Neonode Inc. (NEON) Q3 2017 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for standing-by. And welcome to Neonode's Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. At this time for opening remarks and introduction, I would like to turn the call over to David Brunton, Neonode's Head of Corporate Investor Relations. David, please go ahead and start the conference.

Welcome and thank you for joining us. On today's call, we will review our third quarter 2017 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest. I'd also like remind you that this is the first time that we've had a PowerPoint presentation to the company or call, so I hope you all have that up and we'll guide you through as we go through the comments. So before turning the call over Thomas Eriksson our CEO, I would like to make the following remarks concerning the forward-looking statements. All statements in this conference call, other than historical facts, are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guides, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements do not guarantee the future performance that may involve or be subject to risks, uncertainties and other factors that may affect Neonode's business, financial position and other operating results, which include, but are not limited to the risk factors and other qualifications contained in Neonode's Annual Report on 10-K, Quarterly Reports on 10-Q, and other reports filed by Neonode with the SEC to which your attention is directed. Therefore, actual outcomes and results may materially differ from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements. At this time, it is now my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode. Thomas, please go ahead.

Thank you, David, and good day, everyone. As David said, we will have a little bit different format for this presentation. So, there is some slides that we're going to use for showing according to this presentation. With me today on the call I have Lars Lindqvist, our CFO, and I would like to start talking - taking a step back and outline what Neonode does and what products and solutions we develop and send to our customers. So, with that said, I would like to start with slide number three. Neonode is a technology company that provides optical laser based sensors for human to machine interaction. We call our base technology zForce. We delivered zForce in two formats. First on the license agreement with our customer that build our sensors themselves. And second, as a completely fully integrated sensor component under a supply agreement. Our sensors work as a low-resolution camera with an extended aperture, so it can with high speed and precision sense and detect objects in front of the sensor. It can be used for touch screen applications, to replace proximity solutions and also capture, really well, two-dimensional and three-dimensional gestures and objects. They work as a collision detection sensors and report objects with the correct size and locations. Our sensor components are typically easier to integrate into our customer’s product than our previously custom sensors that we provide on a license agreement. Our sensor components come in different size and shape and many configurations with a multiple of interfaces to support many applications. I'd like to summarize this as: We have a product offering for a large addressable market with the sensor components that support a multiple of applications and projects of any volumes. Next, let me highlight some of the company milestones and where we are today. So please move to slide number four. We have a strategy with top priorities that provides the roadmap that drives our actions to capitalize on our investments in our sensor components. We actively market the company and our products to build brand awareness and create product demand and to convert our license customer platform to produce our new zForce AIR component. Our sales and marketing is directed at different customers and partner supply agreement for large volume projects. We are developing a global distribution network of which first half is DigiKey. We are aware that production quality, capacity, redundancy is top requirements for large OEMs, when selecting a supplier for their products. We know how to address our customer requirements as we have shipped over 50 million sensor solutions to-date with our technology without any quality issues. We are actively working in qualifying all of our processes to meet demand and requirements from our large volume OEM customers. Another of our top priorities is to continue to develop and improve our technology to make it relevant for our customers' future products and roadmaps. While our strategic focus is directed on capturing the great potential with our zForce component business, we continue to nurture the solid and profitable licensing business during the coming years. And now, I would like to move to slide number five. The consumer electronic market is very large and very diverse, where lots of OEM and contract manufacture are operating. We know about this market and our sensor solutions are already embedded into different products in high volume applications such as eReaders and printers. We are already heavily involved with some of the largest OEMs in this market, like HP and Amazon, and know their requirements to win deals. We are addressing this market with our standardised sensors component and selling it through distribution and directly to our large customers. We already started shipping our sensor components to 12 different customers, still in small quantities, but we are working with all our current license customers to win the next platform. We are working with our partners to combine our sensors with their products, for example flexible OLED displays and deliver the complete solution as a module directly to the OEM. In the consumer electronic space, we have also identified several exciting applications for our standardized sensor components such as drones, toys and 3D scanners. Our distribution partners such as DigiKey will initially focus on this market, it's already key, our first sensor components and development kits in stock, and our marketing sales training will start during November. Another important growth market for us is automotive. Please move to slide number six. This picture show, a car with different type of sensors. We believe automotive in time will be our largest market in terms of total ASP and volume. In the car, we can have up to 10 different sockets for our sensors with ASPs exceeding $100 per car. The main application for standardized sensors components in this picture you can see a few exterior sensors like entry systems and collission avoidance systems. We are currently working with the car OEM and Tier 1 on some of these applications and have made a supplier agreement for tail gate sensor components, to start delivering by early next year. Please move to slide number seven. At this picture, it shows some of the new interior applications that our standardized sensors support, by just altering from software in our platform. Our main focus inside a cockpit is still the steering wheel sensor which we work on with AutoLiv. And for self-driving cars and touchscreen applications. We have during the last two years been working with AutoLiv, one of the largest suppliers of automotive safety system to, develop our technology in the steering wheels, to enable autonomous assist in self-driving cars. In our roadmap, we are looking at other possibilities for our sensor to support things like anti-pinch control and window interaction. Please move out to slide number eight. In this slide, we see top view of our self-driving car. This is an example with a lot of different sensors showing what we need to have for full autonomous drive. This is still not a reality, but Neonode are focused on sensors, that can sense and detect objects close to the car - typically from 0 to 1 meter distance. Our sensors have an extended aperture, so they are not sensitive to contamination like cameras and they do not produce dead spots, like a LIDAR or camera. Our sensor can also report the actual object size and precision, unlike a camera that produce an image, which need complex processing by an expensive processor. But in a camera solution there is a lot of blind spots where the car do not have any information or very limited information about its environment. As the cars start to move, very fast, the camera is not fast enough to produce and will produce a distorted environment map. Our sensors are very fast and will produce the correct position of objects around the car. With that technical info, I'd like to turn over the call to Lars for some financial update. Lars, please go ahead.

Thanks, Thomas. You can find our third quarter earnings release and 10Q available for download at the investors section of our website at www.neonode.com. Please go to page number nine. I like to start up with some highlights, important thoughts for the quarter. First, we see $9.1 million net of selling and legal expenses from a private placement completed in August. About $1.8 million of those proceeds was used to pay off a short-term loan. We continue to expand our presence in the customer products and our customers have now shipped with 52 million products to generate $38 million in license fees revenues since 2011. We continue to nurture the solid and profitable licensing business. This is the major milestone, we have started shipping our first-generation touch sensor components and we are in the process of increasing our sales and marketing focus as we rollout new sensors for targeted market. Our revenue increased 41% compared to the same quarter in 2016 due to increased license fees and AirBar revenues. Our operations used in the third quarter approximately 1 million of cash of net of non-cash expenses compared to 2 million for the third quarter last year. In the following slides I'm going to provide some more additional details. Please go to slide number 10. I want to give you a feel, I will look at our business by tracking the top stability of each of business unit and our business units are: license fees, NRE fees, B2C AirBar, and B2B sensor components. The slide presents third quarter 2016 and first, second and third quarter 2017. Revenues in the third quarter 2017 increased 41% over the third quarter last year. That's a nice increase, however that is not the full story, there are new revenue components added in 2017. 2016 only has license fees, but 2017 includes license fees, AirBar and revenues for our first sale of sensor components. For the third quarter 2017, our license fees were $2.1 million, AirBar sales $200,000 and sensor components $20,000. Compared to license fees of $1.6 million last year third-quarter. Operating expenses in cost of goods for third-quarter 2017 was $3.7 million compared to $3.8 million last year. Our licensing business is at 100% gross margin. However, we allocate the portion of our overhead cost representing $200,000 for the third quarter 2017, compared to $160,000 last year. AirBar cost was $1.3 million for the third quarter and sensor components cost and investment of $2.1 million. We have for the last two years invested in design, manufacturing, commercialization of our sensors and that make up a large portion of our total cost. Let me discuss AirBar for a moment. AirBar revenue has not achieved the expected sales through volumes. We know that selling consumer product at AirBar is challenging even though it has received very positive reviews from the market. However, part of the AirBar journey was developing the underlying sensor component technologies, manufacturing processes and supply chain management, that are used in all of our B2B sensor component products. Our primary focus is B2B. We understand that consumer product sales include very substantial marketing efforts and investment to be successful, which has been a limiting factor for us. We are therefore, evaluating strategic options for selling AirBar, so we can put all of our focus on the very large and the diverse B2B market for our sensor components. Our net loss was $1.1 million or $0.02 per share, compared to $2.2 million loss or $0.05 per share in Q3, 2016. Let's move to slide number 11. Our licensing is a solid and profitable business which will be continued to support and representing the largest part of our revenue today, so I want to spend some time to explain where they are. Our license fee has remained stable throughout 2017, and I expect it to be between $2 million to $2.4 million per quarter for the foreseeable future. Printer license fees continues to increase driven primarily by new printer sales from Canon and Epson. Our automotive license business is expected to increase over the coming quarters. Our license customers shipped 2.8 million products during the third quarter 2017 and more than 52 million since 2011. So, let's move over to slide number 12. I go with [indiscernible] talking about the balance sheet and cash. We received a $9.1 million in August, as I've talked about in net cash proceeds from the private placement. And we believe we have sufficient cash to execute on our business plan. Our total operating expenses are expected to continue to be in the range of $3.1 million to $3.3 million per quarter. And our cash used by operations are currently at approximately $1 million per quarter. We have sufficient inventory than we probably expected near-term demand for sensor components. And as of September 30, 2017, we had $6.9 million of cash and $8.2 million of working capital. Our account liabilities including account payable before revenues and accrued expenses are well within plan and our working capital is sufficient to grow our business. Now, I would like to turn the call back over to Thomas.

Thank you, Lars. Looking back at the quarter, I'm happy to conclude, that we're taking the initial steps to deliver on our strategy in direct sales in the sensor components business. I look forward to work together with the new Board of Directors, to continue to strengthen our operation excellence, positioning as a leading supplier of advanced sensor technology. Now, I would like to open the call for Q&A.

[Operator instructions] Our first question comes from Rob Stone with Cowen and Company.

Hi guys. I have a couple of questions. The first one, it's nice to see the breakout by various business segments, I recognize that the volume for sensor components or modules are still quite low, where do you see the gross margins potentially for sensor components as you get to more significant volumes?

Hi, Rob. So, currently at AirBar obviously the numbers are low, but we are increasing as we go. And our product has to reach approximately 50% for automotive and consumer applications.

So, that would be for both AirBar as well as the OEM components?

Yeah, absolutely.

Okay. And clearly there is a lot of different thing that you could be doing in vehicles in the future but the design cycles and product cycles we know for vehicles are pretty long and autonomous vehicles are still a few years out, where do see the near-term opportunities for your sensors components?

Well, I think we talked about that a little bit earlier, but the most advanced projects we have is within steering wheel applications. We are already in quite advanced and different testing and going out to market. Further area where we have come a long way and start shipping sensors that early next year is in entry systems and that entry systems is typically door handles and tailgate sensors, this segment out of first to hit the market, already early next year.

So, within your other OEM product categories I thought for instance that even a segment like printers might move from a licensing approach to a sensor component approach, are you seeing sensor comments opportunities that might be in revenue in 2018 from categories other than automotive?

We have - we currently we have 12 customers which should be still at the quite low quantities. We are ramping during end of the year for this product as they try and put electronic products. This year we have been adding automotive application, so we're going to ship of the component in the beginning of next year. So, we have plan a little bit that we work on automotive qualification for our manufacturing plant together with the quality qualification of the company itself and we expected to be ready by this timeframe. So that's what we are doing.

Okay. So, consumer electronics products I recognized you probably can't get in front of your customers on specific names or products, but can you give us a sense of some of the product categories with those might be in?

It's mostly the areas where we are in like e-Readers and tablet applications and printer panels that application are were we initially will go to market.

Okay. A couple of questions for Lars. You mentioned the OpEx run rate for the next few quarters, it was actually somewhat higher than we have been modeling at this quarter, was there anything unusual in Q3 that would suggest that OpEx are going to decline sequentially in the fourth quarter and so what do you see driving OpEx up and down within that range? Thanks.

Yes. Lars here. This quarter started to sort of explain, but there are certain components in extent to all that it's not recurring as such. But we early - we talked about roughly 3 million per quarter and we put this 3.1 to 3.3 depending honestly a certain actions or in closing that investments we have do. We have to take everything into expense, it is not related to manufacturing [indiscernible] So that could be a little bit like that, a good number to expect.

Okay. And with respect to inventory you mentioned you got sufficient inventory and you're happy with the level of working capital. The inventory is relatively high at the moment to compare to your revenue segments since licensing doesn't require any inventory, so should we expect to your inventory levels to come down over the next few quarters?

Yeah, that is correct because we want to have a managing inventory, with long lead time components and so forth. That is very long lead times for those. I would say we have sufficient inventory now, so we could, that we can build in near-term even I would say little bit near-term, we would expect that to decrease.

Okay, lastly you happen to have the breakdown by raw working process in finished of the inventory?

I don't have it in front of me. It is [indiscernible].

We'll take that offline.

Sure.

Thanks, gentlemen. I'll jump back in the queue.

Thank you.

Our next question is from Mike Malouf from Craig-Hallum Capital.

Great. Thanks guys for taking my question. With regards to the AirBar you obviously are starting to do strategic options for that, can you talk a little bit about what are these options as you look through them and you been only been able to sell about 5000 units a quarter for the last few quarters, is there any expectation that perhaps the fourth quarter could be much better than that, headed into the holiday season or are we just stop trying to market this thing and are just going to try to give it to somebody else? Thanks

Hi Mike, this is Thomas. We still believe AirBar is going to be a successful product however, we learn a lot during this process and we will translate all of that into business in selling our components and from the beginning this has not really been our core business, and with limited marketing and resource, we put into this, we expect - we have expected more, but still it's proportional to the marketing to build the brand and build awareness around the product. The good thing is that we by doing AirBar, we are ready to approach, some of its customers with a sensor component that work have been tested in production and refined that the component and we also meanwhile built the factory and make sure that we can deliver to the OEM customers. So AirBar, we still think with right partner, right marketing and perhaps, a different brand can sell a lot. So, we are in contact with some of the largest accessory companies in this business, I can't exactly say who but, we are looking into see if they would be interested take over this product at their own marketing and selll it and then we will provide the components inside of AirBar directly to them, so we still make money on this providing components, but the burden of having this and the cost associated with AirBar, will hopefully go away.

And, do you have a sense of how long that would take to get something like that signed, I mean, are we talking six to nine more months or is it going to be a lot sooner than that?

I think pretty soon we have been working on that for a while, it always takes time to do this thing obviously we can't say exactly when, I think we are very optimistic there's a lot of interest in this product and we have to get back to the market with some update on that. But we are very optimistic about AirBar and that product.

And then with regards to the modules can you give us a sense of what you're selling these modules for especially the ones that are upcoming next year with regards to the auto side are these contracts that you have signed obviously these have to be in you have to have a lot of lead times, as Rob sort of pointed out. So, are these something that you will eventually announce which cars that they are on, and give us a sense of how big of unit number we are looking at?

Yes, we're going to put in a number in this slide. As you can see there is a lot of different opportunities for our sensors and it can, it can be used in a lot of different applications, but typically, these sensor starts for a few U.S. dollars for entry systems and then it goes up to tail gate sensors for maybe $25 and for collision sensors that number goes up further - typically – it is $34 to $50 ASP. And if you look at infotainment systems, it starts at $20 and up depending on display type and other type of sensors in the range of $5 to $10 depending on the application.

Okay. And do you actually have contracts with actual roll-outs on car, on new cars? Or is this just, just trying to get a sense of how the ramp is going to start here? If there is a new car.

We have signed one OEM customer that we're going to start shipping to. But, we are very engaged with a quite a few different OEMs. First of all we're trying to get into the next platform with these module components, that makes it much easier for these customers to integrate that solution. But we're also adding more features to this, for example gesture controls for the touch screen. What is coming next is the other type of sensors and the first shipment we expect to take place early next year, with this customers. We have deals in the pipeline, that we will announce when they happen. But primarily entry systems, tailgate sensors, and doors handle system and steering wheel with the customers are the first that's going to go to market. The validation of these things is different. For example, the steering wheel, and the reason why it is taking so long is that, this is considered to be a safety zone, an area in which it would take much longer to qualify to go into a real car. However, we've been working with that - as perhaps everyone knows for quite some time, and that's a good thing. Because, we now ready to get that into a real car, and specifically in self-driving cars that's coming out 2020 and forward.

Okay, great. Thanks for your help.

[Operator instructions] Our next question comes from Viktor Westman with Redeye.

Hi guys, thanks for taking my question. Can you hear me?

Yes.

Okay. Just wanted to ask first about the 12 customers that you ship, the sensor components to, in what areas are those? And if the one or several of them perhaps related to the steering wheel?

This is primarily consumer electronics products, and not automotive applications. We're sampling to several of our automotive customers at this point. But, we're shipping these that actually goes into products that are buid to go up in the market, it's not prototypes or anything like that. It's still in low quantities, but we expect it to take off by next year.

Okay, I understand. And I was also looking for an update on the steering wheel if possible and starting with maybe your value proposition is that solely based on the self-driving cars? Are there other value propositions?

First of all, we have several things in the steering wheel. And the first one is sensing of position of the hands on the steering wheel and in direction with the steering wheel itself. The other module we provide is the illumination module that can enable different indicators to move from the rear windows for example directed to the steering wheel, have like a lower resolution display directly on the steering wheel to guide the driver thru the user interface of the car. The third thing we do is to provide the track pad functionality in the center of steering wheel. So, you can navigate directly with the fingers on that. The fourth thing we do is for self-driving car is to have a function where the car knows, if you are in touch with the steering wheel, but also if you are inside of the steering wheel with your hand which is quite dangerous when the car turns automatically on the wheel, so there is a sensor that sounds if something is inside of the steering wheel itself. So for the steering wheel we provide multiple functions, and it's completely modular, so customers can select one part, but not the other one, so we can tailor depending on the needs for that particular customer with sort of modular components.

And last question on the steering wheel and how does the contract look with regards to information, if you receive a design win - are you able to announce that or how does it work?

That depends on the customer of course. We primarily work with AutoLiv on steering wheel and we believe they are the largest supplier in the segment, we have a very good relationship with them, so that will be announced in connection with AutoLiv, I believe, when it happens. We provide first the licensing type of solution for steering wheel, but we also provide the sensor component ready to integrate into the steering wheel aswell - so we have two solutions for that depending on the requirements.

Thank you very much.

Thank you.

Our next question comes from [indiscernible] with [indiscernible].

Hello. Thanks for taking my call. I just want to know you see on the AirBar itself, do you see a difference in different countries on the interest of the product now you are selling in many countries, do you see any countries that have larger interest?

I think we have been focusing on a few markets primarily the US- but initially we we're seeing a lot of interest in India and China, but we have with a limited marketing resources had to focus on specific marketing area for AirBar, so the United States as a homogen market has been primary target for us. We have been looking at different other markets as a second step and I think India and China of course is an interesting market to have a lot of PCs that needs to be upgraded with the touch, but U.S is being our sort of first market.

So, you use to be marketed from QVC, is there any talk about that happening again?

Not at this point. We think that, well, we learned a lot in these processes that the AirBar product is sort of a unique new type of application that you can't really compare to something else. It needs quite a lot of education, to understand what it does and which problems it solves and how we can relate through the cost, what is cost. So, we think to make it successful, we need to take another approach in terms of marketing to educate the consumers and retailers, exactly how to sell the product and how to position it. And I think that's …

But that includes that, because I see that now you have some type of arrangements with Dell, but I'm not sure how far it is?

Yes, we were selling it through Dell's website, so somewhat of a selective model you can basically go in and when you buy a PC can select an AirBar like you would with like a mouse or a keyboard for example. What we're seeing is that people doesn't seem to understand that touch screen is separate from - it's not a separate accessory. It’s been an educational challenge for consumers to understand that and we need to see how do and we believe that going forward we are looking at the group and we can do that with partner than ourselves, because we're using marketing to understand the product.

On the module side, you've plan on having Hewlett-Packard change to module from licensing?

We're working actively with HP, and all our customers actually, to get into the next platform with our component. So, and our components makes it - we called them modules earlier, but smaller components and this thing goes into and it's compatible with our previous protocols and so it is just plug and play basically into their platform. We are trying so solve a few of the problems and address issuess is the hardware production or technology applying a component. And we are also take action to scale our production to that demand which is obviously always a concern as a company. We are dealing with partners, we are dealing with ourselves to meet the expected demand. And that's an important factor to get this large volume boost with someone like HP to make sure we just supply in our margins for that product.

Okay. That's the plan, the question is how long that will take.

Yes. We are working actively with all our customers and we have three primary targets for sales, one is the direct customers, which is a large OEM like some Amazon and HP and then secondly, we are working with our Tier 1 partners with we consider them as indirect customers. And then we have FT, Texas Instruments and Samsung Displays for example, that we work actively with for integrating our module in to their solution. And the third is through distribution, we have DigiKey signs for example for small volume project but there can be quite substantial as they grow, because there are a lot of projects going on that need a very simple touch solution. So, we see how that works, but we're trying to attack this from three different angles and of course the low-hanging fruit is our current customers we have today, like HP.

Okay. Thank you very much.

Thank you.

This will conclude our question-and-answer segment for today's conference call. I'll hand it back over to management for additional and closing remarks.

Thank you. I'd like to say on this call, we're obviously very excited about our sensor component and where our business is going, production is running and we're ramping with some customers. So, thank you for everything and for joining this call. And have a good day. Thank you.

Ladies and gentlemen, this will conclude Neonode's Third Quarter 2017 Investor Conference Call. You may now disconnect your lines and have a wonderful day.