NEON - Neonode Inc.'s (NEON) CEO Urban Forssell on Q2 2022 Results - Earnings Call Transcript
Neonode Inc. (NEON)
Q2 2022 Earnings Conference Call
August 11, 2022 10:00 AM ET
Company Participants
Urban Forssell – Chief Executive Officer
Fredrik Nihlen – Chief Financial Officer
Conference Call Participants
Jesper von Koch – Redeye
Presentation
Unidentified Company Representative
Hi, and welcome to Neonode’s Q2 2022 Earnings Call. Today, we’ll start with the with company presentation, which is then followed by questions-and-answer sessions led by me and the other covering analysts. And the analysts are welcome to dial-in after the company presentation to ask questions.
And with that said, I leave over to the CEO of Neonode, welcome, Urban Forssell.
Urban Forssell
Thank you, Jesper, and welcome to this second quarter 2022 earnings call also from my side. I’m sorry, for a slight delay that we have in this call, it was due to a minor technical issue, which normally solved, hopefully. So you can all follow this with good quality.
Today, joining me in this presentation is our CFO, Fredrik Nihlen, and I will just in a minute give the word to Fredrik. But before we go into the main part of the presentation, I would like you to take a moment and read the following legal disclaimer.
This presentation contains and the related oral and written statements of 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 also may 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, 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.
I also refer all viewers of this call to see our official filings with the SEC that are available through neonode.com. 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 has been obtained, these information 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 on to the main part of the presentation and we have a short agenda today and Fredrik please come up and present Q2 2022 financial results.
Fredrik Nihlen
Thank you, Urban. We – I will summarize the financial results for Q2 2022, and you can find the details on our webpage neonode.com under Investors section and in our 10-Q. Revenues – total revenues for the Q2 2022 was $1.3 million. That is a decrease of 26% year-over-year.
License revenues decreased this quarter due to mainly that our customers has component shortages and cannot produce products with our technology and hence, we get lower revenues. Our product revenues was $0.2 million in Q2 2022. That is a decrease of 39% year-over-year. During 2021, we saw an increase in demand for products or TSMs, and they were included in retrofit solutions.
During 2022, we still are impacted by the lockdowns due to COVID-19. And we can also see that product developments, new product developments take longer time sometimes up to 18 months or longer that impacts our products revenues negatively.
Our gross margin is 56% in Q2 2022 and that is an increase of 17 percentage point year-over-year. And if we look at adjusted margin for TSMs, we can see an increase and then positive trend. The 56% are based on low volumes and we expect that we have – will have some push down when the larger volumes will come.
Our operating expenses was $2.8 million in Q2 2022. That is a decrease of 14% year-over-year. It’s mainly due to lower staff expenses, but also lower depreciation and amortization costs. This gives us a result for Q2 net loss of US$1.5 million compared to US$1.7 million for the same period last year.
Coming to cash, we had a net cash burn of $2.9 million in Q2 2022. That is an increase quarter-over-over of 29%. For the first half of 2022, we invested in our inventory to secure production of our TSMs, we don’t expect to have any more large investment in inventory during the rest of the year. That gives us a cash and accounts receivable balance of $13.5 million as of June 30, 2022.
And with that, I will leave it over to you again, Urban.
Urban Forssell
Thank you. I will share some insights into our corporate strategies and also our current business development activities that we are focusing on in the company. Let me also say this, that also from my side, I think sales and the overall results for second quarter this year are below expectations and we work hard to change this in the coming quarters and the coming years.
And we believe that overall our business strategy is sound and is the right one. And those are you that follow us and have joined the previous earnings call, you will recognize some of this. But our business model rests on two pillars, technology licensing, where we work with two technology platforms, one called zForce, which is a advanced optical technology platform suitable for touch, gesture sensing, and object detection applications. And the second platform we are working with is called MultiSensing. It’s a software platform for scene analysis that we are, for instance, applying in automotive applications for driver and in-cabin monitoring.
For the licensing business or the solutions business, the target is clearly on two segments printers and automotive. These are our focus segments for this business. The second pillar is product sales, where we today offer a range of touch sensor module products and I will describe them later. They are actually based on the zForce technology. So there’s a link between our licensing business and the products business through the technology in this case.
Here the focus is clearly on the elevator interactive kiosk segments. And we believe that these two individually and together form a good basis for the company and will Payway and enable us to grow and return to profitability and positive cash flow in the years to come. In 2020, 2021, we developed overall strategy for the company that we are still executing on and that we are believing is the right strategy.
You can call it a three step approach for growth, focusing on marketing and sale, creating awareness and demand. We have grown our partner network. This year, we have really started to focus more on the key markets, including Japan, South Korea and China. We have also been working to expand our customer offerings, both for licensing and we are working currently to expand our customer offerings, also in the products business with more vertical integration, we can offer more software content for instance, and we are working also new product concepts at the moment.
We are also returning to the investigation of outsourcing the TSM production, and we are actively looking for a second source to complement our own production in Pronode in the West Coast of Sweden. And in the third step, we think that from beginning next year, we will more actively and aggressively pursue further targets like expanding the business scope, new market segments, and maybe some new product offerings.
And we are also constantly evaluating potential partnerships and cooperations that can help strengthen our case and also contribute value to customers and investors alike. Within our business model, we work with licensing, we work with product sales and we also offer engineering services typically as fixed price commitments. We see big potential to grow all three revenue streams and the biggest potential in the coming two years, three years, we believe is with the products business.
And one strong reason for this is that we have much higher average sales price when we sell products than when we license technology per unit. So there’s a stronger lever, if we can achieve higher sales volumes in the products business than if we do the same with the licensing. Still, the licensing has potential to grow, but then it’s a more in the medium and long-term aspect, because typically when we work with customers, for instance, in automotive, there’s a long development cycle before we can earn more royalty revenues from the licensing.
And on the other hand, during that development period, we can earn NRE revenue, so non-recurring engineering revenues. And we are actively working since a couple of years on this, and we have actually several project ongoing that look promising and that bring NRE revenues and Payway for future licensing. So overall, potential in all three revenue streams, short, medium-term biggest potential for growth is to grow the products business.
And what all these products, we call them touch sensor modules or TSMs. They are standardized commercial off-the-shelf sensor products. They feature our zForce reflective technology, and we carry them in 11 different links and in two main variants. Customers can buy them from us or some of our distributors or from value added resellers. Smart embedded sensor modules involving advanced optics, electronics, and software. Very flexible can be used for many different applications.
We have chosen in our new strategy to focus on contactless touch applications, where we think we have a unique offering and can bring a lot of value to different types of applications. Four contactless touch with our touch sensor modules. You have two main ways to realize the contactless touch function. One is to place the sensor module in such a way that the optical detection field is positioned at a distance in front or above a display or a keypad that you want to convert to a contactless interface.
The other one is to align the light field from our sensor with a projected image that you can get from a holographic display, which are becoming more and more popular and we see a quite strong traction in this segment and this technology combination of a holographic display with our TSMs. And just to illustrate concretely how this may look, here is a typical kiosk application, a retrofit solution developed and installed by our partner Happymeter in Singapore.
This is from Hamad Airport, and it’s a typical check-in kiosk that they have converted the normal touch interface to a contactless touch. So the user can input his data on the screen without touching it. Very neat works perfectly and for the airport company, in this case, it also limits the investment they need to make conversion. They don’t need to replace all the kiosks, they can do a simple retrofit, which literally is done in minutes. And if you go online on YouTube or LinkedIn and Google a little bit with Happymeter, you will see several films from them, where they demonstrate in real time, how quick it is to install a solution like this on a kiosk.
I talked about holographic displays, and here’s an example how it can look, it’s quite futuristic. It’s quite nice. It’s a tension grabbing. This is a solution developed and launched by our partner in the United States called Holo Industries. They use technology from Asukanet in Japan an old Neonode partner that we work also with other applications in mind. Here, a solution is a patient monitoring device and the patient data is projected into midair and the nurse or the doctor can interact with that projected image through our touch sensory modules that are installed in the base of this plate here. Very nice, very good. And we see a lot of interest in this, as I mentioned.
Overall, our technology has many application areas, different types of kiosks and elevator applications in different segments. And this pace wave for a very, very interesting business case. And how are we trying to address this and penetrate these different market segments and markets? We have a very structured approach in our marketing and lead generation work. And for contactless touch today, we focus on three main segments, transportation, retail, hospitality.
And if you focus for one moment on transportation, of course, we want to communicate that are different ways to use contactless touch to create a safer and better user experience, when for instance, entering an airport or going into a train station. So our job here, what we are working on is to inform, educate, persuade, motivate, inspire, and we are doing this in different ways with digital marketing and also online events and other types of campaigns.
We do it from Neonode and we do it through partners. And we also have a lot of help from our partners that do a lot of similar activities on their own. So let me move on here and say that within transportation, we have had an – are still having a strong focus on aviation, meaning typical airport applications and in particular people movement in airports. And if you have followed us or if you want to visit our website or check us out on social media on Twitter, you will see evidence of this. What we have done in terms of campaigns and advertising to generate interest to inform, educate, inspire, and simply generate leads and drive sales.
We also have worked on infographics like this, and personally, I think this is quite interesting and useful to study a little bit more in detail. Because it shows, for instance, at an airport, the relevance of Neonode’s touch sensor modules and our technology and the value we can bring to users at different points from the parking lot when they drive up with their car and want to park their car. When they enter in the terminal building, they take a cart, smart carts are now becoming more and more common. We are talking to companies doing smart carts with a type of iPad controlled panels in front of them. You can go in an elevator or escalator. You can have contactless interface in that digital signage. You can interact with different types of kiosks, ATMs, vending machines and so on.
And even inside the aircraft, we see strong use case for Neonode’s touch sensor modules in the panels or for the cockpit personnel or the passengers. And this is something that we pushed in particular before this event, the world’s largest airport event you can say it. It’s called Passenger Terminal Expo. It took place in Paris in June. We were there with a booth. And in our booth, we had several of our partners and customers, also co-exhibiting. And in other booth, we had other partners having their own booths.
So we had a lot of coverage. We had a lot of products carrying our technology on them. We had a team in place that promoted this from Neonode side, and we had at least four or five other companies actively promoting this throughout this show. And we generated quite some substantial interest and it was all prepared and paid the way through the digital marketing campaign and the other activities we did before and even during and after the show.
So it’s a nice example and it ties together what we are doing. Following this event, we want to go further with some of our partners. And one example of this is with our value-added reseller, MZ Technology in France. They have big plans to expand into the Middle East, and we have recently signed a new agreement with them to expand their region that they can operate in to also include the Middle East.
I would see this is a direct consequence of that show and their attention we got from customers in that region. And we have similar examples with other customers and partners we met at the show. In automotive and then remember automotive for us is then a focus for our licensing business. We are similar trying to combine digital marketing campaigns and simple to drive interest and to inform to inspire people to look at Neonode and our offerings.
And we are combining this with different online and live shows and a lot of direct contacts to automotive OEM customers and tier-one customers. And in particular, now we have lately started to focus more and more on driver and in-cabin monitoring, and also all the detection [ph] for head-up displays. And all this work that we are doing is generating quite some interest that we are following up on. And as I mentioned before, we have already started to work on a couple of serious projects, thanks to this work that we have been doing during the spring.
So coming then to quickly to our concluding remarks, to summarize our presentation at this call, I want to repeat that also from my side sales and results for Q2 in this year, they were below expectations. And we work very hard to turn us around. We are faced with several issues that sort of hold us back or slows us down. One is clearly COVID-related lockdowns in particular in China and Korea and Taiwan. They’ve had some serious and still have serious lockdowns. It’s clearly affecting their industry and their domestic markets, but we see that several customers and partners, especially now in Mainland, China and Korea, they have serious problems overall, just surviving.
And this is pushing out new product launches and other things that they plan to do into the future and it continues. Most other markets have now in August, started to open up and start to return to normal. But this is a serious issue. Fredrik mentioned semiconductor shortage, which is a problem for several of our customers, both printer customers and automotive customers. And in some cases, also these companies we work with interactive kiosks and elevators.
I will underline that this is not a serious problem for Neonode, actually for our own production. We have secured components that are – we now have in abundance. And we are also working closely with Texas Instruments who supplies the key component that we use in all the licensing and also components we use for the touch sensor modules, special application specific integrated circuits, ASICs.
But we see in automotive, several customers report and that they have issues elsewhere holding back their production of new vehicles and then generating lower sales volumes for us and lower royalty revenues, same with printers. We hope and we, I see signs that during the third, fourth quarter this will be sort of remedied because there’s hard pressure on the semiconductor companies to increase capacity. And we know that several of them have built new plants and they are operational now since this summer. And things everyone predicted will come back more to normal during the third and fourth quarter.
So we think so. And I can also say that from Texas Instruments, we have clear reports that demand for their integrations circuits that only Neonode’s license customers can buy is on a good level and a good stable level. And this means that probably there’s a clear demand out there, and we hope that we have a sort of rebound during the rest of the year and maybe into next year.
We are also a little bit surprised by long sales cycles and long development cycles. In some cases, it depends on these lockdowns and other effects now macro effects, uncertainties high interest rates and so on that affect also these customers though, they hesitate to launch new products or really to kick off new developments. But we have several large corporations in Asia, for instance, that have really developed product that we worked on for two years now, but they then hesitate to launch them because they feel that the timing giving the overall macro condition in the market is not right. So there are different reasons why sales continues to be a little bit slow, but overall, we see a stable and increasing demand for our touch sensor modules and not least driven by the interest that we see for holographic display solutions.
And that is both in retail, in hospitality, and then transportation. A lot of people talk about it. They like what they see. They think they give a strong added value and a combination is unique. And we have a very, very good play there. Only with our touch sensor modules you can make these hovering and midair images interactive. And to create the holographic effect here, you need unique holographic plates as they’re called. So to create these solutions, these are the two key components that everyone will need. And for holographic plates, there are three or four companies to choose between. For the touch sensor modules, everyone will have to buy from Neonode and we like that situation. And we encourage all these companies to develop and sell more of these. We also see a growing interest. I mentioned this already for C4s [ph] are multi sensing from automotive OEM and tier one customers.
And this is more medium, long term, but we are very much encouraged by this too. And I said in the previous earnings call that we are working to revitalize and grow our licensing business. I stand now in August and say, I’m even more uncertain that we are on the right track regarding this. And I hope that we can announce some new wins in the near future.
Overall, we remain optimistic about our prospects to grow and improve cash flow both during the rest of this year and the coming year, obviously. And from my side growth targets are very ambitious and we work really hard in the company to realize this potential and converted into a strong growth in the years to come.
And this concludes our presentation today. And now we move on to the Q&A part of this event.
Question-and-Answer Session
Q - Jesper von Koch
Thanks for that Urban and Fredrik. So we’ll start the Q&A sessions or the Q&A session with a few questions from my side. And then we’ll take additional questions from other analysts. So regarding your product segment, it seems that, I mean, COVID lockdowns are obviously hindering your business there, but could you just on your main or largest projects, could you just give us an update there?
Urban Forssell
Again, I repeat that we work in elevators and interactive kiosks. In elevators, we have had good success in the first years to secure customers and partner developing retrofit solutions. What we are now working on and seeing that we have more than two, let’s say it like this elevator OEMs developing like new equipment solutions including our technology and they are quite different. And it’s interesting to see.
On the other hand, this is a case some of the major elevator companies, they are slow. They are big industry groups. They tend to be slow. They are meticulous in their development and testing, and before they release something to public, it’s all double checked and triple checked. So slowly but steadily, I think we are getting there. We are growing the market share for retrofits, and we are starting to dig into the new equipment part of that market.
For kiosk, it has also been a race in the previous two years with retrofit solutions, but here we have a more fragmented market segment than elevators, extremely fragmented, I would say. And we see both retrofit and OEM in Asia. We are actually happy to announce. And also in Europe, we have a couple of examples where we have big OEM customers doing now their own retrofit, but also in parallel developing for the next generation of the same products, integrated solutions. And some of these customers are Fortune 500, if not Fortune 200 companies. So it’s really good to see and that encouraged me.
For instance, I went to see some of these customers in Japan before the summer. And it was really impressive to see their development work and what they have brewing. And we hoped, and we are, of course, encourage them to speed up and launch this now because it – if some of these big names come out with new products featuring our TSMs, we think it will have a positive effect also on other discussions we are having.
Jesper von Koch
All right. So it’s basically a quite a broad range of customers that you’re waiting for to turn into volumes.
Urban Forssell
The – it’s overall and it’s always the same story. You have to be focused and be persistent and work hard, and then some are close to launches and some are further away and it’s a whole spectrum. Also, you remember, we talk about both elevator and kiosk market in using a pyramid picture. And at the top in the elevator and in the kiosk space, there are a few, but very large.
And of course, we want to enter with these, but on the other hand, they are more cautious. They don’t move so fast. They want to wait and see. And they are evaluating and observing also market trends. So this is the situation we’re in. We knew it, of course, up front, we are doing everything we can to push them, to motivate, to inspire, show other examples. And we are here very much supported by our different partners and the existing customers, because we are all having the same objective with this and we are working well together, I would say.
Jesper von Koch
All right. So let’s move on to driver monitoring procurements. I mean we know that there are a lot of procurements where design wins are kind of starting to be awarded now a big wave of this. How – could you tell us anything about the attraction that, that you’re seeing any like design wins on the horizon?
Urban Forssell
So yes, we have, and we are a late entrant to this market compared to some other competitors. So in some cases, it’s already clear, other suppliers have already been nominated. But what I think we are seeing, and what we are riding on right now is sort of the second wave and this fits in with our strategy from the beginning.
So we have developed a software platform, which is very, very flexible, easy to adapt to different requirements and combine, for instance, driver monitoring with in-cabin monitoring, different in-cabin monitoring features with the same solution and adapt very quickly.
And the resulting code is super efficient. So now, even OEM customers and Tier 1s that have already sort of decided, when we approach them and show a little bit what we can offer them, we get often very, very positive response, because they have tried other even well known and highly praised solutions from others. And they’re not happy for whatever reason. And then in some of these cases, we are then hook latching on and starting to have a growing relationship and developed and concepts and solutions.
Jesper von Koch
And so when in time, like, are those procurements that you are participating and I do.
Urban Forssell
So that’s – it’s different. I think we believe we have some this year and we will have also some chances next year. And the launch is later on, depends on their product launch plans, but it’s a few years out unfortunately, but that’s the way the automotive industry works. So you have to work through all the development step and test and validate your solution in parallel to the whole vehicle platform being developed and then they launch it. But we remain very positive about this. And then we think we have a very say high customer value solution. And it’s also technically very nifty, so we are quite enthusiastic.
Jesper von Koch
All right. Sounds promising. So one last question to Fredrik, there’s been a lot of macro uncertainties both regarding like inflation and also big FX movement. Does this impact your businesses in way or – and if so, how?
Fredrik Nihlen
Well, short-term inflation will not impact us. We have secured the inventory to produce our TSMs. Of course, we can perhaps see a bigger push next year for employees that say that inflation is high and we want salary raise also. But overall, I don’t think that is the main issue, but we can see a main impact is in the currency effect because our cost base is basically in SEK in Swedish Krona. And when the SEK is weakened, when we consolidate it into the dollars, well, we get the lower cost base. So that is the main thing.
Jesper von Koch
All right. So basically that your cash, which is in U.S. dollars, that will last a bit longer.
Fredrik Nihlen
Yes.
Jesper von Koch
All right. So that’s all questions that I have. So now let’s see if we have – we don’t seem to have any other questions from external analyst as of now. Okay. Then, that concludes this Neonode Q2 conference call and thank you all for watching.
Fredrik Nihlen
Thank you.
Urban Forssell
Thank you.
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Neonode Inc.'s (NEON) CEO Urban Forssell on Q2 2022 Results - Earnings Call Transcript