Urban Forssell
Analyst · Craig-Hallum. Your line is now open
Thank you, Fredrik. Today, I will review some slides describing our vision, our technologies, and our business strategies. I will also describe our key markets and how we work to increase those sales in these markets. First slide here, I want to share with you our vision statement is to transform the way humans interact with machines and very happy about its mission statement as it ties back to also where we're coming from and Neonode's history. Remember that this company was founded as a smart phone company 20 years ago and was the first company to launch gesture-based touch phone on the market, the Neonode N1 which was presented as early as 2002 at the CeBit Fair in Germany. This was the phone without conventional keypads that all the mobile phones had at the time. Later Neonode, [indiscernible] later, we help HP, Lexmark, Canon, and all the other printer manufacturers to get rid of the buttons they have on their printers and replacing them by clever touch displays that allowed scrolling and selecting different options in the printers using a touch interface. And right now, as this picture shown here indicates we work a lot with contactless touch or some prefer call it touchless touch. So, we are still involved in Human Machine Interaction or HMI and we want to transform the way humans interact with machines to make it more convenient to enhance the customer experience and bring more value to all the users. We are a deep tech company and all our work is concentrated around two versatile technology platforms. One that is by now I think well known by follow us C-force. It's a IR based or infrared based optical technology that supports touch and gesture sensing and the very advanced involving optics, electronics, and software algorithms in this platform. We also have developed over the last years a software platform for seen analysis. We call that multi-sensing and this platform supports applications such as eye tracking, drowsiness, distraction, monitoring in vehicles and other situations and, general occupancy and situational context monitoring. Today, we have a certain focus on contactless touch and as you've heard from me and other people representing Neonode in the previous conference calls, this is our main focus since last year and where we also see the biggest potential in the coming years to grow our topline, but also to significantly improve our margin and our general cash flow situation. What is contactless touch? Yes, as the name suggests, it's contactless but touch like interaction with displays, keypads, buttons and holographic images. By touch likely mean that you typically point with a finger or another object like a pen or maybe you have key or something. Here, you can interact with our line machine without touching the display or the keys, but you hover your finger in front of it. And with our technology that is -- that can be interpreted as a touch or a click as we had become accustomed to the computers. This is very convenient and it adds safety security in general an improved customer experience when you interact with different types of kiosks and elevators and other types of applications. Why this is interesting? Yes, I've already touched on it. It's a lot -- it's about safety, and to avoid getting various types of infections from bacteria, from viruses, or in general, to have an unpleasant experience. And I think the key point when we're looking at this slide is that think about one machine, many users. So, we talk about kiosks and elevator in public spaces. It can be at an airport, in a shopping mall, at the hospital, in an office building, where we have many different persons coming in and using the elevator, using the coffee machine or other kiosks. And here's why we see the very, very big advantage of contactless operation. And if you add them improved user experience that you can get with this type of interface rather than conventional touch interface or physical buttons. It's a very compelling and strong offer that we bring from Neonode. Countless application areas, we have decided to go mainly towards the elevator and kiosk segments, and especially advanced interactive kiosks that you can find self-service kiosks, point of sale terminals, different types of vending machines. I mentioned elevators, we see applications in hospitals and clinics could be for obviously, visitors patients coming to that hospital and for instance, in Sweden, it's very common that you sign in using that self-service terminal. And there's other use in the surgery room, where typically nurses and doctors want to interact with machine in a sterile environment and then touching a display for instance, is not an option. So, here also contactless has an important role to play. We also see different types of information displays, like you would happen, for instance, when you exit airport security and they typically have a station where you can tell how happy you were about this experience passing through security. The same view shops is another example. So, all these types of applications is what we are addressing with our contactless touch offers and we think they have a very various strong offering in Touch Sensor Modules, which are embedded sensor modules that we produce in our subsidiary promo in the west coast of Sweden and originally developed for touch applications. It's ideal for contactless touch, because of its optical way of operating and high performance. So, we can sell and we are selling and deliver this as a standard commercial off-the-shelf product today and we can scale it up very quickly because our operation at Pronode uses state-of-the-art automatic production machines tuned for this specific product range. Overall, offer a cost effective and easy to implement solution that's ideal for both retrofit solutions and new designs. The technology itself is very, very advanced and it's both precise and persistent. It supports advanced multi-finger operation, which is interesting in some kiosk applications. How can it look in the retrofit solution in elevators? This is an example from our friends at Dewhurst. Dewhurst is a U.K.-based elevator control panel supplier. They work both OEM and in the aftermarket and for contactless touch, they have developed a technology called HALO. And they are promoting this under their own brand HALO with Dewhurst powered by Neonode. They have an increasing business around this and this is one picture showing how an installation can look like in a modern elevator and this is from a commercial building in London, and they have a sign there next to the control panel says this a touchless elevator operation now and if you look closely, you'll see on the right of the button that the person is pointing at, there's the liquid holder for our TSM and this is one creating that touchless or contactless feature in this elevator. It has been marketed for some time in Europe, its picking up speed. They are also approaching elevator OEMs with this solution, so they work both aftermarket and new equipment. Another example is to show how you can also do it this is still a retrofit solution, developed by a company called Jardine Schindler, it’s a joint venture to Schindler in China. They in turn work with some friends of ours called HKPC in Hong Kong. And they have developed and installed a number of these retrofits for elevators in and around Hong Kong. And what's interesting about this, you see in the picture that you can position, the unit in the corner, or it's actually built into the wall. So, the installation can be very, very unique you have this type of arrangement. So, basically, it will be an invisible solution if you build it into the wall and it works together with standard control panels. So, very small adaptations meeting. But of course, if you look at new installations with new elevators, you can do even nicer installations that are totally in this -- and works very well. The use case of elevators is I think, very, very clear and compelling. And we have good response and market feedback from this type of solutions with different companies that we are engaged with in North America and Europe and Asia. I've been talking about Changi Airport in previous earnings calls, where still airport kiosk is -- it's sort of a sub segment in itself, which is very interesting and very have considerable traction now. We can expand this maybe to call it transportation hubs. So, including airports, train stations, subway stations, bus stations and similar, there's a strong interest from different companies. Some could be the airport companies or the companies doing the kiosks for airports or in other cases, it could be the operators or the airlines or the train companies operating these transportation hubs. So, we see all different versions. We are still mainly doing retrofit projects here, but we have growing interest from kiosk OEMs as well. And this is just one example. We have other types of self-service kiosks in the shopping malls, in supermarkets, in restaurants and so on. The, for instance, we recently came out through the press release about a new project where a certain sushi chain in Japan are using technology to create contactless top self-service kiosks at their restaurants throughout Japan. And these are just some examples of the progress we've been making in the last six to nine months, I would say, and we are happy to say that the interest is growing and we are sort of building the momentum here. Although the third quarter, as Fredrik mentioned, was a little bit slower than we had hoped. We continue to believe that all these types of contactless touch kiosk and elevator applications will simply become more and more common and that our market share will grow. I want to end this little tour of the examples by showing this picture. I like this very much, because it's very, very clear. If you look closely above the display here is a bar holding our Touch Sensor Module or could be also two of them in some applications. And with that, the display can then be used as a contactless display or a touch display. To the right, they have here a temporary guide with step one, step two, step three, instructing the user that this is how you use this contactless screen. And just below the screen, we see a sign saying contactless screen. So, it's very easy to recognize that this is something special and the feedback we have from this particular hospital, which is in Asia is that it's very quick for new users, patients, and staff in hospital to sort of understand and use this. It’s a very, very positive reaction and they have placed follow-up orders to equip further kiosks in the hospital with the solution. So, this is what we're working on and these are some examples of success stories from larger and smaller projects that we have been involved in and our pipeline have multiple other examples similar to these. And we have had the biggest and the best traction so far in Asia, but I'm happy to say that interest is increasing on Europe and North America and as Fredrik said, when we talked about direct offering, and what we use money we had raised to that offering. So, it's not about marketing or sales, continue to promote our solution and raise awareness and drive demand for this, because we think we have a very, very strong right to win with our solution. Here, a small summary, our solution in the first column has several strong features compared to other example, technologies or solutions. It gives a very intuitive user interface is easy to use. It's also easy to install and it's very fast and precise. So, the overall commercial value for both the buying customer and end customer using is very, very high compared to others. I will say that, in some applications, mobile phone apps will also be taking market share going forward like that for sure. And it's a lot driven by the fact that different companies want to own the customers and the customers' data. So, that's why they have different types of apps being developed and deployed, so that you should have like frequent flyer programs or customer loyalty programs and they want you to use that to do your distance with the company. In some cases, I'm sure that this will be very, very common and have a significant market share, but in many others like in elevator or in the airport checking terminal and so on, they have the same terminal for multiple airlines and so on. Our solution is very, very straightforward and quick and brings a lot of value, both to the buying customer and the end users. So, we are very, very confident here and we are very, very motivated to continue our work to market and promote our solutions. We are also working in two very, very large markets, the elevator market and interactive kiosk market. There are around 19 million, 20 million elevators in the world, so a huge installed base. Europe used to be sort of the dominating market for elevators, but in the last 20 years, of course, Asia has overtaken Europe as the main region where elevators are installed, especially China, but also other countries in Asia, the growth rate is somewhere 1 million to 1.3 million new elevators a year. And, again, Asia is leading the way, in particular with China, representing 63% of annual growth. But remember, we have both a play with retrofits and then we are targeting to grow our market share retrofits on the installed base, and then also target our to grow our market share in new installs, new elevators. And this is the gradual work and as I will explain in just a minute, the first step in our approach and in our strategy is to penetrate the market to retrofit installs, and then gradually move into new equipment as well. But over time, we will still continue to do retrofits because of this huge installed base and the long lifetime of elevators, which can easily be like 30, 40, 50 years or longer. Also, interactive kiosk is a super interesting market, we can easily count to 47 million interactive kiosks have installed base. Now, I will say this that some of these 37 million interactive kiosks are simpler type and probably not our target market. But we are confident that at least half of this, say 20 million, 25 million kiosks is our target market. And some of these sub segments like self-service kiosks and self-checkout kiosks, and so on, they show very interesting growth numbers, double-digit CAGRs and these are global averages. So, if you look at certain markets, in particular, in Asia and Europe, the growth of some of these types of self-service kiosk is like super-fast. And again, we can do both retrofit and new installs apps for elevators. So, interactive kiosk is another interesting market next to elevators. And you have to show a little bit an example calculation about the addressable market, we have already explained that we have multiple application alternatives in elevators and kiosks. It's a fast-growing market with Japan and Korea leading the way. But if you look at the example that we are showing here, it's easily calculated that our target market is -- addressable market is worth more than $1.5 billion and if you would include more sub segments and so on, that number will grow. So, our addressable market is very huge one compared to our current turnover. And that's why we feel that we are on the right track, we have a huge potential and we can grow -- we can also make a lot of money. Looking at some example calculation again, but if you think about the average gross margin, which we think is fully realistic, even in volume production of 35%, we see the types of possible gross profits we can generate with our business. Now, we are very far from this today and we use this as motivation for our work to grow the business and we are also encouraged by the fact that there is our large market out there and the potential is there. So, we are working harder and harder every day as we learn more and we grow our team and we grow our partner network to penetrate these markets and to capture a bigger market share and to simply grow first our topline and then also bottom-line results. We are building our business on three pillars; licensing, product sales, and sales of engineering services or NRE, non-recurring engineering. We see growth potential in all three. With licensing, currently, we have more than a dozen active license agreements, mainly printing companies and automotive Tier 1 suppliers. In the future and what we are working on is to, of course, continue to support our current customers and follow-up products for them but also expand into new areas, new types of automotive applications in the military and avionics and some industrial automation projects. And by this, we think that at least in the mid and long-term, we can grow the licensing revenues. And short-term, it will be flat or slightly decreasing because of the legacy character of this business. The product revenues is where we see the biggest potential to grow in the coming two, three years. And this has two explanations. One, I've already addressed. This is the large addressable market for us and elevators and kiosks. So, the volume potential is interesting. Also, here we have an higher average sales price than what we typically get in royalty per product from licensing. And that's a factor of say 10 or even more. So, the lever -- leverage from product sales on our topline results is very, very strong. And we are building up momentum now and we are targeting to grow this business significantly in the coming two, three, four years. And also NRE, as a consequence of our products business and our ambition to grow our licensing business, we are also exposed to opportunities to sell engineering services. And of course, for licensing for Neonode, that's typically the requirement that we together with the automotive Tier 1 supplier, for instance, we developed a solution and we doing that development project, we charge NRE costs to the customer. And then when the underlying vehicle or whatever the product is, is launched in mass production, we get the royalty typically per vehicle or per product sold. Here we see a vast number of opportunities to grow our business through increased sales of NRE, and also some sales for prototypes and other types of concept and the demonstrators. So, overall, remember that our business model rests on the three pillars; licensing, product revenues, and NRE and we see potential to grow all three of them, especially in the mid to long-term. Short-term, it's mainly NRE and product sales that has the potential to grow significantly. And this is what we are concentrating on this year and the coming couple of years probably. We get a lot of questions about our business and how we work. So, I wanted to review two slides here explaining little more in detail how we work and why. The same cycle in the type of industries and businesses that we do typically looks like this. Initially, it starts with a retrofit opportunity. Meaning that we or someone else could develop a solution that could be retrofitted onto an existing elevator or existing kiosk. Typically, here, we have to rely on partner solutions. So another company developing custom retrofit solution for a particular type of kiosk or particular type of elevator, and also going out in the field with technicians and engineers and installing them in these elevators and on to these kiosks. That's why in that phase of the sales cycle, our target customers are integrators and tech companies in the occasional case, also elevator and kiosk OEMs who work in the aftermarket themselves. But typically, they are a little bit difficult to commence and harder to reach in this early phase that we are still in many markets like in Europe and North America. So the first phase is about retrofits and technically we have to rely on partners to develop and install these solutions. As the end customers interest and demand for contactless solutions grow, what we typically are seeing is that this will -- for different reasons, stimulate the OEMs to step in, and they want a piece of that business. And then we go to the new installed space where we can attract elevator and kiosk OEMs to pick up our ideas and buy our Touch Sensor Modules and installing them in new products. And from there, we hope that we can really develop new solutions together with the customers and then it's more R&D and then it's more or less 100% an OEM type of business. Similar to Neonode's business with a printer manufacturers and automotive Tier 1s that were in use to in the last 10 or 15 years. And I reduced a variant of this slide before, but the previous slide should be read together with this one. So when we said before that the retrofit business is very starts and typically relying on partner solutions. What we have done since last year is to expand our ecosystem of partners, some we have signed up as our value-added resellers, other product and technology companies that we cooperate with typically they worked in a particular market, say the Japanese market, Korean market or German market, I have to give you the few examples. They typically also have an existing customer base, and that we can tap into. And we use them and have been using them successfully to reach midsize and also in some cases larger OEM companies in these markets, or in some cases, even in certain segments. With our own salesforce, which is somewhere around a dozen people today in Sweden and in different countries around the world, we focus on large and mid-sized companies and also to support our partners of course. And what we see we are about to hit now is sort of the second phase in sales cycle where we have more direct engagements with the OEMs and then it will be more work for our own sales persons to manage those accounts and to grow that business. Besides these partner sales and direct sense, we also use online distributors like DDT in the U.S., [indiscernible] in China and next to Japan. And we tried to direct smaller customers to those and focus our own resources on the larger accounts that we have the bigger potential. Besides the ongoing work to marketing sale and to grow the business through these measures, we also have other initiatives to ensure that Neonode continues to grow. Right now we are focusing on marketing and sales and expanding our partner network and it's to grow the awareness of Neonode and our contactless touch solutions on the TSM offerings that we have. It's starting to pay off and we have more and more interested in pipeline. And as we have been telling in previous earnings calls, we are building our business pipeline step by step. In the next phase, what we are looking to do really say it from next year is to scale the business in our key markets, Japan, Korea, China, Western Europe and America. We are also currently developing and learning more about the different application areas that we are involved in in elevators and different types of kiosks. And we are expanding our offerings and tuning our offerings and we are also in some cases, vertically integrating more solutions that our partners have been doing into our own offerings. And this is a way of course for us to grow our top line and secure that Neonode comes out as a winner in the end. We are also investigating to add a second source besides our subsidiary Pronode to produce the TSM's and typically, we are looking at some candidate partners for producing the TSM in Asia closer to our main markets in Japan and Korea and China. In the future, we have already several ideas for how to continue to expand our business into new geographical markets and additional market segments. We are developing and looking at new hardware products and also extending our software offerings. And there are also ideas for further accelerating our growth through strategic partnerships and acquisitions. So please stay tuned. We have a lot more to show in the next couple of years. And we are hard at work and realizing all this potential and developing our business step by step and we fight relentlessly every day, every week to grow the business. And by this I -- and basically at the end of my presentation, I just wanted to end this call and then turn it back to Dave to lead us through the Q&A session here. But first some concluding remarks. COVID-19 continues to bring on challenges for us as many other companies. Component shortages is slowing our customers down and we see it clearly in the third quarter, both the automotive Tier 1 suppliers that we are engaged with and the printer manufacturer customers that we have had reported problems in the production or sales due to component shortages. Of course, that's hurting us. We also see a strict lockdown that we have for instance in Taiwan, Korea and Japan during the third quarter. They really hurt us in other ways as well, where we and our partners couldn't even visit companies in the same cities, and we couldn't go out or our partners couldn't go out and install the TSMs in new elevators and kiosks. And in some cases, of course, overall economic uncertainty caused by the COVID pandemic and the new delta variants and other variants coming has slowed down some decision processes. So it's very clear that we have been hurt by this in the third quarter, and we are still to some extent hurting by this in the fourth quarter, like many other companies. So second bullet is that third quarter sales was slow. But yet today, its revenues show and have a strong growth and we are happy for this. We have a very, very interesting sales pipeline, and especially last couple of months, it's been going fast in the right direction. So both new TSM opportunities, new MRE projects that we are cooking or that we have been awarded. And we also have been identifying new licensing opportunities that we hope that we can capitalize on in the next first month to get new project started and in the coming years to grow also our licensing revenues. With a contactless touch business, where we of course focus on elevators and interactive kiosks, we are extremely well-positioned today to become a leader in this business with our TSM offerings and our general know how, and also now with our well expanded partner network and global reach we are well positioned here. So we are confident that we can grow this business significantly in the coming years. And because of this and because of economic uncertainty, we have strengthened our cash position through the registered direct offering and the limited use of our aftermarket facility. We have secured the support from new interesting strategic investors in Sweden and Europe. And I'm happy to say that the registered direct offering was oversubscribed and was a very well creaky and nice process for us. And by now we have the cash to finance the business growth in the coming years actually. So we are very, very optimistic for the future. And with this, I thank you and turn floor back to David for the Q&A.
