Neonode Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Hello, everyone. Thank you for standing by, and welcome to Neonode’s Fourth Quarter 2020 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. 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 fourth quarter and year-end 2020 financial results and provide a corporate update. Our update will include details of customer activities, technology developments and other items of interest.

[Urban Forssell:]

Thank you, David, and welcome, everyone, to our fourth quarter earnings call. I would like to start this presentation short, summary review of our general strategies and business the last year. Maria, can you go to the next slide, please. So it was a very interesting year, very interesting and busy year for me personally as well as for Neonode. And Neonode, we decided on a new direction for the company and developed radically new strategies that we started executing on. Compared to Neonode’s previous notice of branded, the new strategies include several changes. For instance, 100% focusing on B2B organization of our business activities into three separate business areas and a more out focused strategy to leverage existing technology and applying it to new application areas. To support and drive the changeover, we also recruited several new strong team members, both to our headquarters in Stockholm and internationally. And in parallel to all this change work, we, of course, continue to support existing customers and to innovate and improve on our different technology platforms, which also kept us busy.

[Johan Swartz:]

Thank you, Urban. My name is Johan Schwartz, and I head up one of Neonode’s three business areas called HMI Products. So this business area is focused on sales of standardized sensor modules suitable for touch on display or any surface as well as in air, i.e., contactless touch and gesture sensing. Our sensor modules are easy to integrate and ideal for both new designs and repetitive solutions and being placed along only one side of the display or surface enables high level of design freedom and superior customer experience, and are of course, completely churn free. Production is located on the West Coast of Sweden with high-volume capability. Although we, in this business area, have a legacy from past in B2C and medical industrial segments in B2B. We have, on the back of the pandemic, decided to refocus on two selected main segments with a focus on contactless types. i.e., the Elevator segment with an installed base of 17 million units globally and an estimated CAGR of 4.5% until 2026. Secondly, interactive costs with an installed base of 39 million units globally and an estimated CAGR of 9.1% until 2027. In order to efficiently address all segments on the market brings you from the broad market at the bottom of the pyramid to the large OEMs at the top. Sales distribution and system integration is managed through a global network of distributors, value-adding partners, sales representatives and to summit the direct sales. Now signing up a new channel partner is not the guarantee for success, but it is certainly prerequisites to scale for. Therefore, we have, in the past six to seven months, signed up nine new demand creating value-added resellers and distributors. Each one with an active sales force on their own, giving us an extremely strong platform for sales execution going into 2021.

[Urban Forssell:]

Okay. Thank you, Johan. Short quick overview of the business area, HMI Products. I now want to introduce Jonas Wærn, who will present an update regarding HMI Solutions. Jonas.

[Jonas Wærn:]

Thank you, Urban. Thank you. My name is Jonas Wærn, and I head up the business area called HMI Solutions. We work consultatively and strategically with our customers in delivering highly customized solutions. Let me repeat that. We work consultatively and strategically. We focus on owning the relationship with the customers and almost always work directly together with them. Within Neonode and especially within HMI Solutions, we are actively moving to higher-value markets for mission-critical products and systems. The focus is on military and avionics and rugged industrial applications. We play where our quality and technology fit better with the changed market landscape.

[Urban Forssell:]

Thank you, Jonas. I will run off this overview of our three areas by talking a little bit about Remote Sensing Solutions. So please keep one forward. In Remote Sensing Solutions, we are working on driver in-cabin monitoring for automotive, which is a rapidly growing area, attracting a lot of interest on a lot of new players and well-established companies also wanting to have a piece of this market. We are talking about here 60 and also comfort features. So features or systems that increase safety, increases comfort for the driver and the passengers. And in this space, we have, for several years, been developing an AI based software platform. But called multi sensing that we currently are marketing towards automotive OEMs and Tier 1 system suppliers. In multi-sensing, our customers can create very efficient and cost effective yet high performance driving income and monitoring systems. Next. The main market drivers for these type of systems is, of course, safety. And then it is about sphere of vision to avoid any kind of debts or injuries and traffic. And the people have noticed that many drivers are distracted. They text on their phones, they look out to the side window or they are simply not paying attention. Some fall asleep, that would be a typical thing these type of systems can warn for. But also looking at autonomous driving, especially when you go beyond level two, OEMs and legislators want to know that the drivers are in charge and also in some modes that they keep their hands on the steering wheel. This is another example of a safety feature, where driver and in cabin monitoring can play an important role. But we also have advanced passive safety features like adaptive deployment of seatbelt, pre-tensioners and airbags given that you detect and you can accurately position persons in the cabin. Then you can imagine that you can do so much more with your advanced seatbelts and airbag systems as well. There is also legislative pressure here, playing into our favor. In the EU, the so-called General Safety Regulation, decided by the e-commission in November last year makes DMS mandatory by 2024. Similar legislations or rules being planned, both in the U.S. and China and other markets.

[Maria Ek:]

Thanks, Urban. You can find our 2020 full-year earnings release and 10-K available for download from the Investors section of our website at neonode.com. So I would like to start out with a summary of our revenues. We had a strong fourth quarter 2020 with $2.4 million of total revenues compared to 1.5 million in the previous quarter, and $1.6 million in the fourth quarter of 2019. The increase from previous year is mainly driven by product space and non-recurring engineering services within military and avionics. We also see some of the expected rebound in license revenues in the fourth quarter. Total revenues for 2020 were, however, down by 10% from $6.6 million in 2019 to 6.0 million. A growing part of our revenue is derived from product sales within our business area, HMI Products. Our business HMI Solutions generated revenues of 1.9 million in the fourth quarter of 2020 compared to $1.2 million the previous quarter and 1.4 million in the fourth quarter of 2019. Majority of our revenues within this business area is still earned from our print and automotive customers. Our intense work with customers in military and avionics is also starting to give effect. Revenues for the full financial year 2020 within the Solutions business area decreased, however, by 17% from $6.0 million in 2019 to 5.0 million in 2020, much related to the COVID-19 pandemic and the economic slowdown related thereto. Our license customers shipped 1.1 million devices during the fourth quarter 2020 and 5.0 million in total 2020. The gross margin for HMI Solutions was 87% for the fourth quarter 2020 compared to 100%, all other quarters 2019 and 2020. This was a result of considerable non-recurring engineering projects delivered in December. Our business area HMI Products generated revenues of $0.5 million in the fourth quarter of 2020 compared to 0.3 million in the previous quarter and 0.2 million in the fourth quarter 2019. A major part of the products was shipped through our distribution partners in the U.S. and China. Revenues for the full financial year 2020 within the product business area increased by 67% and from $0.6 million 2019 to 1.0 million 2020, much driven by the demand for contactless touch solutions. We shipped approximately 28,000 sensor modules, AirBar’s and evolution - during 2020. During the year, we were selling off our AirBar inventory and earning, reduced gross margin. And as a result, the overall gross margin for the HMI Products business was 18%. Gross margin for a sensor module sales, excluding AirBars, was 30% to 35% in 2020. In 2019, the margin for the business area was negative due to increased valuation reserves for slow-moving and obsolete products in combination with write-down of advanced payments for components. Operating expenses for 2020 were $11.1 million compared to 11.7 million in 2019. And this is decreased by 5% compared to 2019 despite the onetime costs in 2020. Without them, the decrease would have been 12%. The expense of 2020 were lower than 2019 due to general cost savings, less traveling and lower SERF expenses derived from a Swedish governmental support program related to the COVID-19 pandemics as well as delayed backfill of vacant positions. Operating loss was $6.2 million in 2020 compared to 5.7 million in 2019. This is an increase of 8%, but would have been a decrease by 5% if it hadn’t been for the onetime costs. The net loss in 2020 was $5.6 million or $0.56 per share compared to a net loss of 5.3 million or $0.60 per share 2019. The loss would have decreased by 8% if excluding the onetime costs. 2020 was an un-ordinary year with the COVID-19 pandemics, causing swings and runabout for our business and in our numbers. Lower license fees during the first half year, made us take actions like reduced working hours for our Swedish employees. On the other hand, we have growing interest for our sensor modules and the contactless touch functionality they offer. Net cash used in operating activities during 2020 was $2.2 million higher than during 2019, primarily due to the increase in net loss, cash and cash receivables were $12.2 million as of December 31st. So a strong position, enabling us to continue to execute on our business strategy. And now I would like to hand you back over to Urban for some closing remarks.

[Urban Forssell:]

Thank you, Maria. To summarize and wrap up our presentation here today, I would like to highlight the following

[David Brunton:]

Thanks, Urban. We will open the Q&A now from our analyst -- covering analysts. So if you guys have a question, please.

[Operator:]

Our first question comes from the line of Christian Schwab with Craig-Hallum.

[Tyler Burmeister:]

Hi guys, this is Tyler on behalf of Christian. Yes. Congrats on the strong end of the year and thanks for allowing me to ask questions here. So first, I was hoping, any color on Q1 pretty well along here into the quarter. Directionally, is that shaping up to possibly be down sequentially after the strong Q4 or is it possible that Q1 could maintain these sort of flattish over $2 million kind of revenue levels. Any color on Q1 would be great.

[David Brunton:]

Yes, I’m going to pass that one over to Urban since he’s much closer to it than I am. Urban, can you respond to that?

[Urban Forssell:]

We are seeing a little bit softer sales beginning, especially January, coming out of the holidays. But the overall activity level is increasing. So I cannot give you any guidance right now for actually the actual numbers in the first quarter, but the activity level is much, much higher than last year. So we are quite confident that sales will grow significantly this year compared to 2020.

[Tyler Burmeister:]

That is great. That leads into my next question a little bit, too. Could you expand on that maybe as we think about the full-year and how we frame it, you just said you expect 2021 revenue to be up significantly. So 2021 isn’t going to be steady in this stage, and we are looking for future growth, we would expect the material inflection of growth this year.

[Urban Forssell:]

You have to realize, actually, back up two years to 2019 and check Neonode’s product sales compared to 2020. It was already up a lot. And for this year, we put the aim much, much higher. On the other hand, like we have been communicating in the earnings calls during last year and also today is that we have been building our business pipeline. We have been strengthening our ecosystem. And several of these value-added partners and demand creation distributors that we are working with are very active with significant sales forces, and they are each managing an impressive number of opportunities in parallel. What has been going on for several months already, in many cases, it is different types of proof of concepts, pilot studies, but also pure developments and testing validation. We have some very, very interesting projects going in Japan and Korea, for instance. And those of you that know the national business and the culture in these countries and in these companies. They are meticulous. They want to investigate and test and validate everything. So we have successfully passed several of these. We expect that this will then materialize as business later this spring and this year that they will gradually ramp up. We see similar developments with companies in Europe and North America as well. Johan highlighted a few that we are working with marine in France, for instance; in U.K. There are also other elevator companies in North America and other kiosk companies in North America. Some of these are already engaged with, again, pilot studies. So we are confident that we are going to see like 2021 as a breakout year for our business and that it will significantly grow top line. And that will continue also in the next couple of years because some of these processes, even though we have the products, we are ready to sell. There are new kiosks and elevator solutions that has to be developed, tested and actually launched in the market. So there is a slight delay. And I think it is natural, and that is what we are trying to say. This is not going to be a quick fix that we launched this product in like April, May last year, and then everything is fine two months later. Steady progress, we think we have a good pace, we have good traction, we have a good team on board, we have a good ecosystem. So I think we are well set.

[Tyler Burmeister:]

Great. That is very helpful. And then last one for me, changing a little bit here. I don’t think I heard any update. So just wondering if you could give any update on your work with your partner to monetize couple of your patent families related to old Smartphone technology. I understand it is litigation according to you. So to the extent you can provide any commentary there on an update or time line would be great.

[Urban Forssell:]

Yes. And short answer is no. And the background is the following

[Tyler Burmeister:]

That is perfectly clear, I understand. Thanks for all the color. That is all for us, thanks.

[Urban Forssell:]

Thanks.

[Operator:]

Our next question comes from the line of Viktor Westman of Redeye.

[Viktor Westman:]

Thank you so much. I have a question for Johan, about the purchasing behavior in HMI Products, how much of it is centralized and how much is decentralized in these different retails and airports, restaurants, et cetera.

[Johan Swartz:]

Right. Okay. Well, it depends. I think it varies a lot between each of those segments we indicated. So for example, if you take - and even in that, if you take, for example, the QSR market, quick service restaurant market, even within this market that are actually drastically different purchasing behavior from a - whether you are decentralized or centralized. So some of them stick to centralized, meaning that a global head office would take a decision what type of costs and what technology to roll out on every (Ph) of taking restaurants. Others are much, much more fragmented. So it is kind of really difficult to answer that question specifically, since it varies so much. And also, if you go, for example, to airport or airports, that was the case that we mentioned here. It also depends a little bit if it is actually the airline or if it is the airport that purchases the kiosk because some of the - in some cases, the kiosk are owned by airlines. In some cases, the kiosk is owned by airports. And in other cases, they are even owned by other independent third-party organization, such as . So it really varies. It is very difficult to give one straight answer to that question.

[Viktor Westman:]

Yes. Okay. Thank you, anyway. Good color, nevertheless. And my question also for Jonas. If you can say something about your military customer, the potential to leverage into other adjacent applications with this customer. What kind of potential are we talking about there, is that other kind of display or can you give some examples here?

[Jonas Wærn:]

Yes, sure. This is an initial prototype project. The idea has always been to deliver excellence there and then from that, take it into a few major projects. And without divulging anything and going specifically for any project like this, we want to make sure we make place, not only in the military segment, but maybe, first and foremost, as COVID-19, hopefully, is going to close within a year or year and a half, the commercial avionics space as well, where the volumes is way bigger. So back to my initial comment, it is really about large account management. It won’t be hundreds of customers for us. It would be a handful to start with, but we will make sure to map them out and make the most, then going into it. It could be ground meaning Army, it could be maritime, both for civilian use and military use. So they are all springboards into higher volume markets. Does that answer your question?

[Viktor Westman:]

Yes. Very good. Great. Just the last quick question, a general question also for Urban then, with all these many potential areas and all these opportunities coming in. How do you prioritize the leads?

[Urban Forssell:]

Yes. That is like a background of the idea to organize our business into 3 business areas, where Johan and his team are working in a very, very structured and focused way for HMI Products, there, we work very much regionally or country-by-country with our area sales directors, covering, for instance, Japan, South Korea, Taiwan and Greater China. And we have also people in North America and Europe. So they work in a very systematic and structured way. Now also, we have, as mentioned, a lot of help from several value added resellers, demand creation of distributors and other types of partners, like we have discussed, Viktor, before, ESP, DSR, there are two Chinese tech companies that, actually, they promote and sell our products. These partners typically also operate regionally. So it has become a very much like a regional game or a country-by-country game. And it is extremely structured. If you move over to HMI Solutions, as Jonas explained, it is large account management. We are working mainly with direct sales, and we have Jonas and his core sales team, where we have end of last year, added two very, very strong persons, one in Europe and one in North America. They are addressing these customers, together with our engineering team. This is our solution sales and then engineers are instrumental to actually make the sale. So that is actually quite different. And the third area, remote Sensing solutions, we are doing some of the marketing and sales directly from the head office, myself included. But the bulk of the work is being done by our partner, based in outside Stuttgart, Germany. And they have some 40, 50 salespeople, meeting with customers every day. So we have found a good structure that ensures that everyone knows what they are doing, that we stay focused. And for each business area, we also have very, very clear both strategies and execution plans. And for me, driving sales is not magic. It is a lot of hard work and good strategy and other planning work before we set off. and this is what we have been doing during my tenure at Neonode, and we will continue to do. So we are constantly reviewing this. If we are making progress. If everything is going in the right direction, and we are making corrections. And that is the only way forward and upwards.

[Viktor Westman:]

Great and keep up the hard work guys. Thank you.

[Urban Forssell:]

Thank you.

[David Brunton:]

Thank you. And that is it for the Q&A for today and the presentation. So we want to thank you all for joining us on our call. And as Urban said, we have big conference coming up tomorrow in the U.S., register and join in on that and check out our new website when it is released. So thank you so much for joining us today.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.