Neonode Inc (NEON) 2017 Q2 法說會逐字稿

Hello everyone, thank you for standing by and welcome to Neonodes' Second 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 introductions, I would like to turn the call over to David Brunton, Neonodes' Head of Corporate and Head of Investor Relations. David, please go ahead and start the conference.

Welcome and thank you for joining us. On today's call, we will review our second quarter 2017 financial results and provide a corporate update. Our update will include details of customer activities, technology developments and other items of interest. Before turning the call over to Thomas Eriksson, our CEO, 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 be subject to risks, uncertainties or other factors that may affect Neonodes' business, financial position and other operating results, which include but are not limited to the risk factors and other qualifications contained in Neonodes' Annual Report on 10-K, quarterly reports on 10-Q and other reports filed by Noenode 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 is my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode. Thomas, please go ahead.

Thank you, David, and good day, everyone. First, I'd like to introduce the people we have on the call today. Together with me today I have Lars Lindqvist, our CFO, who will present the financials, and we have Mr. Remo Behdasht, our VP of AirBar business, who will provide a brief update on AirBar. Following the recent exciting launch of AirBar for MacBook Air. But first let me start with strategic update. Digitalization is rapidly transforming companies and sectors creating economic value from new products and services. This brings a fantastic opportunity for Neonode to help OEMs Tier 1 companies across the world and lastly growing (inaudible) innovation and driving differentiation from the peers. Using our path in that MultiSensing technology embedded into our hardware modules for a wide range of devices ranging from multi sensors and application to consumer electronic products. I firmly believe that sensing technology profoundly going to change the way humans interact with machines, not only touch and displays, but also interacting with the devices, touching different materials in many shapes and forms. We also see a growing demand for machine-to-machine sensors for robots and artificial intelligence from them. With that said I'd like to share with you some of our recent accomplishments and our strategic plans for Neonode. To capitalize on our investments in our most valuable assets the zForce technology, our broad IP portfolio and a need to develop advanced production processes and our strong worldwide client relationship. We are now ramping manufacturing and selling our [market] sensor modules to our customers. By providing our technology encapsulated as modules along with our license business, we have positioned our company to move up in the value chain. With our modules, we address a larger diverse market then with our licensing business. We have a plan to expand our customer base, which we believe will generate substantially higher revenues. We have recently found more application market for our sensors. Using the same hardware, software and the same manufacturing process, this makes it possible for us to move into new markets and new customers without any new development. Our new zForce AIR modules can be used not only for touchscreens, but also in many other software applications, like in interior and exterior cars and 2 and 3 dimensional measurement inclusion of (inaudible), in door entry system and a gesture controls to name a few.

In addition, our objective is to provide different sensor for self-driving cars like our optical sensors embedded into steering wheels and sensors that can help cars to navigate in 3D space. We believe that our total addressable market for our multi-functional sensor modules now exceed USD 10 billion per year, ranging from applications in automotive and consumer electronics sectors. And in this context, Neonode technology is becoming increasingly relevant.

Moving now on to our sales. In the second quarter of 2017 reported net revenues of USD 2.1 million loss. This is not satisfactory, I'd like to walk through some of our new module sales strategies, that I believe will help us to grow our hardware module business and improve our sales numbers in general for our B2B business.

First, to address the broader market, where we typically see low-to-medium size orders, we have signed an agreement with DigiKey, selling and distributing our modules. They work actively with our sales team to promote our modules to their [top] 2 million customer base using email, web marketing and on-site customer visits. Second, to address new larger OEM customer opportunities and yes, go after new market segments. We're working with partners like STMicro and Texas Instruments to reach out to large Tier 1s and OEMs and also ODMs that have geographic spread all over the world. These companies posses big sales teams of thousands of people and you can leverage their connections and networks to sell and promote our modules. This has already been done successfully with our licensing business, creating an impressive customer base with a market presence of today over [60 million] devices using our technology. Third, we actually worked with our current customer base for them to adopt the modules in current and new product developments, such as printers and automotive touchscreens. In addition, we are exploring new category of products such as flexible displays for mobile devices, interior and exterior sensors for automotive market. Fourth, we supply our modules in different sizes with different [interfaces] to fit into all kind of products and systems. In addition, we also provide development kits for our customers to quickly evaluate our technology and speedup time to market. And the result of all of these activities is that will now have already 3 new customers that are going to embed our modules into their devices [ordering] parts in 2017, and more to come from our sales pipeline.

I would also like to comment on our recent financing. To support our growing business, we're very happy to announce the closing of private placement in Neonode, the Swedish tech investors for a long-term and their view of Neonode and its opportunities ahead. I look very much forward to working together with the new team onboard and [would] actions announced today, I believe we are very well positioned to further strengthened Neonode as a leading supplier of advanced optical sensors. With that said, I leave the word to Lars, who will present the financials for second quarter in more details. Lars, go ahead.

Thanks, Thomas. You can find our second quarter earnings release and 10-Q available for download from the Investors Section of our website at neonode.com. I'd like to start-off with some highlights and important milestones for the quarter. First, we have over the last 3 quarter invested approximately USD 5 million in setting up and building out our production facility, building inventory and hiring and training the necessary staff needed to manufacture sensor modules for AirBar and embedded modules for our B2B customers. Our operating expenses are going to plan and currently run rate [USD 3 million] per quarter, and as Thomas outlined we are increasing our focus on sales and marketing to grow our module business to become profitable. For the second quarter this year, our operations used [USD 700,000] of cash compared to [USD 2 million] for the second quarter 2016. Going forward we are tracking and reporting our business by 3 separate revenue streams, which are licensing, business-to-business, hardware modules and business-to-consumer products AirBar. The [$9.8 million] we received from the private placement is strengthened our balance sheet and provide us with the liquidity to grow our business.

Net revenue of $2.3 million for the second quarter of 2017 decreased 10% from the compared quarter last year and remain essentially flat compared to the first quarter. The key element of the decrease is mainly related to expected lower NRE fees, as a result of a fewer full custom design projects for our license business. 84% of our revenues for this quarter came from our licensing business and this revenues from sales of modules to become a larger percentage over the total -- of our total revenue going forward.

For the second quarter of 2017, our customers who licensed our technology shipped 2.7 million devices in an average license fee of $0.74 compared to second quarter last year, where our customer shipped 3 million units in an average license fee of $0.67. Total license fees for automotive business for the quarter was $700,000 and $1.3 million for our consumer business, which are flat compared to last year.

Our gross margin was 84% for the second quarter compared to 85% last year, primarily due to 100% gross margin license fees becoming a smaller proportion of the total revenue. There was a negative gross margin on AirBar sales in the 3 months ended at June 30, due to additional production costs related to the initial production setup and [tuning].

Operating expenses decreased 10% to $3.1 million for the second quarter compared to $3.5 million last year. Our net loss for the second quarter was $1 million or $0.02 per share compared to a net loss of $1.3 million or $0.04 per share for the second quarter last year.

Inventory is a key component in a business going forward. [And some long] lead time Neonode specific component that are used in all our sensor modules. We monitor these component levels in our inventory to make sure we have a sufficient quantities on hand to meet the customer requirement. Inventory increased $1.4 million in the first 6 months of the year to support increased production [to beat] modules and AirBar in different sizes. The production of sensor modules for our (inaudible) embedded module customers and sensor modules to be used for embedded B2B sales and marketing support.

So now I'd like to turn the call over to Remo.

Thank you, Lars. Good morning, everyone. For the first half of 2017, we completed significant milestones setting up our AirBar business. Notably there were 3 key milestones. Firstly, the development and setup of an advanced production process, perhaps sensor modules that power all AirBar products. Second, launching a full range of AirBar consumer products for Windows 10 and MacBook Air laptops. And third, the establishment of the distribution in the retailer network that is enabling us to deliver AirBar to a global market.

Here is some color on where we are and what we are doing to build our AirBar business. The investment in the AirBar business unit has been relatively low in the initial stages as far as sales and marketing are concerned. AirBar was a vehicle we used to test, refine, verify and complete our zForce AIR sensor module production capabilities. As with all new technologies it was a great deal of trial and error until we had feasible production yields and a complete marketable product. This has been seriously challenging, but all our assets have rendered us an award-winning technology and product.

In Q2, we started shipping the full range of AirBar devices, covering laptops with screen sizes 13.3 inches, 14 inches and 15.6 for Windows 10, and also the much anticipated AirBar for MacBook Air. AirBar is now available in the U.S., through the largest online retailers and also in-store enterprise electronics' and rolling out into selected Apple Authorized Resellers.

We had started out initial marketing activities with walmart.com and are now in discussions with Walmart stores for a spring 2018 store rollout. Furthermore, we are working with Staples in the U.S., and Reliance in India to be our next major retailers that will rollout AirBar into their stores in time for the 2017 peak shopping season.

AirBar will be featured in more online activities on Walmart and Amazon.com. In the U.S., plus Amazon in the U.K., Germany and India. Last week, we had our first AirBar TV commercial with MacBook Air in Sweden. This was with the largest retail and MediaMarkt, which we anticipate will set the scene for similar activities throughout Europe. In September, we will commence placement of the AirBar lighthouse, a point of sale display that is designed to showcase AirBar at the retail level and grab customers' attention. Customers will start seeing AirBar, the AirBar lighthouse in key retailers where we have presence. September will also mark the commencement of our retailer sales staff training, an incentive program in order to gain sales momentum for peak shopping season.

We are now receiving support from Microsoft to increase our visibility with key retail decision making. Microsoft see AirBar as a means to have more people using touch phone on their current Windows 10 devices, so when they upgrade they buy a touchscreen device or what Microsoft call the modern PC. Microsoft sees AirBar as a great complement to their Windows 10 platform and we expect more activities with them in the near future.

In the second half of this year you will see more of AirBar at all levels, including greater retail presence, product promotions, retailer bundles and DIRECTV sales spots. I would like to say that establishing AirBar has been really challenging far over and above our initial anticipation. We had hurdles at each stage, which we had to overcome and this all contributed to progress taken much longer than we wanted. Having said that, it is important to stress that a great deal has also been achieved with very limited resources and in a short time span. We are now at a point where we can start benefiting from our invested assets as we increase our sales, marketing and retail activities greatly, and we are very positive about the future of our AirBar business.

I would like to now hand you, back over to Thomas.

Thank you, Remo, for that extensive information about AirBar. We will open the call for Q&A session now. Thank you for listening.

(Operator Instructions) Our first question comes from Mike Malouf with Craig-Hallum Capital.

I just want to -- of course I had a little bit more on AirBar, it sounds like there's a lot of activity. How is the production of AirBar now, I know you have obviously a lot of trial in areas you pointed out. Can you give us a sense of where production is now, is there any kind of issue with regards to the number that you can produce right now?

Mike, yes, very good question, actually. So production is, yes, as we've -- as I mentioned in my remarks, the production [process] take a lot of more time than we anticipated and what we wanted to do is before we do full scale marketing and sales to get the product right. And so it has taken a bit longer than we wanted. However, now it's at a point where depending on the orders that we get and the volume of orders we get, we will be producing based on that demand and production is really after all of the fine tuning that we have done at a point where we can -- we will be able to deliver great demands when we start generating them, so production is in a good position right now.

And maybe you could give us a little bit of a color on recent demand trends, you have obviously placed it -- starting to place it in some new areas and you have all of the sizes and have the MacBook out. Can you give us some sort of recent color on things as the unit sales in the first 2 quarters were quite low, how does it look for you as you look into the next 2 quarters in the back half of this year?

Well, I'm very positive about how it looks for the next 2 quarters. Realistically to my remarks, it has taken longer than we wanted it to. In the excitement of the product we obviously wanted it to be much quicker than market was willing to go with the market -- think of a market as a massive engine, which we need to feed into as a [COG] and that's essentially what we were. And some of the devices for the smaller sizes came in late Q2, so they haven't really had a chance to really have a good run, so what's happened is which is really important from the retailer perspective is that they see now that we have a range, and a lot of retailers don't give you too much focus or too much, let's say marketing incentives or marketing activities -- if you have just one product, because that's [like I address] is a small percentage of their markets, we're only a percentage, a fraction of their markets. Now we have something completely unique, we can address the majority of their existing customers as well as their previous customers when we are in, let's say not only on the websites, but in their shop floors, we actually look like we are a substantial product in a range. So that's why conversations have been not -- we're not, let's say the retailers were not interested in earlier, they are now calling and saying now we can talk because you addressed a greater percentage of our customers. So as far as -- that's the range, however, with regard to breakdown the [15.6] is still going to be the highest volume, because that is really the highest volume of any laptop out there. And a big efforts is now being placed by the PC OEMs on the 14-inch size, so we see the 15.6 and the 14-inch for the Windows 10 and of course the 13.3 MacBook Air version being the top 3 sizes. The fantastic thing for us is Apple have decided to continue the MacBook Air, which is really good for us and so therefore we're getting a lot of interest and support from the Apple Authorized Resellers, who are looking for an accessory to sell with us in many of their devices as possible and AirBar is something which is very interesting to them. So I'm very positive about the second half and there's a lot of interest, so we can't give you numbers, because we just right now we just don't know. This is all happening, we are talking about deals, which are quite substantial, but we are also talking about making sure we have a sustainable business going forward, and that's where we are at the moment.

And maybe one question for Thomas. You mentioned the 3 new customers on the sensor module side, I think (inaudible) get all the details or maybe missed that. Could you give us a little bit of color on those 3 customers and maybe sort of the pipeline types of customers that you mentioned that were subsequent to that?

Yes. These customers are all in the consumer space, so it 's actually new customers. We of course working actively with the current customers to transform them into the (inaudible) modules, but these are 3 new customers in the consumer space. It will be quite limited volumes initially, but we ramp during the course of the year. So modules will be built according to this and this is our first version of our module that's going to actual product except AirBar.

And what were those modules run at, roughly, what kind of prices are we talking about?

This module is typically around USD 20 price in average. So compared to license business it would be 20x more in terms of revenues.

And as you look into 2018, what type of potential volumes are we talking about? What kind of needs for these products are out there?

We look at the market for consumer space and [multi space] is a little bit different, but we -- as I said before we see the addressable market to be quite significant because we (inaudible) a lot of new areas where we can use this sensor for different application. So going from, yes, touchscreen applications we see new areas like drones and robots, toys and games, we're working with customers [make] OLED displays for mobile phones and tablets with reality hand controls, 3D body scanners, sound effective furnitures with a key efforts of those. And of course also the e-reader and print customers are -- the markets will grasp there, but in terms of rollout that we see, of course AirBar is the first product in the market, but we primarily go after touch replacements for different products, and then we go into the interior of cars for different sensors, we work [interactively] with Android systems for next year, and we have already customer for door handles and tailgate sensors for beginning shipment in Q1 2018. And in parallel with that the company also working on the qualification of certain automotive standards that we expect to be completed by end of the year, which is important to start shipments direct to Tier 1s and OEMs.

Our next question comes from Viktor Westman with Redeye.

First, I wonder if you can give an update on the Autoliv deal there, we know Autoliv has closed some customers here, when can you announce that for instance or just a general update what's going on here?

Yes. Regarding, I talked earlier about self-driving cars and an important part of that is steering wheel, so a lot of different OEMs are currently working to put these cars on the market with different levels of autonomous driving capabilities. But in terms of Autoliv, which is our partner for steering wheel, we are completing a series of qualifications both in software and hardware, and we're working along with them and in the sales process to approach different OEMs. We have [those] programs with a series of different OEMs that we can't disclose at this time, but we believe this product is something that hopefully going to go on the market in 2019 or 2020. And along with that we are also working with other parts of the steering wheel, which for example, the touch areas around steering wheel and we have a series of different projects to that as well that have quite substantial volumes. So the rollout to that might be that (inaudible) sensor we come up before the steering wheel and hit the market before. So we have tailgate sensors entry system and potentially attract that around -- kind of touch systems in the car, that's going to come out before the steering wheel.

And can you comment on the license revenue, maybe this is a large question on the licensing fees there why was not growing from Q1 there? And what part is it there related to printers or e-readers?

Hello Viktor. Lars here. Well, it is basically in combination of different things. First of all the overall decline in revenues related to the lower proportion of NRE fees due to less customer signed projects. When it comes to licensing, it is basically a mix from -- consumer services, consumers [levied] to the lower license fees per unit and (inaudible) coming from new customer and automotive customers with higher license fees, so there's a -- it's a mix of things, but we still expect a license fees to grow, continue to grow slightly up, very much related to both sensor and automotive.

One last question on AirBar, I have a bit of a follow-up here, if you can comment on the AirBar demand for MacBook Air, you say that you have a lot of more tailwind there so to say than the Windows version?

If you go to any retailer right now, you will see devices like Windows laptops, you will see them with a touchscreen. You will see some once without and some with, but nowhere can you go where you see a MacBook product with a touchscreen and this is really the -- where the Apple at least not the Apple Stores unfortunately yet, but the Apple Authorized Resellers are very excited, because they don't have an option of selling a touchscreen Mac or non-touchscreen Mac. They see -- they make very low margin than the actual Apple products themselves, so they really look to sell as many accessories and [desktops] have own attachments to these devices as possible, and they see AirBar as a really, really good attachment. So currently we're working with that distributor, Ingram in the States, really that's where the big demand is happening and now we're also getting a lot of activity happening in Europe as well, where some distributors want to be part of the deal with a specialized in addressing a number of focused resellers who specialized in Apple products. So this is not just -- you get listed on Amazon.com and then it's available everywhere in the country that it takes it's a process. And this just because we brought out the product doesn't mean it's going to be a massive spike in sales. There will be an initial spike, but to actually grow the business it's a project and that project means that we're addressing these retailers, making sure they know about the product, make sure they know this is the way to sell it, what support there is, what warranties there are, why people would buy, so the whole package actually goes into selling a product into various retailers and as good as AirBar for MacBook Air is, it's still is needs to go through that process and that's what we're currently doing. So we anticipate and by all accounts from the feedback we're getting from people who see this and I'm sure that people you've spoken to, they see this as a product which will going to work and work very, very well and people are going to want it. And I think that our first evidence is when a big retailer like MediaMarkt believes enough where they are going to put this thing on national TV that's our first and of course, we have the other retailers coming onboard, which we can't mention too much yet in the U.S., as well.

(Operator Instructions) Our next question comes from James Medvedeff with Cowen.

So let me just follow-up on the AIrBar a little bit more. Once you open up these direct channels through -- when do you see the longer-term mix of business between direct channels and indirect channels?

Sorry, when you say direct channels, do you mean like going through distributor as opposed to going, could you explain a bit what you mean by that?

Yes, so I guess going through distribution versus going direct through your website?

To make a product available on our website and then taken order and then of course fulfill that order is not the business we're in. Initially we took pre-orders just to get like a [testament] and what's their demand, they would be for our product, but it's not the type of thing we want to get into. We will always go through a distribution channel, because not only does that give us reach, that also gives us a lot of flexibility, so we can focus on what we do, which is developing the technology, developing the product, working on sales and marketing and building the brand. And then someone like an Ingram Micro or other distributors that we are currently working to bring on. They would focus on their core strengths and that process becomes a lot more optimized then if we start selling these to the public. So that was something we did initially and it's not something we're going to do anymore or ever again I'd say.

But so for example, when you sell through Amazon, you would still use a third-party distributor to fulfill those sales?

Yes. So what happens with Amazon. Amazon is a little bit different, let's say walmart.com. In the U.S., we have one customer, direct customer and that's Ingram Micro, this is just an example for the U.S., and [unless use that as the base]. We have one customer, so when someone -- when Amazon wants the product, they already have systems established with Ingram Micro, so Ingram lifts us in the inventory system, Amazon then actually places an order for a substantial -- for a certain amount of products for example, let's say 15.6, which they carry in their own warehouse. And then that way you become a product, which is available on Prime for Prime members and then that can guarantee you delivery dates and so on. Amazon actually buy products from Ingram and then hold it in their own warehouse, Amazon is not a customer of ours. They are technically a customer of Ingram Micro, however, we work with Amazon to make sure the listing is presentable. So then what we want to always get is the Amazon buy button, which is really, really important. If you have that then that means people can order it, and all the prime members who are loyal to buying stuff from Amazon and so on, they will get delivery, let's say the next day or the day after. Walmart is different, we have a very close relationship with Walmart, but they are different. They actually don't carry any product, so what happens is when someone goes to a Walmart, places an order than Ingram Micro actually drop ships that directly to the customer, so what the customer gets is a box with containing AirBar and on the packaging other box it actually has Walmart's stickers on it, so you think it's coming from Walmart, but it's actually coming from Ingram Micro. So they fulfill that, they will do that for [States], they will do that with any customer of ours that who start working with Microsoft, they'll fulfill Microsoft, so we won't be doing any of that dealing with those retailers ourselves.

In the past you've provided some numbers around unit numbers for e-readers, automotive and printers and also some sort of annual forecasts for those unit numbers. Can you provide any of that today?

Lars here. Well, I can't give you -- a summarized picture that during the second quarter it was as I said -- we said earlier 2.7 million units or devices shipped for our customers and out of that e-readers made up approximately 600,000, and printers around [1.8 million] and automotive a little bit about 300,000, so that's the mix, and when it comes to e-readers, there's always seasonality because they are high in the first quarter, because then we get the Christmas sales that effects reports from e-reader customers.

How do those lineup with, your expectations are with those change in your annual total unit forecasts?

Well, I think what we have discussed earlier, if I summarize that, I mean we have a license revenues around -- around [$2 million] plus level, and we expect it to slightly increase, then our operating expense is of [$3 million] and basically that gives a bottom line of 700,000 to [$1 million]. So what we believe that, what we need to get to say profitability is the revenue from modules and AirBar, and we expect that to increase over the year. So I think and also adding to this step, what does it mean, what we need from AirBar modules, well, if we had arranged [2.3 million, 2.5 million] of license revenues with 100% margin, we would make a loss [total of 700,000 to 1 million]. And that would represent say AirBar as an example of $1.5 million to $2 million in revenues, so that is -- yes, that's my outline.

And at that level of service for AirBar, what would you expect the gross margins, I know the gross margin was slightly negative this quarter, I assume that's because of startup costs and all the things you mentioned in the prepared remarks about ramping and production process are being put in place, retail channels open. How would you expect gross margins to track for that business through the rest of the year?

As the volume increase -- volumes affect the manufacturing costs that we expect in the top line is 50%.

And my final question is on expenses, so -- flat quarter-over-quarter they're good, down year-over-year, how should we think about those for the rest of the year as sales ramp?

Yes. We basically expect them to stay in that level, because that -- we talked about that during the -- the last couple of quarter, when our growth down from very high level, basically we're in the top peak of developing the module concept and all that. So the $3 million, that's where we expect it to stay plus-minus a little bit and more focused on the sales and marketing rebalancing a little bit from heavy engineering and also [securing] the sales marketing focus.

Ladies and gentlemen that does conclude the Q&A session for today's call. This also concludes today's program. You may now disconnect your lines and have a wonderful day.