcome Urban Forssell, CEO of Neonode. Please take us through.

[Urban Forssell, executive]

Thank you, Jesper, and welcome to our Q3 earnings call. Today's presenters is myself, Urban Forssell; and our CFO, Fredrik Nihlén.

Before we go into the main part of our presentation, please take a moment and read this legal disclaimer. I will read aloud a summary of the disclaimer.

This presentation contains an 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 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 of 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.

And with this, we move into the main part of our presentation. Today, we have a fairly short agenda, and we will jump right into it with a summary of the key points of this third quarter and of today's presentation. After this, Fredrik will take us through the highlights of the financial results for the quarter. And after Fredrik's presentation, I will give a strategy and business update. And as Jesper mentioned in the introduction, he will join us again and share a short Q&A session.

Summary of key points for the third quarter and also year-to-date. Our licensing revenues in the third quarter decreased somewhat. And this has to do with certain customers reporting lower sales volumes for this quarter. However, year-to-date, we are on par with the same period last year. So that's why we say that license revenues for the full year so far has been stable on the same level as last year.

Product sales improved in the third quarter, and this, obviously, we are grateful for, and it proves that our increased level of activity and focus on pushing through sales and closing deals is paying off. However, the slow start in the first 2 quarters this year has made that we are below targets for the first 9 months.

And as we have discussed in previous earnings calls, we continue to adjust and sharpen our strategies and tactics to improve our sales performance. We are not satisfied with our performance to date, and we are working hard to improve on that. And we are also encouraged by the interest level we get from new and existing customers.

So although this quarter was similar to the previous quarter. We have a very optimistic view of the future, and we continue to believe that we are on the right track and that we have a team in place that can turn this business around and create growth, and also improve our cash flow significantly in the coming years.

So with these 3 points as a summary, I hand over to Fredrik who will take us through the financial results summary for the third quarter. Fredrik?

[Fredrik Nihlen, executive]

Thank you, Urban. You can find our 10-Q and earnings release on our website, neonode.com, under the Investors section. I will just -- in this presentation, I'll just summarize the key points. Revenues for Q3 was $1 million. There is a decrease of 18% compared to the same quarter last year. License revenues was $0.8 million for the third quarter. There is a decrease of 20%, and this is due to lower sales volumes at our customers. Year-to-date, license revenues are at the same level as 2022, as Urban said.

Revenues from products was $0.2 million in Q3, an increase of 5% compared to the same period last year. We maintained our focus on certain sectors and increased activities within sales and marketing.

Gross margin for Q3 2023 for products was negative 39%. This is due to a onetime effect of costs in Q3 2023 due to some customer claims. If we adjust for that, we are at 48% in Q3 2023, which is at the same level as the quarter -- same quarter last year.

Operating expenses was $2.2 million for Q3 2023. It's an increase of 6% compared to the same period last year. It's mainly due to increased activities within marketing and sales.

We had $1.8 million in net cash burn, operating activities for Q3 2023, an increase of [ 272% ]. We have 2 explanations for this. In Q3 2023, we purchased components to our production unit, and we didn't do that in Q3 2022. And Q3 2022 is exceptionally low because of a currency effect we took in that quarter.

We have $19.4 million in cash and accounts receivable as of September 30, 2023, it's an increase of $3.5 million from year-end 2022. So we are still stable on the cash front.

With that, I will hand the word back to you, Urban.

[Urban Forssell, executive]

Thank you, Fredrik. And just to continue our presentation here and give you, new followers and also old followers, an update about our strategy and business. Let me first talk about what we do with interactive kiosks and in particular, holographic display applications are very, very interesting. Shown here in the picture is a type of queuing kiosk deployed in a government office in Seoul, South Korea. This kiosk is manufactured by our customer Marketon, and they also have a whole range of similar products, allowing people to -- in a touchless way here, sign up for a queue and get a ticket while waiting for the next clerk to become available. This is just one example.

But why we want to highlight this is that interactive holographic displays is a very interesting application example where our touch sensor modules fit very well. And the combination of holographic display and our touch sensor module technology is a perfect one. And we make these type of holographic images interactive using our touch sensor module technology.

So all kinds of holographic display applications are of interest, and we have a lot of customers, especially in Asia, but also in France that are very, very active in the space, and they work with information kiosks, ticketing kiosks, payment terminals, ordering terminals and other types of interactive kiosks. So we continue to be very, very active here and support our partners, as I said, in China, South Korea, China, Japan and France.

Another interesting area that we have some considerable efforts in is Medtech, and especially touchless interaction for Medtech devices is something that we are pushing. And shown here is an example of a machine that we retrofitted with a touch sensor module unit to allow for touchless interaction with a control panel. And this -- for this type of industry is very interesting because it avoids any risk for cross contamination.

The machine shown here in the picture is used for DNA testing. For instance, to check for different diseases or doping controls or similar. And then these laboratories, cross contamination is a huge problem, and it costs them considerable amounts every year to control that.

Here, we offer them a totally different and smart solution to avoid any risk for cross-contamination with the operators of these machines. We have presented this also at other events and with direct customer meetings, and it has been very well received. So we continue to push in the Medtech sector, starting especially with analytical instruments, but we also see, obviously, other Medtech devices also can benefit from our touchless solutions.

Our technology, being an optical touch technology, also supports rugged touch for glove finger operation or even operation with stylus pens or other pointers, which is also very much appreciated in clinics and hospital settings.

Our optical touch technology zForce also supports touch on any surface. And the combination, if I combine Interactive Kiosk and Medtech, with touch on displays, what we also can offer that is fairly unique is that we can offer them touch beside or outside of the display surface.

Sometimes you want quick buttons on the side of the display, and we can cover that in a very simple and straightforward way using, say, software-defined buttons, so-called soft buttons. We can also create solutions where you can touch on any other surface being glass, plastic, wood, leather or so on.

Shown here is an example in a vehicle in the center console, where you have traditional infotainment screen above and then you have some kind of touch panel below. And our optical touch technology fits very well for these type of applications that you can -- like here, for instance, use your finger to write airport and then the navigation system picks up this and then guides you in the right way.

So any kind of user machine interface solution, where you have touch, you have touch on displays on other surfaces. And in our case also, we support, obviously, touchless interaction and mid-air interaction through holographic displays or other means.

We continue to be active in these areas, and we see potential for this technology still. And what's even more interesting for us is that the same basic technology can be used for, say, more passive or reactive object detection.

So a particular application area where we have some focus and where we spend a lot of time in the last year, we'll do so in the future, is head-up display obstruction detection. We see a trend in the market that more and more vehicle manufacturers will change the layouts of the interior of the vehicles and probably remove the traditional instrument cluster altogether, and instead start to use the head-up displays as their main information display, you can say.

And head-up display works in a way that it's a projector shining, projecting an image onto the windshield and given like a picture that looks to sit in front of the vehicle, a few meters in front of the vehicle. And this has certain advantages in terms of safety because you can keep your eyes on the road, and it's very clear for the driver.

However, if you have this type of solution and no backup in the form of a normal instrument cluster, it's very important to avoid the risk of objects obscuring parts of the image or the whole image. So without that backup of a traditional instrument cluster, you cannot have something blocking, for instance, the speed reading for the driver. So it's mandatory by law to always show the speed of the vehicle and also other warning symbols.

So what we have been working on and discussing with both automotive OEMs and Tier 1s is a solution where we can help them to detect foreign objects such as parking tickets, credit cards, keys, and other things that may fall on top of the head-up display, which is normally mounted at the front of the dashboard in a low position, shown here in the picture. So as a driver sitting down in the driver's seat, it may be invisible to you if there is a parking ticket, for instance, sitting on this surface, and then you will never know if there's a warning sign coming on that you don't see.

So this is a very interesting application area for us, and we have good resonance with several Tier 1s offering head-up displays to OEMs and also from OEMs, especially here in Europe, and I would say also premium manufacturers of more advanced and exclusive vehicles.

So probably this is where it will start, but we see that in the future, more and more OEMs will follow the trend to move into head-up display as the main information projectors, so to say, for the driver in their vehicles. And we are super excited about our opportunities here, and we continue to work with customers in Asia, in Europe and North America to promote this and work with them to develop different solutions.

Also, we continue to be very optimistic about our chances to break in through the expanding driver monitoring market. Our solution is very generic and it's both a driver and an in-cabin monitoring solution. And we offer a very flexible and scalable platform here that also has very efficient algorithms to do this.

With our customers today that we are talking to, and we are in advanced stages of negotiations with some. They may have, in some cases, we know for sure that they have in sort of the first wave here, chosen other DMS solutions, but they have now refocused, and they are very interested in our flexible and scalable platform. And we feel that we have a good chance now to come into sort of a second wave here and offer our solution to both customers that have DMS solutions in the vehicles today and those that are new and planning also for further features in the vehicles based on cameras inside the cabin.

That could be comfort features, could be safety features, and it can also be combination features such as special control of the augmented reality head-up display system or there could be identification systems for fleet management and control [ alcometers, ] there could be also automatic adjustments of seats and rearview mirrors and so on based on the head positions of the drivers and so on.

So a lot of different features are being contemplated and will surely be launched in the coming years. And our platform is ideally suited for this type of scalable architecture and also continuous feature growth and over their updates. So we believe that this is the most modern and most flexible platform there is. And it's also very, very efficient and require very little system resources for its implementation.

In the last 2 years, especially this year, we have increased levels of activity in our marketing and sales, and I repeat that we continue to adjust this, and we are not happy with our sales performance to date. So hence, we work more and more, focused on marketing and demand creation.

And one way is through different types of events, and only in the third quarter, we joined several events, automotive events, medic events and also some other events shown here. Some, we participated ourselves and some with partners. And shown in the picture here is a solution from our French customer, [ MZ Technologie ] that we co-exhibited with at the Vendtra show in Munich, and met with different types of kiosk manufacturers and vending machine manufacturers. And this touchless solution for displays and buttons was very well received there, as one example.

And upcoming events. In November, December, we have a few events, and then we are also working hard now to prepare, and we will join the CES show in Las Vegas in January, and also the big world NRF show in New York for the retail industry.

So if you are around, please join us and visit our booth at these events. And otherwise, stay tuned for also our online content sharing from the events. And in general, please follow us. We have a lot of exciting things in the making, and we hope that we can announce some new business wins in the near future.

This takes me to the end of the presentation. And now as promised, we will go into the Q&A session.

[Jesper Henrikson, analyst]

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

[Urban Forssell, executive]

We are still optimistic. To be honest, we have in a couple of these cases, we have experienced a slight delay. It's not our fault, but it's very complex deals, and it's also multiyear. And in some cases, we deal with large OEMs, with multiple brands and like global operations. There are many interested partners that should have their say. So sometimes these processes take longer than expected also for them. . In other cases, we are dealing with even bigger Tier 1 system suppliers. Then probably the main decisions are centralized to Germany or Japan or wherever they have their headquarters. But still, there are some of them very large corporations and takes time to process. But.

[Jesper Henrikson, analyst]

Okay, so we shouldn't -- and like we shouldn't interpret this as it has been won by any other [ player ]?

[Urban Forssell, executive]

So our main opportunities in this space, we are still in the race. We think we are in a good position. And I want to explain to you and also the listeners here that we are addressing both passenger car OEMs and commercial vehicle OEMs and third, also Tier 1 system suppliers.

And we have a global reach. And indeed, we have interesting dialogues here in Europe and in North America. And in some cases, also in these 3 countries I've talked about before, Japan, South Korea and China. And it's in different stages, but we are very optimistic to break in first into this market, which is quite dynamic, and I know you are somewhat of an expert following different companies active here.

And we are doing things in a slightly different way. And like I tried to explain in the presentation, we see now that some customers are into the sort of second round of sourcing and then they have experiences from their first projects, and they are, in some cases, where we obviously have the greatest interest. They have had perhaps not the perfect experience with other solutions or other suppliers, and that's why we have a chance now to enter sort of in the second phase. Quite interesting.

[Jesper Henrikson, analyst]

All right. Good. And how would you compare the -- I mean the meanings from the OEMs and the -- or the interest from the OEMs and the Tier 1s about like the HUD offering versus the DMS. Do you see, do you see any difference or?

[Urban Forssell, executive]

Yes. So one big difference that DMS is driven by regulatory requirements in Europe. But in other markets, it's not. So then it's more comfort driven or branding driven. But we expect that this type of DMS regulations will come also in the U.S. and in China, for instance. May not be exactly the same as in Europe, but something will come. And some manufacturers in these markets, they want to sort of preclude this by starting to offering a good solution. Even before, for instance, in North America before NHTSA releases a new federal motor vehicle safety standard on this topic.

Head-up display is not directly driven by any legislation, but as I tried to explain also, if you remove any kind of backup and only rely on the head-up display, you cannot sell your vehicles without this type of safety guard, because you must show all important information to the driver or turn on another warning sign that something is wrong, please stop the vehicle.

So there is where we see our chance. And indeed, some OEMs are going in this direction. And it's because it's -- they want to achieve a different look and feel of the interior of the vehicle. They want to use the space differently. And of course, it has to do with electrification.

So when you go to a fully electric vehicle, they want to also experiment. And there is this company, Tesla, that has sort of triggered a little bit this. So now everyone is thinking about interior.

We don't need to do in the same way as we've always done it. And I believe that this is also very much driven by cost. So I give you this as final comment that there's been a trend for 10, 15 years towards bigger and bigger screens. You talk about pillar-to-pillar displays in front of the driver and passengers. And we have some examples from Chinese OEMs and so on, massive curve displays and the high-resolution color displays with touch features. They are very, very costly.

So a way to break that cost spiral and complexity is to simply move into head-up displays altogether. And obviously, that is much more cost effective for the manufacturers than competing with bigger and bigger screens.

So let's see how this plays out, but automotive is a very dynamic industry. But in the end, everything takes quite a long time. So we have a long sales cycles. Then you have a development phase of 2, 3 years. And then the new solutions are launched into production, and this is where we can then start to get royalties.

But automotive is a very important say, industry or sector for us, and we have been active there for at least 11 years since 2012. It was the first automotive product developed with Neonode technology. And to date, we have licensed our technology more than 7.5 million vehicles closing up to 8 million. And going forward, we hope to increase that significantly with the DMS offering and also other offerings like this head-up display obstruction detection.

[Jesper Henrikson, analyst]

All right. Sounds promising. And then also one question for you, Fredrik. I mean, you are kind of like -- it seems that you're changing focus more and more towards the automotive industry, perhaps less so in the product sales. How does this affect your cost base, like part on how but also going forward, what do you see?

[Fredrik Nihlen, executive]

Well, we see that we're focusing our current business to towards automotive. So it's not that we are growing our cost base, it's that we are refocusing our cost base and looking for that in the future. So -- but of course, if we get some good news out there, we need to also expand on that sense.

[Jesper Henrikson, analyst]

For the, yes, engineering part of the implementation?

[Fredrik Nihlen, executive]

Yes.

[Jesper Henrikson, analyst]

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

[Urban Forssell, executive]

Thank you.

[Fredrik Nihlen, executive]

Thank you.