Neonode Inc.
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

Hello, everyone. Thank you for standing by, and welcome to Neonode's First Quarter 2022 Earnings Conference Call. [Operator Instructions]. At this time, for opening remarks and introductions, I would like to turn the call over to Urban Forssell, Neonode's CEO. Urban, please go ahead and start the conference.

[Urban Forssell:]

Welcome, and thank you for joining us. In today's call, we will review our first quarter 2022 financial results and provide a corporate update. Our update will include details about our business strategies, customer activities and other items of interest. Joining me on today's call is our CFO, Fredrik Nihlen. Fredrik will present the financial results of the company for the first quarter of 2022. After this, I will come back and comment on overall strategies, customer activities and other operational topics. Before we proceed with the main part of the presentation, I'd like to read the following legal disclaimer. This presentation contains and the related oral and written statements on Neonode Inc. and its management may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information about current expectations, strategy, plans, potential financial performance or future events. They may also include statements about market opportunity and sales growth, financial results, use of cash, product development and introductions, regulatory matters and sales efforts. Forward-looking statements are based on assumptions, expectations, information available to the company and its management, and involve a number of known and unknown risks, uncertainties and other factors that may cause the company's actual results, levels of activity, performance or achievements to be materially different from any expressed or implied by these forward-looking statements. These uncertainties and risks include, but not limited to

[Fredrik Nihlen:]

Thank you, Urban. You can find our first quarter 2022 earnings and 10-Q with the details of financial performance during the first quarter of 2022 available for download from the Investors section on our website, neonode.com. In the interest of time, I will only summarize the key comments here. Our total revenues for the first quarter of 2022 reached $1.3 million. That is a decrease of 21% compared to the same period in 2021. License revenues for the first quarter of 2022 was $1.1 million compared to $1.3 million for the same period in 2021. The decrease is primarily the result of component shortages within the printer and automotive markets related to the COVID-19 pandemic, which, in turn, impacted our license revenues for the first quarter of 2022. Product revenues for the first quarter 2022 was $147,000, an increase of 20% compared to the previous quarter. In the first half of 2021, we saw an increase in the product sales. In the second half of 2021 and continuing into the first quarter 2022, our sales were negatively impacted due to COVID-19-driven lockdowns in Asia. Our elevator and kiosks customers in Asia have been first adopters of our contactless touch technology and as expected, most of our initial TSM sales are related to retrofit solutions technology and are more limited. New customer equipment launches can take 6 to 18 months or even longer before a customer is ready to begin mass production. Our gross margin of products were 65% for the first quarter of 2022, which is an increase of 41 percentage points compared to the same period last year. If we look at the gross profit and gross margin only for TSMs and adjust for the onetime effects, we can see a positive trend for the gross margin with 62% from the first quarter of 2022. Long term, as volumes continue to increase, we will probably see a pressure on the margin. But short and medium term, we are confident that our margins in the product the products business will be around 40%. Operating expenses for the first quarter of 2022 decreased to 12% compared to the same period in 2021. The decrease is primarily due to lower professional fees and lower depreciation and amortization. We continue to invest in marketing and product development and hiring new company team members. These investments are strategic and will strengthen our medium and long term. These investments are fully in line with what we communicated regarding how we intend to use the net proceeds of the registered direct offering we did in October 2021. Summarizing the results of the first quarter of 2022. Net loss attributed to Neonode Inc. was $1.4 million compared to $1.6 million for the same period in 2021. Net cash used in operating activities during the first quarter of 2022 was $2.3 million. Compared to the previous quarter, net cash from operating activities has increased to 16%. In the first quarter of 2022, we purchased component product [indiscernible] to secure future production of our TSMs. I will now hand -- give the word back to Urban.

[Urban Forssell:]

Thank you, Fredrik. And at this point, I would like to go into our strategy and business update. Our vision is to transform the way humans interact with machines. And we strive for this by offering innovative touch, contactless touch, gesture sensing and scene analysis solutions. Our business model rests on 2 pillars

[Operator:]

[Operator Instructions]. Our first question will come from Jesper Von Koch with Redeye.

[Jesper Von Koch:]

So let's start with products. So for products, you have 3 major ongoing projects that we view as the main revenue drivers for 2022. So 7-Eleven, the elevator OEM and the Japanese sushi chain. Could you elaborate on the progress of the these?

[Urban Forssell:]

Yes. First of all, I'm not sure I fully agree that these 3 projects are the main revenue drivers this year, but they are indeed significant wins for us, and we are very happy with them. We have with -- starting with that elevator company, we made an announcement in the fourth quarter. I believe it was about an elevator our OEM deciding to use our TSMs and our contactless touch solution in their new elevators. They have already developed solutions. They have started in a smaller scale to launch it in the market. They are slowly also opening up the curtain when marketing is publicly and showing commercials. And our local people in that market have shared pictures of that, and I'm sure we will continue that rollout. And I have no information suggesting that they had second thoughts, so the rollout is continuing. It's looking good. Also, the feedback we have from 7-Eleven Japan is very, very positive. They clearly have the ambition to roll this out in a bigger scale across their stores in Japan. Personally, today, I'm missing like day fresh updates regarding this -- the pace of that rollout, but we have no information suggesting that they are backing away. Regarding the sushi chain. One of Japan's major sushi chains have already installed in all their self-service kiosks in all restaurants across Japan the contactless touch interface so that you can reserve a table, and you can also preorder food outside of the main restaurant area using their self-service kiosks. They are sitting there in public and being used every day. We are working with other quick service restaurant chains in Japan and also in other countries. And we hope that this will be like a snowball effect when other chains see what this first chain is now doing and how well the solutions work.

[Jesper Von Koch:]

All right. So in light of all the uncertainty factors playing an important role at the moment, what's your view on a potential ramp-up of revenues during 2022?

[Urban Forssell:]

It's apparent that we, indirectly, is -- we are under pressure due to COVID pandemic lockdowns and also, to some extent, the strain of supply chains for semiconductors. We have seen this from some of our licensing customers in automotive, and we are also seeing this from some of our product customer. And it's like indirect effects. So it's a little bit slowing us down and probably taking a little bit of the edge out of our growth this year. But overall, it's not a significant problem or risk. It's a little bit slowing us down. That's our feeling. Overall, the trend is positive. And our own suppliers -- remember, our licensing customers buy special circuits, ASICs from Texas Instruments, which they use to realize the touch features that they are using in their printers and automotive and similar. TI is also a little bit under pressure, but they have confirmed to us that the situation is under control. All of our customers will get all of the ASICs they need for their production. So it's a tough situation for many, but we and our partners, we are actively working to mitigate any problems or risks that this causes.

[Jesper Von Koch:]

Okay. Good. And so my last question. Like -- since the Q4 report, you haven't announced any major customer deals. You talked a little bit about it, but how do you experience the underlying customer activity and interest?

[Urban Forssell:]

We are very positive still. Of course, we are also working hard to actually -- to realize new business wins with customers around the world. We have actually a very broad and deep pipeline, and we have shared some insights into that pipeline today. We expect during this year actually that we're going to get positive feedback from several of these customers that we have indicated here and projects we have indicated here during this call from automotive OEMs, Tier 1s and also elevator and kiosk companies. So we are actually very encouraged by that development still, although we also would like to see a faster pickup of the sales revenues, definitely, with sales volumes.

[Operator:]

Our next question will come from Valter Lindhagen with Pareto.

[Valter Lindhagen:]

My first question is regarding your input costs. So a hot topic right now among manufacturing companies is increased input costs. I wonder, how much you've been affected? And how -- kind of what's your ability to raise prices? Are you able to do that instantly when you experience increased costs? Or will there be a lag there?

[Urban Forssell:]

So for our own production of TSMs in Pronode Technologies, we actually have, from last year, secured a significant component stock. And also in the cases where we have more recently bought additional components, we didn't experience any major cost increases. So for that reason, our own situation is sort of stable. Nevertheless, we have reviewed and updated our pricing strategy and also improved on our margins in products business over the last 18 months. So hence, the good margins that Fredrik talked about in his presentation earlier during the call. In other cases, we are fully aware that raw materials and components can drive costs up, and this is a little bit, perhaps, slowing down some of our kiosks and elevator customers, but it's not stopping them completely. And I cannot comment on and I don't know about the magnitude of their challenges with the cost increases and the possibility of doing increased prices of their products. But it's like an indirect effect or a risk for us, not really a direct issue for me or Pronode Technologies.

[Valter Lindhagen:]

All right. And then just another question related to the gross margin there. As you mentioned, you showed on one slide that you have had to constantly improve the gross margin for, I mean, quarter-over-quarter for more than a year. Could you just remind us a little bit what has been driving this development?

[Urban Forssell:]

Yes. I will let Fredrik answer this.

[Fredrik Nihlen:]

Yes. So during the years, we have looked into the costs that we have had, and we have also increased the price list. So we have -- as you can see in the presentation, we have a table showing you the onetime effects. And the onetime effects, obviously, [indiscernible] moving down. And now we can see a more stable gross margin, and it's relatively well.

[Urban Forssell:]

So Fredrik means that in the report, there are further details included that explains the onetime effects. And some of them were taken already before and not in this quarter, but in the fourth quarter last year and even earlier than that. Going forward now, we think that we have actually cleaned up the books and taking out a lot of these onetime effects, and we will see like a more stable situation going forward.

[Operator:]

Thank you. This concludes today's Q&A. I will now turn the call back over to our presenters for any additional or closing remarks.

[Urban Forssell:]

We just wanted to thank you for taking the time to join this call, and we wish you a good day. Thank you very much.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.