Neonode Inc (NEON) 2017 Q3 法說會逐字稿

Hello, everyone. Thank you for standing by and welcome to Neonode's Third Quarter 2017 Earnings Conference Call. (Operator Instructions). At this time, for opening remarks and introductions, 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.

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 to remind you that this is the first time that we have had a PowerPoint presentation to accompany our call so I hope you all have that up and we will guide you through it as we go through the comments. So before turning the call over to Thomas Eriksson, our CEO, I would like to make the following remarks concerning our 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.

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 Lindquist, our CFO. And I would like to start talking, taking a step back and outline what Neonode does and what products and solution we develop and sell to our customers.

So with that said, I would like to start with Slide number 3. Neonode is a technology company that provides optical laser-based sensors for human-to-machine interaction. We call our base technology zForce. We deliver zForce in 2 formats: first, under a license agreement with our customer that build our sensors themselves and, second, as a completely fully-integrated sensor component under supply agreements.

Our sensors work as a low-resolution camera with an extended aperture so it can, with speed and precision, sense and detect objects in front of the sensor. It can be used for touch-screen applications through placed proximity solutions and also capture real-world 2-dimesional and 3-dimensional gestures and objects or work as a collision detection sensors and report objects with the correct size and location.

Our sensor components are typically easier to integrate into our customer products than our previously custom sensors that we provide under a license agreement. Our sensor components come in different sizes and shapes and in many configurations with a multiple of interfaces to support many applications. I'd like to summarize this as we have a product offering for large addressable market with a sensor component that support a multiple of applications for projects of any volumes.

Next, let me highlight some of the company milestones and where we are today. So please move to Slide number 4. We have a strategy with top priorities that provides the roadmap that drives our actions to capitalize on our investments in our sensor components. We actively market the company and our products to build brand awareness and create product demand and to convert our license customer platforms to use our new zForce AIR components.

Our sensor marketing is directed to secure key different customers and partner supply agreements for large-volume projects. We are developing a global distribution network for which (inaudible). We are aware that production quality, capacity, redundancy is top requirements of large OEMs when selecting a supplier for their products. We know how to address our customer requirements as to have shipped over 50 million sensor solutions to date with our technology without any quality claims. We're actively working in qualifying all of our processes to meet demand and requirements from our large-volume OEM customers.

Another of our top priorities is to continue to develop and improve our technology to make it relevant for our customers' future products and roadmaps. While our strategic focus is directed on capturing the great potential we see for our sensor component business, we will continue to nurture the solid and profitable licensing business during the coming years.

And now I would like to move to Slide number 5. The consumer electronics market is very large and very diverse with lots of OEMs and contract manufacturers operating. We know about this market and our sensor solutions are already embedded into different products in high-volume applications such as e-readers and printers. We are heavily involved with some of the largest OEMs in this market, like HP and Amazon, and know the requirements to win these.

We are addressing this market with a [standard] light sensor component and selling it through distribution and directly to our large customers. We already started shipping our sensor components to 12 different customers, still in small quantities, but we're working with all our current licensed customers to win their next platform designs.

We're working with our partners to combine our sensors with their products, for example flexible OLED displays, and to deliver the complete solution as a module directly through the OEMs. In the consumer electronics space, we have also identified new and exciting applications for our standard light sensor components such as drones, toys and 3D scanners. Our distribution partners, such as Digi-Key, will initially focus on this market. Digi-Key is already keep our first sensor components and development kits in stock, and our marketing and sales training will start during November.

Another important growth market for us is automotive. Please move to Slide number 6. This picture shows a car with different type of sensors. We believe automotive, over the time, will be our largest market in terms of total ASP and volumes. In a car, we can have up to 10 different sockets for our sensors with ASPs exceeding $100 per car. The main applications for our standard light sensors components, in this picture you can see a few exterior sensors like entry system and collision avoidance systems. We currently are working with the car OEMs and Tier 1s on some of these applications and have signed a supply agreement for tailgate sensor components to start delivering by early next year.

Please move to Slide number 7. This picture shows some of the new interior applications that our standard light sensor can support by just altering some software in our platform. Our main focus inside the cockpit is still the steering wheel sensor, which we work with Autoliv, and for self-driving cars and touchscreen applications. We have during the last few years been working with Autoliv, one of the largest suppliers of automotive safety systems to develop our technology in the steering wheel that enables autonomous, assisted and self-driving cars. In our roadmap, we're looking at other possibilities for our sensors to support things like anti-pinch control and the window interaction.

Please move out to Slide number 8. In this slide, this is a top view of self-driving car. This is an example with a lot of different sensors showing what we need to have full autonomous drive. This is still not a reality, but Neonode is focused on sensors that can sense and detect objects close to the car typically from (inaudible) to 1 meter. Our sensors have an extended aperture so they are not sensitive to contamination like cameras and do not produce dead spots like a LiDAR or a camera. Our sensor can also report the action of the size and position unlike a camera that produce an image, which needs complex processing by an expensive processor. For a camera solution, there is a lot of blind spots, but the car don't have any information or very limited information about its environment. As the car starts to move very fast, the camera is not fast enough and will produce a distorted environment map. And our sensors is very fast and will produce a correct position on objects around the car.

With that technical info, I'd like to turn over the call to Lars for some financial update. Lars, please go ahead.

Thanks, Thomas. You can find our third quarter earnings release and 10-Q available for download from the Investors section of our website at neonode.com.

Please go to Page number 9. I'd like to start out with some highlights and put in my thoughts for the quarter. First, we received $9.1 million net of selling and yearly expenses from the time at placement completed in August. We used $1.8 million of those proceeds to pay off a short-term loan.

We continue to expand our presence in our customer products and our customers have now shipped more than 52 million products, which generated $38 million in license fee revenues since 2011. We continue to nurture the solid and profitable licensing business.

We achieved a major milestone when we started shipping our first-generation touch sensor components. We are in the process of increasing our sales and marketing focus as we roll out new sensors for targeted markets.

Our revenue increased 41% compared to the same quarter 2016 due to increased license fees and AirBar revenues. Our operations used, in the third quarter, approximately $1 million of cash 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 how we look at our business by tracking the profitability of each business unit. And our business units are license fees, NRE fees, B2C AirBar and B2B sensor components. This slide presents third quarter 2016 and first, second and third quarter 2017.

Revenues in the third quarter 2017 increased 41% over the third quarter last year. That's a nice increase. However, that's not the full story. While there are new revenue components added in 2017, 2016 only had license fees, but 2017 include license fees, AirBar revenues and revenues from our (inaudible) of sensor components. For the third quarter 2017, our license fees were $2.1 million, AirBar sales $200,000 and sensor components $20,000 compared to license fees of $1.6 million last year, third quarter.

Operating expenses and cost of goods for third quarter 2017 were $3.7 million compared to $3.8 million last year. Our licensing business is 100% gross margin. However, we allocate the portion of our overhead costs representing $200,000 for the third quarter 2017 compared to $160,000 last year. AirBar cost was $1.3 million for the third quarter and the sensor components cost an investment for $2.1 million. We have, for the last 2 years, invested in design, manufacturing and commoditization of our sensors and it make up the large portion of our total cost.

Let me discuss AirBar for a moment. AirBar revenue has not achieved acceptable sell-through volumes. We know that selling consumer product at AirBar is challenging even though it has received very positive reviews from the market. However, part of the AirBar journey had been to develop the underlying sensor component technology, manufacturing process and supply chain management that is used in all of our B2B sensor component products.

Our primary focus is B2B. We understand that consumer products sales and the very substantial marketing effort and investment to be successful (inaudible) a limiting factor for us. We are therefore evaluating strategic options for selling AirBar so we can put all of our focus on the very large and diverse B2B market for our sensor components.

Our net loss was $1.1 million or $0.02 per share compared to $2.2 million loss or $0.05 per share in Q3 2016.

Let's move to Slide number 11. Our licensing is a solid and profitable business, which we will continue to support and representing the largest part of our revenue today so I want to spend some time to explain where we are. Our license fee have remained stable throughout 2017 and are expected to be between $2 million to $2.4 million per quarter for the foreseeable future. Printer license fees continues to increase driven primarily by new printer sales from Canon and Epson. Our automotive license business is expected to increase over the coming quarters. Our licensed customers shipped 2.8 million products during the third quarter 2017 and more than 52 million since 2011.

So let's move over to Slide number 12. I'm going to end by talking about the balance sheet and cash. We received $9.1 million in August, as I talked about, in net cash proceeds from a private placement. And we believe we have sufficient cash to execute on our business plan. Our total operating expenses are expected to continue to be in the range of $3.1 million to $3.3 million a quarter. And our cash used by operations are currently approximately $1 million per quarter. We have sufficient inventory to meet our expected near-term demand for sensor components. And as of September 30, 2017, we had $6.9 million of cash and $8.2 million of working capital. Our current liabilities, including accounts payable before revenues and accrued expenses, are well within plan and our working capital is sufficient to grow our business.

Now I would like to turn the call back over to Thomas.

Thomas Eriksson: Thank you, Lars. Looking back at an eventful quarter, I'm happy to conclude that we've taken the initial step to deliver on our strategy with the first sales in the sensor component business. I look forward to work together with the new board of directors to continue to strengthen our operational excellence, positioning Neonode as the leading supplier of advanced sensor technology.

Now I would like to open the call for Q-and-A.

(Operator Instructions). Our first question comes from Rob Stone with Cowen and Company.

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

So currently, with AirBar obviously those numbers are low, but we are increasing as we go. And our target is to reach approximately 50% for automotive and consumer applications.

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

Yes, absolutely.

Okay. And clearly there's a lot of different things 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 you see the near-term opportunities for you sensor components?

Yes. I think we talked about that a little bit earlier. But the most advanced projects we have is within steering wheel applications where we already in quite advanced in the sense of testing and going out to market. The other area where we've come a long way and we'll start shipping sensors by early next year is in entry systems. And that entry systems is typically door handles and the tailgate sensors. That's where we -- these 2 segments are the first that are going to hit the market and already early next year.

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 component opportunities that might be in revenue in 2018 from categories other than automotive?

We currently have 12 customers we're shipping, still, as I said, it's quite low quantities. We are ramping during the end of the year for these products, this area in consumer electronic products. This year we're not going to have any automotive applications where we're going to ship sensor components before the beginning of next year. So we outlined a little bit that we're working on automotive qualification for our manufacturing plants together with the quality qualification of the company as a whole. We are expected to be ready by this timeframe. So that's what we are doing.

Okay. So consumer electronics products, I recognize 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 that those might be in?

It's mostly the areas where we are already in, like e-readers and tablet applications and printer panels. That's the applications that we initially will see go to market.

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 had been modeling this quarter. Was there anything unusual in Q3 that would suggest that OpEx are going to decline sequentially in the fourth quarter? And sort of what do you see driving OpEx up and down within that range?

Yes. Lars here, Rob. Yes this quarter I'll try to sort of explain it. There are certain components in the expense side that it's not recurring as such. And earlier we talked about roughly $3 million per quarter and we put it up a little bit to $3.1 million to $3.3 million depending on the (inaudible) and actions or important investments we have to do. We have, as you know, to take everything over expense if it's not related to manufacturing equipment. So that could (inaudible) a little bit, but eventually $3.1 million to $3.3 million I think is a good level to expect.

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

Yes. That is correct because what we have mainly in the inventory is long-lead components like the (inaudible) and so forth. And that's very long lead time on those. So I will say we have sufficient inventory now that we can be in the near term even, I would say, a little bit mid-term. But we will expect that to decrease.

Okay. Lars, do you happen to have the breakdown by raw work-in-process and finished of the inventory?

I don't have it in front of me. It is in the 10-Q.

Okay. We'll take that offline.

Sure, great.

Our next question comes from Mike Malouf with Craig-Hallum Capital.

With regards to the AirBar, and you obviously are starting to do strategic options for that. But can you talk a little bit about what are these options as you've looked through them? And we've only been able to sell, I guess, around 5,000 units a quarter for the last few quarters. Is there any expectations that perhaps the fourth quarter could be much better than that headed into the holiday season? Or have we just stopped trying to market this thing and are just going to try to give it to somebody else?

Hi, Mike. This is Thomas. So we still believe that AirBar is going to be a successful product. However, we learned a lot during the process and we will translate all of that into our B2B business with selling our components. And from the beginning this has not really being our core business. And with the limited marketing and resources we put into this, we expect -- we have expected more, but still it's proportional to the marketing put in to build the brand and build awareness around the product.

The good thing is that we, by doing AirBar, we are now ready to approach some of these customers with a sensor component that work, have been tested in production and refined as a component. And we also have meanwhile built a factory and make sure we can deliver it to the OEM customers.

So AirBar, we still think with the right partner, the right marketing and perhaps a different brand can sell a lot. So we have -- we are in contact with some of the largest accessory companies in this business. I can't exactly say who. But we're looking in to see if they would be interested to take over this product as their own and market it and sell it. And then we will provide the components inside of AirBar directly to them. So Neonode will still make money on providing components, but the burden of having this and the cost associated with AirBar will hopefully go away.

And do you have a sense of how long that will take to get something like that signed? I mean are we talking 6 to 9 more months? Or is it going to be a lot sooner than that?

I think pretty soon. We have been working on that for a while. It always takes time to do these things. Obviously we can't say exactly when. But I think we're very optimistic. There's a lot of interest in this product. And when it happens we will get back to the market with some updates on that. So we're very optimistic about AirBar and that product.

Yes, okay. And then with regards to the modules, can you give us a sense of what you're selling these modules for, especially on the ones that are upcoming next year? And 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 time, as Rob sort of pointed out. So are these something that you will eventually announce which car that they're on and give us a sense of how big of a unit number we're looking at?

Yes. We didn't put any numbers in these slides for sensors. But as you can see there is a lot of different opportunities for our sensor. And it can be used in area of different applications. So typically these sensor start at a few U.S. dollar for entry systems and then it goes up to the tailgate sensors for maybe $20-$25, and you have collision sensors that goes up. Steering wheel typically $30-$40-$50 ASP. And if you look at infotainment systems, they start at $20 and up depending on display type. Other types of sensors in the range of $5 to $10 depending on the application.

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

Yes. We have actually signed one OEM customer that we're going to start shipping to. But we are very engaged in quite a few decent OEMs where we, first of all, we're trying to get in to the next platform with these module components. That makes it much easier for these customers to integrate a solution. But we're also adding more features to these, for example gesture controls for the touchscreen.

What is coming next is other types of sensors. And the first shipment we expect to take place early next year with (inaudible) customers. We have a series in the pipeline that we'll announce when they happen. But primarily entry systems, tailgate sensors and door (inaudible) system and steering wheel (inaudible) sensor that's going to go to market first.

The validation of these things is different. For example, the steering wheel and the reason why it's taking so long is that this is considered to be safety zone because an area which takes much longer to qualify to go into to 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're now ready to get that into real cars and specifically self-driving cars that are coming out 2020 and forward.

(Operator Instructions). Our next question comes from Viktor Westman with Redeye.

Just wanted to ask first about the 12 customers that you shipped the sensor components to. In what areas are those? And is one or several of them perhaps related to the steering wheel?

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

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

First of all, we have 2 things in the steering wheel. On the one, it's the sensing of position of the hands on the steering wheel and interaction 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, directly to the steering wheel. So you can have like a low-resolution display directly on the steering wheel to guide people through the user interface of the car. The other thing we do is we provide the track pads functionality in the sensor of the steering wheel so you can navigate directly with your fingers on that.

The third thing we do is, for self-driving cars, is to have a function where the car knows if you are in-touch on the steering wheel, but also if you are inside of the steering wheel with your hands, which is very dangerous when the car has turned the wheel. So there's a sensor that sense if something is inside of the steering wheel as well.

So the four things we provide, multiple functions, and it's completely modular so customers could select one part but not the other one. So we can tailor depending on the needs for that particular customer with our sort of modular components now.

Yes. And last question on the steering wheel. How does the contract look with regards to information? If you receive a design win with the steering wheel, are you able to announce that? Or how does it work?

That depends on the customer, of course. We primarily work with Autoliv on the steering wheel because we believe they are the largest supplier in this segment and 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 our licensing type of solution for steering wheel, but we also provide the senor components as ready to integrate into the steering wheel as well. So we have 2 solutions for that depending on the requirements.

Our next question comes from [Musi Whiteman] with Darby.

I just wanted to know if you see, on the AirBar itself, if you see a difference in different countries on the interest of the product. Now you're selling it in many countries. Do you see any countries that have a larger interest?

We have been focusing on a few markets, primarily the U.S. But initially we've seen a lot of interest from India and China. But we have, with our limited marketing research, has had to focus on specific marketing areas for AirBar. So United States as a home in the end market has been the primary target for us. We've been looking at different other markets as a second step. And I think India and China, of course, is an interesting market as they have a lot of key things that need to be upgraded with the touch. But the U.S. has been our sort of first market.

So you used to be marketed through QVC. Is there any talk about that happening again?

Not at this point. We think that what we learned a lot in this process is that the AirBar product is sort of a unique new type of application that we can't really compare it to something else. So it needs quite a lot of education for people to understand what it does and the problems it solves and how you can relate to the cost what it costs. So we think to make this successful we need to take another approach in terms of marketing to educate people and retailers exactly how to sell the product and how to position it. And I think that one of --

Would that include Dell? Because I see that now you have some type of arrangement with Dell, but I'm not sure how far it is.

Yes. We're selling through Dell's website. So for some of the selected models you can basically go in and when you buy a PC you can elect AirBar as an accessory product, like a mouse or a keyboard, for example. What we've seen is that people doesn't seem to understand that touchscreen is something separate from -- it's not a separate accessory. So it's been an educational challenge for people to understand that. And that's something we need to see how it is, and we believe that going forward as we're looking at this, we can do that better with a partner than ourselves because it would need some marketing for people to understand the product.

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

Yes. We're working actively with the HP and all our customers, actually, to get into to their next platform with our components. And our components makes it -- we called it module earlier, but it's more a component. And this thing goes into and is compatible with our previous protocols and things like that so it is plug-and-play, basically, into their platform.

We're trying to solve a few of their problems and address issues they have with production on our technology by supplying a component. And we're also taking action to scale our production for that demand, which is, obviously, always a concern for big companies. We're dealing with partners. We're building it ourselves to meet expected demand. And that's an important factor to getting large volumes with someone like HP, to make sure we can supply enough modules for that product.

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

Yes. That's to be seen, obviously. We're working actively with all of our customers. And we have 3 primary targets for sales. One is the direct customer, we call it, which is a large OEM like some OEMs, HP and so on. And then second we're working with particularly one partners, which we consider them as an indirect customer. And now we ST, Texas Instruments, Samsung Display, for example, we work actively with for integrating our module into their solution. And then third is through distribution. We have dedicated signed, for example, for small volume projects. But they can be quite substantial as they grow because there's a lot of projects going on that need a very simple touch solution. So we'll see how that works. But we're trying to attack this from 3 different angles. And of course, the low-hanging fruit is these, our current customers we have today like HP.

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

I'd like to just end this call saying we're obviously very excited about our sensor components and the business going, production is running and we're ramping with different customers. So thank you for everything and for joining this call. And have a good day. Thank you.

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.