Neonode Inc (NEON) 2013 Q4 法說會逐字稿

Hello, everyone. Thank you for standing by, and welcome to Neonode's fourth-quarter 2013 earnings conference call. I'll 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 introductions, I would like to turn the call over to Daniel Gelbtuch, our Senior Vice President of Corporate Finance and Investor Relations. Daniel, please go ahead and start the conference.

Thank you. Welcome, and thank you for joining us. On today's call we will review our fourth quarter and year ended December 31, 2013 financial results and provide a corporate update. Our update will include details of our design wins, technology developments, and new customer agreements that were recently announced. The prepared remarks will be provided by Thomas Eriksson, our CEO; and David Brunton, our CFO.

Before turning the call over to Thomas and David, 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, can, will, guides, confident, target, projects, and other similar expressions typically are used to identify forward-looking statements. These forward 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 obligation to update these forward-looking statements.

At this time, it's now my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode. Thomas, please go ahead.

Thank you, Daniel. Good morning, everyone, and welcome to the call. To start with, we are very pleased to note that we just received Microsoft's real estate touch certification for our new zForce PLUS technology. This major milestone for Neonode has opened the floodgates for several new projects from Tier One PC OEMs who are looking to integrate our solution into Windows 8 Ultrabooks monitors, all-in-one computers and (inaudible) accessories.

With our solutions, high-performance, low-cost and (inaudible) [high-yield] manufacturing, we expect to garner incremental Tier One licensees and win in the near-term. Moreover, we still expect to generate revenue from the PC segment this year with an (inaudible) round recurring in 2015.

One of the key markets for Neonode is the automotive segment. Also development of product cycles are much longer than consumer electronics applications. Once traction is achieved, the revenues are linear, consistent, and long-term. Neonode is working with all major OEMs and ODMs in the automotive sector with success that will be revealed in the coming year.

Neonode's technology is currently being showcased on an industry-leading infotainment system at the Geneva Motor Show. This implementation also proves the diversity and quality of Neonode's zForce technology as automotive compliance and testing are among the most stringent and demanding of any testing requirements today in any industry.

Our fourth-quarter GAAP revenue of $1 million excluded approximately $713,000 of revenue due to our new revenue recognition policy, which recognized revenues on customer reporting rather than on earnings periods. Our soft comparisons were due to the weak (inaudible) markets. Our (inaudible) is still well above $100, which is increasingly uncompetitive relative to color tablets.

However, on the positive side, we signed a new contract with a major Tier One (inaudible) OEM who hopefully, starting the second half, should help us recapture the market share that we lost over the last year. Moreover, we believe this large OEM is particularly focused on aggressively driving down rates and price points in order to transform annuities into compelling giveaways and promotional products, which hopefully will revive unit growth this year.

The diversity of our technology in combination with our license and business models allow us addressing markets that are ultra cost-sensitive but also markets that require very high performance. This diversity means that we can touch-enable cost-sensitive applications like (inaudible) box to multi-touch PC, remove (inaudible) and display technologies (inaudible) [resistive] and capacity touch on printers, and provide solutions for very high-end automotive infotainment systems.

Moreover, this diversity enables OEMs to touch-enable (inaudible) new form factors such as round, curved, irregular shapes for automotive infotainment systems and wire box. The applications and surfaces that Neonode's MultiSensing solution can touch-enable are endless, including LCD, OLED, glass, wood, metal [lifters], and other materials and even enable palm gestures to control wearable devices using a person's skin as a touch surface, giving you the ultimate tactile feedback and true real-time response.

In the past 12 months, Neonode has invested great resources and focused on achieving not only marks of Windows 8 certification but also improving our core technology for a diverse range of applications. Over the next 12 to 18 months, we expect revenue to be driven by PCs and PC-related devices -- printers, wearables, and other high-volume consumer electronic devices.

Neonode's focus is to grab market share and create new markets in all of the aforementioned markets. For example, Neonode is aiming to dominate touch and proximity sensing for notebooks, PC monitors, all-in-ones, and printers. We are not only aiming to replace the current technologies already in these kinds of devices but also to create new opportunities for the OEMs, who will be able to integrate ultra low-cost and high-performance touch and proximity-sensing solutions in a greater range of devices. Neonode is aiming to grab market share and dominate in all these markets including automotive.

We are now engaged with numerous PC and [CD] conductor OEMs and have multiple development projects ongoing in parallel with working with the operations and systems suppliers to enhance the customer's offering with low-cost, large-screen solutions that add features like low-power 2-D and 3-D proximity sensing, (inaudible) gestures, and any-surface touch for keyboards and mouse pads.

On the printer front, we are very happy to announce that during Q4 a large Tier One printer customer started mass production of its first (inaudible) next-generation printers that integrate our optical touch technology. This large pre-launch ramp is in the latter stages and in full force, and we expect to see customers' printers on the shelves in the near-term.

We expect this particular OEM will progressively ramp up more than a dozen additional models over the course of 2014 and 2015 as our partnership keeps expanding, particularly into the low-cost printers using new technology. This low-cost breakthrough technology makes it possible for our customers to touch-enable low-cost printer control panels that normally includes both (inaudible) display. Currently these types of high-volume printers only have buttons without any touch functions, and traditional repetitive touch is way too expensive.

Our research teams have during the past year been very focused on completing our high-performance and low-cost multi-touch solution, zForce PLUS, which just received Microsoft's Windows 8 touch certification. Not only will our solutions drive future touch total system cost to low all competing solutions, but it will enable OEMs to add compelling features like proximity-sensing and touch on any surface while substantially reducing overall system cost in areas such as keyboards and trackpads.

During the last year, we also continued to investment and further develop our single-site sensor, now called zForce AIR, in terms of reducing the bill of material cost for our customers and increasing the overall performance levels. Together with our hardware partners, we have also ensured good availability on the hardware components and reduced the lead time for short-to-market projects. We have also improved the mechanical architecture of the single-site sensor so it can easily be integrated into very small designs such as mobile phone cases and round smart watches.

Along these lines, we have made significant strides in the variables and the peripherals, both of which have billion-unit-plus potential. As we demonstrated during the Mobile World Congress last week, our proximity-sensing smart phone cases and smart watch designs are gaining substantial interest in traction. Our smart phone case module, which integrates 2-D proximity sensing in low-energy Bluetooths, is now commercially ready for production. It finally enables the billion-unit peripherals market to differentiate with value-added intelligent features. While this segment is still developing, we are working with Texas Instruments and the major peripherals OEMs, who are eagerly anticipating these markets' ramp.

On the IP phones, we have been extremely active and have intensified development of our touch and (inaudible) interface solutions to further expand and bolster our patent portfolio. To date, we have 31 patents issued and have 87 patents pending, up from 20 and 80 last quarter.

And now over to Daniel, who will talk about the financials.

Thanks, Thomas. Earlier today, we released our fourth-quarter and year-end December 31, 2013 financial results press release and filed our annual report on Form 10-K. Both of these are available for download from the investors section of our website at Neonode.com.

For the fourth quarter ended December 31, 2013, revenues decreased 57% to $1 million compared to $2.3 million for the same period in 2012. Our revenues for the three months ended December 31, 2013 included $867,000 from license fees plus $142,000 of non-recurring engineering, or NRETs, compared to $2.2 million of license fees plus $160,000 of NRE fees for the same quarter in 2012.

One of the reasons for the decrease is that in the fourth quarter 2013, we determined it was appropriate to recognize licensing revenues in the period in which customer loyalty reports are received rather than in the period in which the products are distributed or to which the license fee relates. The effect of this change is that $713,000 of licensing fees will be recognized in revenue in the first quarter of 2014 rather than in Q4 of 2013.

On a full-year basis, revenue was $3.7 million, a 48% decrease from $7.1 million for 2012. For 2013, 78%, or $2.9 million, of our revenue was generated by licensing fees compared to 87%, or $6.2 million in 2012. The remaining revenues for both periods was related to engineering fees.

On a previous call, we discussed that in the fourth quarter of 2012 Amazon discontinued shipping its e-reader that used our touch technology. Amazon accounted for 32% of our revenue, or $2.2 million, in 2012. We also previously discussed that in 2013 several new customers such as LeapFrog, Volvo, and Oregon Scientific began shipping products in markets other than the e-readers. The license fees from these new customers and others was not sufficient to offset the decrease resulting from the change in our revenue recognition policies combined with the loss of the revenue from Amazon.

On the customer front, we signed nine license agreements with new customers in 2013 and now have license agreements with 33 customers. In addition, we have several additional license agreements with new customers in the final review phase.

Our operating expenses for the fourth quarter were $3.8 million and have been basically flat throughout 2013. Operating costs for Q4 in 2013 are a 4% decrease from the $4 million total operating expense for the fourth quarter of 2012. This is primarily due to a decrease in our sales and marketing department costs due to lower headcount. And the overall decrease in our sales and marketing costs was partially offset by increases in our R&D costs as a result of an increase in head count, consultants, and costs associated with developing and building PC-related demo units.

On a full-year basis, our operating costs saw a slight increase to $15 million compared to $14.8 million in 2012. Included in operating expenses is a non-cash stock compensation expense totaling $2.7 million for 2013 compared to $3.5 million in 2012.

The overall increase in operating expenses is due to several factors. In our R&D group, we hired several engineers to service the significant increase in customer development engagements and to improve our bench strength due to our increased emphasis on the development of game-changing intellectual properties.

In addition, we incurred significantly higher legal expenses related to patent filings in 2013 compared to 2012. We filed 50 new patent applications in 2013 compared to a total of 64 since 2001. As of December 31, 2013, we have 27 patents issued plus 87 patents pending worldwide.

Our patent portfolio covers six main areas -- user interface, optics, controlling integrated circuits, drivers, mechanics, and applications. We believe that renewed continued emphasis on vigorous IP development will serve the Company well in the coming periods as our new technologies are incorporated into customer products.

We plan to continue to increase our headcount globally to service new and existing customers and to expand the reach of our sales force.

To note, we recently announced the addition of a Vice President of Global Sales and a Director who is going to take charge of the new opportunities in the global PC monitor markets running Microsoft Windows and Google Chrome operating systems. Our cash operating expenses are currently averaging approximating $1.2 million per month. We estimate that this amount will increase gradually over 2014 as we bring new personnel on board in our offices in the US and Sweden to take advantage of customer-driven opportunities in addition to continuing our focus on inventing new technologies.

Now I will move to the balance sheet. As of December 31, 2013, we had cash of approximately $8.8 million plus $1 million in accounts receivable and total working capital of $6 million. Our operations used $8.8 million of cash in 2013 compared to $3.7 million of cash used in operations in 2012. During 2013, we received net proceeds of $1.8 dollars related to exercise of stock options and warrants. In addition, we raised approximately $6.9 million in cash, net of selling expenses, and issued 1.2 million shares of our common stock in a September 2013 financing transaction.

As of December 31, 2013, our shareholder equity was $6.3 million. And at the end of 2013, we had approximately 37.9 million shares of common stock outstanding plus 800,000 warrants and 1.6 million stock options outstanding for a total of 40.3 million fully diluted shares.

Now I will turn the call back over to Thomas for some closing comments.

Thanks very much, David. To recap, Neonode continues to gain momentum and visibility in the market that would allow the Company to further accelerate growth in 2014 and beyond. We are not only securing new design wins, but we are aggressively investing in our business to meet our customers' demands and to remain on the leading edge of touch and proximity solutions.

I would like to take this opportunity to thank all our customers, partners, investors, and our very talented and dedicated employees for their trust and support.

This concludes the prepared remarks, and I will open the call for questions. Thank you very much.

(Operator Instructions) Rob Stone, Cowen and Company.

Congratulations on the Windows 8 certification. Thomas, now that you have certification, and you mentioned in your press release and prepared remarks that you have objects underway, what is left to do in terms of getting PC products to market? And do you have a sense of when we might see the first ones reaching the channels?

Rob, this is Daniel. The technology is obviously going to always be improved and tweaked, and we are adding features to it like our native proximity-sensing features and stuff like that. But as it stands right now, the technology is ready, and we are working with Tier One OEMs -- multiple Tier One OEMs on hopefully many projects. So right now we are in a very sensitive stage of triaging the many different opportunities. We will possibly know in the very near-term exactly what we are going to be working on. And we still believe that we will have PC-related revenues within the next 12 to 18 months. So hopefully within that period of time we should have PC revenues.

So it's too soon to tell whether it's this year, potentially?

Again, we hope to have the PC revenues very soon. It's certainly possible. We are going to have to figure that out over the next few weeks.

Okay. And then just a point of clarification -- you mentioned that the first printer model is in production, more to come, and you also described a new contract when for a low-cost printer. Is that with the same customer or a different customer?

It's with the same customer. Yes. So as we mentioned, we are in the latter stages -- or our customer is in the latter stages of pre-inventory -- pre-launch build, and things are going very well. And we hope to have and we hope to see product on the shelf in the very near-term. And these new wins, which are at particularly the lower end of your business line, are very good validation for our technology at even lower cost, to demonstrate that we can even replace buttons at this point in a very cost-effective way.

Okay. My final question had to do with the smart phone cases. You mentioned demonstrating that recently at Mobile World Congress. I guess one of the hurdles is developing applications that would take advantage of that technology. Can you provide any color on potential partnerships there where maybe a case could be bundled with an app? Thanks.

Yes, we are talking to several game companies for using these as a platform. But this iPhone case is really just to showcase our single-site sensor, which we [need] today, called zForce AIR. That means we can touch-enable any surface. So this is one application really to showcase what we can do with this technology. It's not the product we develop. In fact, it's a reference design that case manufacturers can take at the starting point of their design and use our technology. So it is a complete reference design we have developed together with Texas Instruments.

And just to add to that, along those lines, there are a number of case manufacturers for both tablets and for a smart phone. It doesn't necessarily mean it's just for a smart phone. There are some tablet case manufacturers that are interested, and it's purely as a mouse-type function, which doesn't really exist -- a virtual mouse type function. So the killer apps are still -- some of them already exist in theory on the now side for tablets. But again, we are working with some software application developers to create more killer apps for it.

Great. Thanks, guys. I'll jump back in the queue.

Mike Malouf, Craig-Hallum Capital.

Let me give you my congratulations on Windows 8. That's a big hurdle and that's great. My question is if you could you give us a little bit of clarity on your competitive position within Windows 8. And when you talk to OEMs, it sounds like you've talked with them pretty extensively over the recent period. What kind of difference with regards to a bill of materials are you offering up in OEM versus what they can get from either the ITO -- traditional ITO or the new emerging metal mesh providers?

So Mike, it's an excellent question. But as you can imagine right now, we are in very sensitive negotiations and discussions with our customers, so we really can't give you a precise bill of materials. But what I will say is that from what we understand the cost for a traditional ITO is right now in the $30 range. The metal mesh guys are in the $20 to $30 or even higher. And we are considerably below that level, a fraction of that level.

On another note, just to add to that, as our light guys improve, as LED prices continue to reduce, and as our controller continues to evolve, our internal costs will continue to go down. We are not [assuming] out our -- or the system cost for our solution. Total system cost will continue to decline. So we have a very good path for consistent cost reductions going forward.

Great. And those cost reductions would go directly to the OEM, and your license would remain, hopefully, static over that time?

Absolutely. That's exactly it. We move in the same direction or have the same interest for our customers, so they benefit 100% from the system cost reductions.

Great. And then I'm wondering if you -- as you have gone through this Windows 8 certification, have you been able to see any performance difference from the usability standpoint? And is a customer going to know whether or not this is a Neonode touch sensor or a traditional ITO? Is it going to act different? Is it going to be either slower or faster or better at some things or worse at some things?

The technology optical (technical difficulty) --

Hello?

(Operator Instructions) Mike Malouf with Craig-Hallum Capital.

Hello, can you hear me? Hello? I guess not.

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume momentarily. Thank you for your patience.

You may proceed.

Yes, sorry about that. Mike, can you hear me? Hello, is Mike Malouf there?

Dan, can you hear me?

Yes. Sorry about that. There was some technical difficulty; our line dropped. Can you ask that question again? You are asking about, excuse me, performance difference.

Yes, my question was -- let me just rephrase it. I'll start over. As you look on the usability, your technology versus the traditional ITO or the metal mesh technology, is there any difference in how a customer, and end- customer, would perceive using a Neonode touch sensor versus some of the others? Is it faster or slower? Does it do better at some things than others? I'm trying to get a sense of when someone is at the retailer, will they either -- is there a difference on the choice there? Thanks.

Hello, yes. First of all, the technology is optical, which means that there's no need for any conductive objects like the capacity touch. So, in fact, you could use a nail or finger or any object to control the touch screen. So also passive [pan] and other objects. So it's going to be a feeling of very smooth operations and also the touch screen being -- in some situations can be very fast. So for one- or two-finger tracking, we are looking at 200 or 300 frames per second, which is quite much better than competing solutions today.

Great, and then just a couple of follow-up questions. When you talk to the license or the OEMs, and obviously touch has been pretty low penetration so far versus expectations, are you getting any kind of feedback from these OEMs on how many devices that they would like to roll touch out to over the next couple of years?

They don't give us exact numbers. But again, they are very much focused on getting this out as soon as possible and trying to get it across everything that's Windows 8, provided that the cost and the yield and the easibility or the pragmatic -- or the way of making it easily is -- it's all pragmatic. If it makes sense, they want to have it across their product line.

So, again, there are a number of estimates out there which I think are very much predicated on ITO still being dominant or being the only solution. But now that there's an alternative, I think that dramatically -- or should dramatically change the landscape over the next few years. Again, if we have a cost-effective product that can be easily manufactured at high yield, there's no reason why they wouldn't use it across all product lines.

Great. Thanks a lot. Appreciate it.

[Nick Sentenio] with [Wavering] Asset Management.

My question was just asked and answered.

[Theodor Metcalf] of (inaudible) Capital.

Can you hear me now?

Yes.

Okay. First, I missed part of the call. Did you provide any financial guidance in terms of revenues, net income, or cash flows for the year?

No, we do not. We do not provide guidance at this point. As you can understand, right now we are in a very interesting period where we have initial ramps of new markets like printers and children's tablets and, of course, PCs coming right into the fray right now. And we are going to probably have a much better understanding of that over the next few weeks. And so therefore, visibility is very much something that we can't predict and we're just not giving guidance at this point.

Right, understood. And then I had a question about the non-recurring engineering development costs. When I compare the 10-K and the 10-Q, it looks like you devised the total payments maybe in 2013 under the TI agreement from $344,000 to $270,000. And I'm trying to understand what caused the revisions.

Yes. Can you just repeat that? I didn't understand exactly what you are asking.

Yes. In the 10-K, you have a section on the non-recurring engineering development costs. And in that section, it says that the payments for 2013, the total payments under that agreement, were $270,000. But then in the 10-Q, the number was already $844,000. So I'm wondering what happened there. Why was the number revised downward?

That's a good question. [Theodor], we will have to take this off-line, and we will try to get back and answer it for you. But again, remember that those non-recurring engineering payments go to TI. That is for development of the controller chip. And again, I will try to reconcile that.

Oh, hold on a second. Here is Dave Brunton, our CFO.

Yes. The difference is at Q3 we included the VAT tax because they are paid out of our subsidiary in Sweden, and there's that included. And at year end, when we went through the audit, we determined that the VAT, which is 25% in Sweden -- we should not have included the VAT tax because that goes to the government and not to TI.

That's true. So basically, when I look at this number right now, so this $270,000, I should be able to imply the number of chips by simply using the numbers in the agreement. Right? The number of ASICs that have been shipped? Without any other (multiple speakers)?

Yes, that's the amount that (technical difficulty) paid in cash. Right? So there's also some -- there's some [tables] on the books. So yes, but you are right. Between -- there's a group at $0.05 and a group at $0.08, so you are going to have to do the math. But yes.

Right. So that expense basically -- the expense is net of value-added tax, right? That expense is a clear number?

The $270,000 is. $344,000 was not.

Right. But the expense -- not the payment, the expense for the year is to your number, without (multiple speakers)?

(inaudible).

Okay. Okay, that's it for me.

(Operator Instructions) Mike Adams, Millennium Partners.

Can you comment on the 879 patent, please?

Yes. Again, I wish I could. Right now, it's some that we are obviously working on very diligently, and it's something that's in a very sensitive state. As you have seen in our prepared remarks, the amount of patents that we have across the board went up to about 31 patents issued. I think it's 87 that are pending, which is a considerable jump. And what's in those 31 -- a number of them are actually UI-related. They strengthen dramatically our UI base. And, again, we are working diligently on the monetization part, but at this point we cannot comment. It's a very sensitive subject at this point.

Right. Anything -- when do you think that we will hear something about those?

Well, I hope -- as soon as I can. Remember, the options here are, I guess, are fourfold. Either we could do nothing with them, for a variety of reasons, or we could theoretically sell them, or we could partner up with a [troll]. Or we could theoretically -- if we lost our minds, we could try to sue by ourselves. But -- so you can imagine we have a number of options.

We're in the -- and again, we are not shirking our responsibilities in terms of looking for the best options. And we are trying to figure out -- we are at the latter stages of figuring out which one is the best option of the four -- really, the three.

So you think we will hear something on the next call?

I hope so, but I can't give you that level of guidance. That's something that we are working on but, again, that's a very sensitive subject.

Thank you.

And there are no further questions at this time. Are there any closing comments?

Yes.

I want to thank you all for joining us on the call. We will keep you posted on our progress in 2014 and in the future. Have a very good day and thank you, everyone.

Thank you for joining today's Neonode fourth-quarter 2013 earnings conference call. You may now disconnect.