Neonode Inc. (NEON) Q1 2018 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for standing-by and welcome to Neonode's First Quarter 2018 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. I would like to direct your attention to the company's PowerPoint slide-deck that you can view when logged on to this call. The company will control the navigation through the slide-deck to coincide with their prepared remarks. Thank you. At this time for opening remarks and introductions, I would like to the 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 first quarter 2018 financial results and provide a corporate update. Our update will include details of customer activities, technology developments and other items of interest. On the call today with us is Håkan Persson, our CEO; and Lars Lindqvist, our CFO. Before turning the call over to Mr. Persson, I would like to make the following remarks concerning 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 differ materially 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 my pleasure to turn the call over to Håkan Persson, Chief Executive Officer of Neonode. Håkan, please go ahead. Håkan Persson: Thank you, David. Thank you. I should probably note I was appointed as CEO in February and started my precision about a month ago and I am very happy to be here. Today, I will present the highlights for the first quarter, present myself and my background and give you a flavor of right where I see Neonode today and our platform. So first a quick glace at the first quarter, Lars will go into greater detail later on. Our sales of $2.4 million were flat compared to the first quarter of last year. Our net loss of $700,000 for the quarter was 21% lower than last year and the cash used in operations was primarily the $60,000 compared to $1.6 million prior year. I am happy to announce that we are engaged in two new OEM development projects based in sensor modules, which I will discuss in later slides. I would say that we are heading in the right direction and I strongly believe that Neonode’s technology is becoming increasingly relevant and has the potential to create unique value. This is what triggers me to define and drive our need to work going forward to capitalize on this great opportunity. So now let me tell you a little bit about my background and how I look at our market opportunities in a little bit more detail. I have worked with several high tech companies with strong products and market aspirations that needed clear direction and forceful sales execution to take our products to the markets, companies in many ways similar to Neonode, why I believe my experience is relevant for the companies [indiscernible] to deliver world-class solutions and products to our customers. P: We will provide the company with a clear direction of focus and the processes needed to take our products to the market including clear value propositions and market segmentation telling what we sell, where we sell and how we sell, the increasing alignments of our sales and R&D resources to take full advantage of opportunities both long-term and short-term and we will took actions in place to become a more market and customer focused organization in order to ensure long-term success and grow over the business. In short, we have a strong foundation from a company, technology and customer perspective and there are lots of opportunities to explore. I am convinced that Neonode has the technology to resources and the capacity to achieve profitable growth. So our short-term action program will be as follows. We will focus on capturing to full potential of our licensing business based on zForce CORE. This is a stable foundation, which is very important to us. Here we have revenues from a lot of strong grounds and several markets such as printer companies, automotive companies, et cetera, who have shipped 59 million products [indiscernible]. I believe we can grow our licensing business by selling new products – projects to existing customers, but also through new customer acquisition. It’s great and potentially growing profitable business, providing steady cash flow enabling the company’s growth strategy. We will grow customer related development projects, where we get the NRE revenues and have a strong commitment from our customers to use our technology. The NRE revenues potentially represent a large business opportunity in its own growth, but leading up to focus sensors module sales, an additional licensing agreement. We see a significant revenue potential selling our zForce AIR sensor module. By working with the right customers and partners in close collaboration, we will lay the ground work for substantial sensor module shipments over time. The automotive industry is the key market and a significant beachhead for both our licensing and module business. We have seven Tier 1 customers to ship approximately 300,000 infotainment systems in the first quarter with our zForce technology, cumulating a total of approximately 3 million systems shipped in 2015. This is an area where we will continue to increase. Our current Tier 1 customers already have to knowledge during a supply chain in place for these infotainment systems from new car holders. We saw a significant shorter time to market. Our zForce CORE technology has proven to offer the highest such performance and reliability for the noted customers, we continue to refine our zForce CORE technology to ensure it continues to be the best charge for our customers. The steering wheel project with Autoliv is progressing and we have now entered into the commercialization phase where several OEMs are actively engaged with discussions and testing with Autoliv moving towards the targeted vehicle program implementations. We have entered into a new development project with an automotive OEM for external door sensors which includes NRE payments. With the growing interest to entry system solutions and our engagement sales activities with interest in OEMs and our Tier 1 suppliers. We also see a big future opportunities selling zForce AIR Sensor Modules. In addition to our current customers using zForce CORE technology, the new zForce AIR product allows us to reach a number of new market segments more efficiently such as industrial, medical devices and home appliances, where we have a compelling value proposition. And as a result, we are now engaged in a new and interesting market segment with the global OEM developing as such solution for aircraft cockpit instrumentation panel using our zForce AIR Sensor Modules. And we are exploring and entered in discussions about new opportunities in select strategic markets collaborating with and building on our close relationships with key customers and products. So, Lars, now I hand over the call to you.

Thanks, Håkan. You can find our first quarter earnings release and 10-Q available for download from the Investor Relations section of our website at neonode.com. You can also find a slide deck that is presented today available from the Investor section. In the first quarter 2018, Neonode adopted the new revenue recognition standard ASC 606, which requires the company reported all revenues in the quarter that corresponds to the actual customer sales. Previously the company reported revenues in the quarter in which the sales report was received from the customers. ASC 606 requires the company to estimate revenues in case with actual customer sales report has not received by the financial reporting filing date. . : Our total revenues in the quarter is basically flat compared to last year, but would have increased 9% if we started prior year related to the exchange in revenue recognition rule. Our total license fees increased compared to same period last year even though we had $230,000 decrease due to the account measures. Our first quarter is typically higher than the fourth quarter due to higher sales during the Christmas season for customers’ products such as eReader and printers. Previous to the accounting exchange, we reported our customers’ fourth quarter sales in our first quarter when we received the sales reports. I want to talk about the licensing in more details in the next slide. AirBar sales decreased as expected from $200,000 to $46,000 in 2018. We’re going to see AirBar as a significant revenue opportunity going forward and are evaluating different options to monetize our investment support and collaboration. Our net loss was $700,000 or $0.01 per share in the first quarter compared to $900,000 or $0.02 per share in the same period last year. Our operating expenses for the quarter amounted to $3.2 million and are on-plan towards the quarterly run rate of $3 million. Please be aware that our results going forward may have a material impact from exchange rate variance between U.S. dollar and Swedish krona, while approximately 85% of our expenses are in the Swedish krona and all revenues in U.S. dollars. A 10% variance in exchange rate would impact the result with approximately $300,000. Our licensing is solid and profitable business, which increased 10% year-over-year, a bit focused on capturing the full potential going forward. The increase would have been 18% if we restated in the prior year. Printer license fees in the first quarter from five OEMs increased by 40% compared to the same period in 2017. The increase is primarily due to Epson and HP. Epson is shipping the printers with our technology in the first quarter of last year. They began shipping printers in the second. The product made for HP is stable while we moved – moved up to larger screen size with higher per unit license fee. Our automotive license business increased by 20% in the first quarter of 2018 compared to the fourth quarter last year. This is mainly due to increased shipments of existing car models using our technology plus release of new motors. This increase is partially offset by a decrease of shipments in China from two of our Tier 1s where they have chosen alternative designs for current production. We believe however the work we’re doing with a new release of zForce CORE will address this situation. Our license customers shipped 2.9 million products during the first quarter 2018 and accumulated more than 59 million products since 2011. I am going to end my talking about the balance sheet and cash position. We believe we have sufficient cash to execute our business plan. We are implementing a tight cash management and cost control and more focus on key customer projects. Our total operating expenses for the first quarter accounted to $3.2 million and we are targeting $3 million in the near-term. Our cash used by operations was $560,000 in the first quarter compared to $1.6 million in 2017. We have sufficient inventory to meet our expected near and mid-term demand from module sales. As of March 31, 2018, we have $4.9 of cash and $2 million of accounts receivables. Our account liabilities including accounts payable, deferred revenues and accrued expenses are well within plan and our working capital is efficient to grow our business. I want to end with a comment about upcoming shareholder meeting in June, on June 7th, where we are asking shareholders to approve a reverse stock split as proposed in the proxy statement. All shareholders on a record date of April 11, 2018 will be able to vote. We believe that our NASDAQ listing is an important event and are asking for your support. Now I would like to turn the call back to Håkan. Håkan Persson: Okay, thank you Lars. So to conclude we have a great technology that provides robust and flexible touch, gesture and object detection solutions, which provides a unique value proposition to our customers. We also have a solid foundation with the growing license business and have started to ship our first project related sensor modules and we are transitioning the company’s technology development activities to market specific and customer driven solution. We believe that the actions we are taking will allow us to increase our license business and grow our sensor module business that’s increasing shareholder value. This makes me optimistic about the growth opportunities going forward, direction, focus and sales execution are our key. Thank you all and I now hand over to the moderator for questions.

[Operator Instructions] Your first question comes from the line of Mike Malouf with Craig-Hallum Capital.

Yes, thanks for taking my questions guys. My first question is on the auto side. Could you talk a little bit about sort of as you look out over the next six to nine months, particularly on the sensor side, what kind of opportunities do we have to get to revenues in that period? And then secondly, it sounds like you have lost a Chinese customer due to a design change. Could you give us a little bit more color on that? And that I think you said that you might be able to get that back through the sensor modules, but provide some clarity on that as well. Thanks. Håkan Persson: Yes, hello. With respect to the auto segment, I mean, we see rather strong interest actually on the external door sensor type of applications. And this project that we have ongoing is on the finance development project, which is stable over the 12 months and we see a similar type of interests, similar type of applications going forward. And with respect to the Chinese situation, I think perhaps Lars can fill in, but basically how these guys work as they do have more than one solution potentially in play and then given where they sit, they choose either. And I think what we do now is clarifying our future roadmap with respect to our technology, as I said, we are refining zForce CORE and we believe and we know that from a performance perspective, we have a very good product. So I am quite optimistic about that we have the opportunity in the back actually.

And on the door sensor side, is that actually…

Lars here, Mike…

Yes.

Lars here. I have to add in something too. These two Chinese Tier 1s, they represented approximately $200,000 for the total automotive revenue in the first quarter of 2017 and now down to 50k. So they are not out of game and that’s also why we basically believe that addressing now with the new zForce CORE phase lift that that is something we bring back to customers that, yeah, basically to all customers.

Okay, great. That’s helpful. And then when you look at the door handle opportunity, is that something that is potentially going to go to market this calendar year or is this more of a 2019 or 2020 opportunity? Håkan Persson: Yeah the timeline is always difficult because there is so much that can happen in process like this. But hopefully we will see some traction at the end – towards the end of the year.

Okay, great. And then Lars maybe a question for you, you said that you’re trending to get to that $3 million per quarter. When do you think based on your plans that you will have a $3 million expense quarter? And do you think that’s sustainable?

Hello, Mike, a little bit hard to hear what you say, but next question being up – louder a little bit. But when it comes to expenses, we really are focusing pretty much on tight cost follow up and control. And when we have streamlined our expenses into customer driven projects also NRE finance, not revenues, but finance your payment, we then also offset some of our expenses in that investment. So I am quite confident that the $3 million run rate for quarter, we will receive quite soon.

Okay, thank you very much for the help.

And your next question comes from the line of James Mezedeith with Cowen & Company

Hi, good afternoon. Can you hear me? Sorry, can you hear me? Hello? I am sorry, can you hear me? Hello.

And James Mezedeith…

Yes, can – hello, good morning. Can you hear me? Håkan Persson: Yes, we can hear you loud and clear.

Okay, great. Thanks for taking my question. I wanted to ask about the modules business in the sensor modules and I didn’t – couldn’t hear exactly, clearly that you – that you’ve mentioned two new projects that you’re working on, one of which was related to aerospace and didn’t catch what the second one was. Håkan Persson: Well, what we talked about was two as you say. One is for cockpit instrumentation panel project that we are running, which is in the aerospace and then probably automotive space, where we have an external door sensor project going on.

And that’s a new door project… Håkan Persson: Sorry?

That’s a project that’s you are already working on. Håkan Persson: Yes, this is a new project that we are working on.

Okay. And secondly you mentioned that NRE is a good business because not only because it generates revenue but because it generates future business, but there was no NRE in this quarter. How should we think about those revenue streams in the next several quarters or years? Håkan Persson: Yeah, well, we would see NRE revenues coming up through these projects, but I think the important thing here is that they are laying the foundation of future sensor sales. Lars, do you had a comment on this?

Yeah, Lars here. Yeah, if you recall, going back a little bit, we stated earlier that we maybe see that our NRE revenues, payment revenues will go down, but now the focus is very much aligned to that the projects will run, focused and selected that they will have NRE connected to them. And we have ordered to have NRE payments coming in now and expect more to come, but it’s a little bit too premature to say what the markets will be, but it will be NREs. And as we look forward and sign on new contracts, we will let you know more about those details.

Okay, thanks. And my final question…

James…

Yes…

James, this is Dave. Just to be clear, there is two things that happen with NRE. The first is they pay us the NRE and it goes in to deferred revenue and tell such time as whatever milestone that that payment is associated with is completed. So we can get payments of – I will go back to the Autoliv payments for example. If you remember back a couple of years ago – 18 months ago or a couple of years ago, they paid us like $3 million upfront, right. And that was recognized into revenue over a 12 month period, really I think 16 months period or something as those milestones of that cash was related to or completed and accepted by Autoliv. So the same dynamics is here. We may have cash come in and it may not be recognized into the income statement for – I don’t know it could be some time before that portion is complete and milestone has met. Does that make sense?

Yes, absolutely. In fact that was – that’s the perfect lead in to my next question, which is the deferred revenue declined by $1.1 million in the quarter from – declined by about $1 million in Q1 and I wondered what was the cause of that and how much of… Håkan Persson: Okay, 50% of the deferred revenue is related to prepaid license fees for some of our customers. We are a bit quite successful in getting that earlier and the rest of it is basically related to deferred revenue recognition of all AirBar and module sales when there are agreements when they can return some part of it and then we then don’t record revenues till it is sold through, I’d say the sell-through so to say policy with all of our accounting recommendation.

Okay, thanks. Is it safe to say that the cash is not yet come in for these new NRE projects that you’re working on? Håkan Persson: No, there is not that NRE payments that they normally pay all at upfront, they are normally – let me say a general guidance could be that part of let’s say for example US$100,000 NRE. We try to get 50% sign up the contract because it’s the commitment fee and the rest of it is linked to different milestones during the project. So we try to secure that we will not finance customers. We want to have a commitment fee and absorption amount already with the standard agreements.

Okay. Thanks for – thank you. Thank you.

And at this time you have no further questions. Håkan Persson: Thanks everybody for joining us and have a good day.