Neonode Inc.
Q2 2021 Earnings Call Transcript

Published: 11 Aug 2021

[Operator:]

Hello, everyone. Thank you for standing by, and welcome to Neonode's Second Quarter 2021 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 with the company's covering analysts. . Thank you. And 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.

[David Brunton:]

Welcome and thank you for joining us. On today's call, we will review our second quarter 2021 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest. On today's call is our CEO, Urban Forssell; and our new CFO, Fredrik Nihlén. Fredrik joined the company last week and will provide a brief introduction of himself in just a few minutes. He will also present the financial results of the company for the second quarter. Before turning the call over to Urban, 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 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 obligations to update these forward-looking statements. At this time, it is my pleasure to turn the call over to Urban. Urban, please go ahead.

[Urban Forssell:]

Thank you, David, and also from my side, and welcome to this call. Pleasure being here with all of you. And we're ready to present second quarter earnings and also share some updates on our business and our strategies. Presenters during this call, will -- besides Dave, who you already met, and myself, will be Fredrik Nihlén, our new CFO. I'll hand over to Fredrik and let him take a couple of minutes to introduce himself. Thank you, Fredrik.

[Fredrik Nihlén:]

Thank you, Urban. I'm excited to join Neonode. I have worked within finance, since I graduated in '08. I started auditing and accounting, moving over more and more to consolidating, analyzing and reporting. My last three positions have been as the leader of the finance department in the companies I worked for. Latest as the Finance Director at Nordics in IFS. IFS develops and delivers enterprise software to customers around the world who manufacture and distribute goods, build and maintain assets and manage service focused operations. With a turnover of SEK 1.7 billion, about US$200 million the Nordic region spans a 24% of IFS’ total net revenues. Before IFS, I was the Group CFO of Cinnober, listed on First North NASDAQ in Stockholm. Cinnober was a Swedish fintech company with state-of-the-art software. Cinnober developed software for the heart of the stock exchange, the trading system, and also redesigned clearing system through the clearinghouse. Real-time clearing means real-time trade in motion, trade and precision management and risk calculations. NASDAQ acquired Cinnober in 2019. I've had the finance integration into NASDAQ and Cinnober was delisted during that time. Indeed, my last position was as head of Finance. This was also a fintech company providing online payment solutions in the early days of ecommerce. When I joined in 2013, this was listed on NASDAQ First North in Stockholm. It was acquired by Nets and delisted and I led the finance integration. My goal is to transform the finance team in Neonode to be a true business partner and to be a natural part of ongoing business decisions. One prerequisite for this to happen is to have data, structures and algo. So it can be applied in different ways, turn into information so that decisions can be made from knowledge. The world is always changing, and that means finance needs to adapt through the change. Therefore, we all always need to develop and strive to be more efficient. There is always a better way. As I said, I'm excited to join Neonode. I think Neonode has great technology and great potential. Back to you, Urban.

[Urban Forssell:]

Thank you, Fredrik. And again, welcome to the Neonode and to the team. Look forward to working with you here. As an upfront summary and highlights on what we will present on this call, I want to review the following bullets with you. First one is that, it should be clear, and we repeat that we continue to execute on the strategies and build our business pipeline. We will share some positive updates of our business today and in the company and in the management team we are encouraged by the progress we are making. Of course, like many of you, we are eager to see the business of Neonode grow and we are working hard every day to do, but we have some good results to share with you in this call. And you can find more details in the report and in the 10-Q. Like many others, we are still affected by the COVID-19 pandemic and it negatively impacts our business, that should be clear. We have direct impact in terms of lockdowns and problems in traveling and meeting with customers. We have a more indirect -- that also we are affected, especially for our license business with automotive customers and to some extent printer customers on the shortage of semiconductors in the world. And in some cases, we also see effects of a general economic downturn. We see some effects of this. But despite these headwinds, we are quite happy with the progress we have been making during the first, second quarter and the fight on and we have our target clear, to grow the business. To give you one KPI for the second quarter is that we grew our revenues by 127%, compared to the corresponding quarter last year. I think it's a good result. Personally, of course, I was excited more. But on these circumstances, we think that the progress is really good, and it proves that our strategies are working and that we are on the right track. The demand for our contactless touch solutions, which is our main focus, and our Touch Sensor Modules, the products where we have embedded our zForce technology into standardized sensing modules that we produce in our own subsidiary in Pronode here in the West Coast of Sweden. The demand for those are also picking up. Asia is leading the way with customers in Japan, South Korea, Taiwan and China. But we also see interest and growing interest from customers in Europe and North America, which is very, very positive. Our license revenues have recovered well after the dip we saw during spring last year, when the pandemic hit us. Then it was a very, very slow period for both printers and automotive sales. But during the second half of last year, and also the first half of this year, it has recovered very well for us. And we see some changes in the product mix. But overall, it's a good recovery and we are at a good level now in the second quarter of this year. These are some of the highlights of the call. And I will now turn the word back to Fredrik who will take us through some further details on the financials. So over to you Fredrik.

[Fredrik Nihlén:]

Thanks, Urban. You can find our second quarter earnings release and 10-Q available for download from the Investors section on our website neonode.com. For the second quarter, our total revenues reached $1.7 million. That is an increase of 127% compared to the second quarter of previous year. Revenues from sensor modules increased from low levels of sale with 439%. We can see that sensor modules revenues have a positive trend, especially in APAC, visualized with a blue bar -- blue color box. As we expected, APAC is the first region to embrace our contactless touch technology. Operating expenses for the second quarter increased to 38% compared to the same period last year, and by 9% compared to previous quarter. During the second quarter last year, costs are low due to the pandemic. We got governmental support at the same time, as we introduced cost measures, meaning we are very cost conscious. We are now investing in expertise. That is, we are hiring concerned people who help with our continuing journey. The cost level we see in the second quarter this year is more in line with expected cost levels. Our total gross margin for the second quarter of 2021 was 87% compared to 84% for the same quarter 2020. The increase is related to higher product sales with higher margins as you can see in the second chart. In the second chart, you can see a trend of improved margin on our products. The main explanations are

[Urban Forssell:]

Thank you, Fredrik. Now, for the next part of this call. I want to review with you a little bit more in depth on our strategies and our business development. First of all, I'd like to share what is our vision in the bigger space like this

[David Brunton:]

Thanks, Urban. I now open the call for Q&A from our covering analysts.

[Operator:]

. We'll take our first question from Christian Schwab with Craig-Hallum.

[Tyler Burmeister:]

Hi, guys. This is Tyler on for Christian. Thanks for letting us ask a couple of questions. First, it seems like everything is progressing well here as expected. So I was just wondering if you can maybe give some more color, break out maybe what was better than expected or worse than expected over the last 90 days. If that's by end market or geography or even just regarding your pipeline and outlook, that'd be great?

[Urban Forssell:]

Yes, I mean, so during the second quarter, we saw actually new growth numbers for both our licensing business and that is mainly related to automotive customers and printer customers. Actually, we are quite happy and we are up more than 50% on the licensing revenues. So, there we can say that we are back on a good level and this is a trend that also was present during the first quarter. But this is a good news and we expect to try to do best. We are also working on some new licensing or NRE projects that will in the longer term generate new licenses. So our solutions business continues to be one of our focuses that we work on, automotive, military & avionics, medical, this type of customers we are talking about. But even more interesting I think is the growth of our products business which is growing quite nicely and achieved several hundred percent. Like I talked about in the previous earnings call with you guys, we are now seeing that type of growth. And personally, I think that we're just in the beginning of the growth term for our product sales. So this is what we mean by, we are building our pipeline. And so far, Asia is leading the way, and in particular, Japan and South Korea, this is no secret and this is also what we expected. But we are happy to see that our sales funnel both in Asia and Europe and North America is filling up with quite interesting leads that we are now working to qualify and push forward into new deals for us. But of course, even though there's a pandemic and many customers and end customers feel like a pressure to come out with like contactless touch interfaces, we have to remember that the OEM customer that we're working directly or indirectly with. There are still large Fortune 500 companies, many of them, they won’t change their purchasing processes and development processes or launch processes. So things take a little time. And in some cases in Japan, South Korea, actually the projects we are seeing now being rolled out, they’ve started last year in the second quarter or third quarter, and now we are seeing the results of them. So it's true. Europe, North America is a little bit behind, but the sales funnels also there are starting to fill up with a lot of interesting leads that we are now working to qualify and it's exciting for us. And it's looking very, very promising for the coming months and quarters.

[Tyler Burmeister:]

That’s great. I appreciate the color. Second question, I understand the focus near-term here is on the kiosks and elevators and you outlined that very well, so not to distract from that. But I want to ask you about your in-car cabin monitoring solutions. Any changed update there? Seems still very interesting, but longer term opportunity. Maybe just a comment there will be great.

[Urban Forssell:]

Yes. It's one of the technology areas that I personally find very, very interesting. Here we are using cameras and camera inputs. And combining this with AI software to detect humans, for instance, inside a car, we can obviously use it also to detect humans inside an elevator. So for me, it's a little bit more generic. But yes, you're right. And this is also what we have stated. Our main focus has been the driver monitoring and in-cabin monitoring for automotive applications so far. We continue to develop the technology platform, to develop also applications around this for automotive customers. We are involved in a number of interesting discussions. We are invited to participate in some RFQs that we are answering up to right now. But it is a longer process. And this is something that -- if and when we can win some of these projects, then we’re followed by interesting development phase of two, three years before the corresponding vehicle models are launched and when we can start to just wait and see some royalties from this business. There is a long-term, more long-term venture that we are doing and the technology development is progressing well. We will also use more kiosk and elevator applications and it fits very, very well into our technology. So there is both a business aspect of this and a product portfolio and technology aspect of this venture that we're doing here with driver in-cabin monitoring.

[Operator:]

And we'll take next question from Jesper Henrikson with Redeye.

[Jesper Henrikson:]

Fredrik mentioned that you had updated your pricing list of some products which had a positive effect on margins. Could you repeat what that was and elaborate a little on this?

[Urban Forssell:]

Yes. Urban here. I'll answer the question on behalf of both me and Fredrik. So obviously, we have spoken in previous earnings calls and IR presentations that our main focus is to grow our top line. So we've to grow the revenues from our product sales. But also the gross margin is super important for us. And we have continuously monitored this. And we saw for instance in the previous quarter what I think not satisfactory gross margins on our product sales. Now, it should be clear, we write this in the report. This is a lot due to onetime effects from sales of old AirBar products that we did in the beginning of the year. But during the first, second quarters, like the end of first quarter and the beginning of the second quarter, we have implemented reprice list for our distributors and our customers for the sensor modules but also Evaluation Kits, but most of that’s increased the gross margin to a more healthy level, like above quarter percent. There we are targeting the prime sellers. So actually on the running business, we have a very, very good gross margin between 40% and 50%. And the average numbers we show, therefore, include also some sales from the beginning of the year. That’s little bit dragged sales down. But now we are on a good level. Of course, we try to apply value based pricing and that applies both for NRE when we work on projects and when we do for instance software development for some customers and for sensor modules. But if we have an opportunity to increase prices, improve our margins, we will do. We are also working on the cost side obviously. We are a product company. We produce the sensor modules ourselves. So we have continuous focus on cost reductions in terms of component costs, manufacturing costs and so on. So that has also helped to some degree. And going forward, we will have still the main focus on growing the top line but we will make sure that also the gross margin is on a good level because that gives us in the end the profit and that will help us improve the cash flow into figures, positive cash flow first, obviously month-by-month but then year-on-year. That’s the background. Housekeeping. And yes, being focused on our business and our margins.

[Jesper Henrikson:]

Great. And you also said that you have moved for your positions considerably, even compared to Q1. I think that was mainly in regards to HMI products. Could you elaborate a little on this?

[Urban Forssell:]

Yes. This is a good thing. Contactless touch for elevators and kiosks, that really continues to be our main focus. This is also what really matter the most and where we have the highest activity in our marketing, sales, and business development. So here is also where we have now covered larger parts of the sales cycle for us where we have started to feel that we have in some cases penetrated the retrofit opportunity, and moving into the new installs, the new equipment opportunity with OEM customers that are pulling us along. So that's quite encouraging. At the same time, if I move from the Asia into Europe and North America, we can see that, yes, they are a little bit behind during the second quarter and we believe to a large extent are supported by our move into regional sales organization where we could serve with our resources much more efficiently. We have been able to increase first the sales funnel here and also start to convert some of these opportunities into deals and convert prospects into real customers. But it is an ongoing work and we are a global team. So I should promise you we work literally 24x7 on this. Topping in Asia, and then competing in Europe and ending the day in excellent Southern California. So we have a pretty global team and everyone in the team is working on this around the globe.

[Jesper Henrikson:]

Nice. And as a follow-up question on that, you say that you have come basically all the way in the sales cycle process in the retrofits solution. Could you talk a little bit about how you expect sales in the retrofit solutions, yes, develop going forward before you reach that stage?

[Urban Forssell:]

I had in one slide. Remember this pyramid sitting upside down.

[Jesper Henrikson:]

Yes, yes.

[Urban Forssell:]

The retrofit opportunity also long-term will continue to be our main opportunity. And this is because the installed base in both elevators and the relevant types of kiosks is at least around 20 million and plus 20 million. So there's a huge installed base both in elevators and kiosks. And every year, I mean realistically, how many of these can be reached? Some a few percent, or 5% or something like this. But doing the math, that's a good number. And the lifetime on the elevators is far beyond 25 years, I would say many sites keep elevators for say 50 years but of course with a regular refurbishments and upgrades. At every such upgrade, we have retrofit opportunity. Perhaps real estate owner or the landlord they will not replace the whole elevator. But they will perhaps replace and update the motors, control electronics and inside the control walls and -- a control panel inside the elevator. And then we have an opportunity to do elevators. Kiosks, you can check Jesper, a typical kiosk costs everything between $5,000 and $10,000. If you have -- if you're the owner of a hamburger restaurant, that represents a huge investment for you. And if they buy 5 or 10 kiosks for the restaurants, which is common, they will not replace them every year or they will use them for as long as possible. And also for kiosks, we haven't had a good retrofit opportunity every year to penetrate the supply in certain portion of the market with our solutions. Now, to install this in every kiosk and every elevator, we need you could say boots on the ground. And they need to be in Japan, they need to be in Korea, they need to be in France and Sweden and U.S., Canada. And again, here's where we see a good opportunity for the right partners to come in and build the business. And we have several such samples that have engineering resource and capabilities so that they can develop good hardware solution, which is mainly mechanical housing, but also that can work on the software application. And then they have technicians or they work in turn with service providers in different countries, in different locations to go out and install this. One of our partners that I spoke to just the other day, they worked a lot with airports and they have started to use the airport technician to work as installers and operators of kiosks. So that's another channel for us.

[Jesper Henrikson:]

All right. And do you see any specific partners or OEMs starting to ramp up their installations?

[Urban Forssell:]

Yes, several. It’s gradual. NEC is one that we can obviously name, but we are working with a few elevator OEMs and MAD, Dewhurst, FineTek are also OEMs. Okay, they are controlled kind of OEMs but they have started already to roll out and launch their product in earnest in the market. But this is coming along and it's a gradual process. It will not happen overnight. And this is what we mean again by we're building our business pipeline.

[Jesper Henrikson:]

Then my last question about Dewhurst. Will that initially only target the UK market? And if so, what are the chances of a global expansion and in what time horizon?

[Urban Forssell:]

Well, I think Dewhurst and MAD, both, they are interesting companies. They are leaders in control panels and buttons for elevators. They work internationally. MAD is located with headquarters in Canada but they cover North America and also sell into Europe. Dewhurst is a UK company. They have big market share in the UK, but they also sell in other parts of Europe at least. Both MAD and Dewhurst, they work both with customer space and OEM space. So we have heard from one of the four leading elevator OEMs in the world that, yes, they use control panel for new projects from both MAD and Dewhurst. So this type of company is interesting both as a direct customer to us and as a lead into elevator OEMs. And they are -- let's say, they have baked in their catalog, they're doing installs and rolling this out. FineTek is a third company, very similar. And I can also mention that in China, we have two companies, one is Jardine Schindler and the other one is called , they are doing installs. And the third, Chinese or Hong Kong companies HKPC that have -- already during the winter, starting to roll out and launch their own contactless touch solution of elevators in Hong Kong and China. So elevators, it's happening. And again, this is a gradual rollout and you can realize. If you thought of retrofit in an elevator or even a new installation, you have to visit every building and you have to install the elevator or the control panel. So this is the dynamics of this market that we are working in and we expect that’s working. But our module fits very well to these applications. It's simple to use, easy to install, and so far customer reactions are enormously positive.

[Operator:]

And there are no further questions. I'll turn the call back over to you Mr. Brunton for any additional or closing remarks.

[David Brunton:]

Thank you. We want to thank you all for joining us for our call today. Have a great day. Bye, bye.

[Operator:]

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.