Neonode Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

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

[David Brunton:]

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

[Thomas Eriksson:]

Thank you, David, and good day, everyone. As David said, we will have a little bit different format for this presentation. So, there is some slides that we're going to use for showing according to this presentation. With me today on the call I have Lars Lindqvist, our CFO, and I would like to start talking - taking a step back and outline what Neonode does and what products and solutions we develop and send to our customers. So, with that said, I would like to start with slide number three. Neonode is a technology company that provides optical laser based sensors for human to machine interaction. We call our base technology zForce. We delivered zForce in two formats. First on the license agreement with our customer that build our sensors themselves. And second, as a completely fully integrated sensor component under a supply agreement. Our sensors work as a low-resolution camera with an extended aperture, so it can with high speed and precision sense and detect objects in front of the sensor. It can be used for touch screen applications, to replace proximity solutions and also capture, really well, two-dimensional and three-dimensional gestures and objects. They work as a collision detection sensors and report objects with the correct size and locations. Our sensor components are typically easier to integrate into our customer’s product than our previously custom sensors that we provide on a license agreement. Our sensor components come in different size and shape and many configurations with a multiple of interfaces to support many applications. I'd like to summarize this as

[Lars Lindqvist:]

Thanks, Thomas. You can find our third quarter earnings release and 10Q available for download at the investors section of our website at www.neonode.com. Please go to page number nine. I like to start up with some highlights, important thoughts for the quarter. First, we see $9.1 million net of selling and legal expenses from a private placement completed in August. About $1.8 million of those proceeds was used to pay off a short-term loan. We continue to expand our presence in the customer products and our customers have now shipped with 52 million products to generate $38 million in license fees revenues since 2011. We continue to nurture the solid and profitable licensing business. This is the major milestone, we have started shipping our first-generation touch sensor components and we are in the process of increasing our sales and marketing focus as we rollout new sensors for targeted market. Our revenue increased 41% compared to the same quarter in 2016 due to increased license fees and AirBar revenues. Our operations used in the third quarter approximately 1 million of cash of net of non-cash expenses compared to 2 million for the third quarter last year. In the following slides I'm going to provide some more additional details. Please go to slide number 10. I want to give you a feel, I will look at our business by tracking the top stability of each of business unit and our business units are

[Thomas Eriksson:]

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

[Operator:]

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

[Robert Stone:]

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

[Thomas Eriksson:]

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

[Robert Stone:]

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

[Thomas Eriksson:]

Yeah, absolutely.

[Robert Stone:]

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

[Thomas Eriksson:]

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

[Robert Stone:]

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

[Thomas Eriksson:]

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

[Robert Stone:]

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

[Thomas Eriksson:]

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

[Robert Stone:]

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

[Lars Lindqvist:]

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

[Robert Stone:]

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

[Lars Lindqvist:]

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

[Robert Stone:]

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

[Lars Lindqvist:]

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

[Robert Stone:]

We'll take that offline.

[Lars Lindqvist:]

Sure.

[Robert Stone:]

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

[Thomas Eriksson:]

Thank you.

[Operator:]

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

[Mile Malouf:]

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

[Thomas Eriksson:]

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

[Mile Malouf:]

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

[Thomas Eriksson:]

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

[Mile Malouf:]

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

[Thomas Eriksson:]

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

[Mile Malouf:]

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

[Thomas Eriksson:]

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

[Mile Malouf:]

Okay, great. Thanks for your help.

[Operator:]

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

[Viktor Westman:]

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

[Thomas Eriksson:]

Yes.

[Viktor Westman:]

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

[Thomas Eriksson:]

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

[Viktor Westman:]

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

[Thomas Eriksson:]

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

[Viktor Westman:]

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

[Thomas Eriksson:]

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

[Viktor Westman:]

Thank you very much.

[Thomas Eriksson:]

Thank you.

[Operator:]

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

[Unidentified Analyst:]

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

[Thomas Eriksson:]

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

[Unidentified Analyst:]

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

[Thomas Eriksson:]

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

[Unidentified Analyst:]

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

[Thomas Eriksson:]

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

[Unidentified Analyst:]

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

[Thomas Eriksson:]

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

[Unidentified Analyst:]

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

[Thomas Eriksson:]

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

[Unidentified Analyst:]

Okay. Thank you very much.

[Thomas Eriksson:]

Thank you.

[Operator:]

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

[Thomas Eriksson:]

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

[Operator:]

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