Neonode Inc (NEON) 2018 Q1 法說會逐字稿

Hello, everyone. Thank you for standing by, and welcome to Neonode's First Quarter 2018 Earnings Conference Call. (Operator Instructions) Thank you.

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 first quarter 2018 financial results and provide a corporate update. Our update will include details of customer activities, technology developments and other items of interest. On the call today with us is Håkan Persson, our CEO; and Lars Lindqvist, our CFO.

Before turning the call over to Mr. Persson, I'd like to make the following remarks concerning forward-looking statements. All statements in this conference call, other than historic facts, are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guide, confidence, targets, 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 be subject to risks, uncertainty 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 is my pleasure to turn the call over to Håkan Persson, Chief Executive Officer of Neonode. Håkan, please go ahead.

Thank you, David. Thank you. As you probably know, I was appointed CEO in February and started my position about a month ago. And I'm very happy to be here. Today, I will present the highlights for the first quarter, present myself and my background and give you a flavor of right where I see Neonode today and the path forward.

So first, a quick glance at the first quarter. Lars will go into greater detail later on. Our sales of $2.4 million were flat compared to the first quarter of last year. Our net loss of $700,000 for the quarter was 21% lower than last year, and the cash used in operations were -- was $560,000 compared to $1.6 million last year.

I'm happy to announce that we are engaged in 2 new OEM development projects using sensor modules, which I will discuss in later slides. I would say that we are heading in the right direction, and I strongly believe that Neonode's technology is becoming increasingly relevant and has the potential to create unique value. This is what triggers me to define and drive how we need to work going forward to capitalize on this great opportunity.

So now let me tell you a little bit about my background and how I look at our market opportunities in a little bit more detail. I have worked with several high-tech companies with strong products and market aspirations that need a clear direction of forceful sales execution to take their products to the market. Companies, in many ways, similar to Neonode. It's why I believe my experience is relevant for the company's journey to deliver world-class solutions and products to our customers.

During my first month, I spent a lot of time talking with our employees to get a feel for and an understanding of the business, its opportunities and challenges and what we should focus on going forward. I will share with you some of my observations so far. Our employees have a deep technology confidence and are passionate about the company, our technology and our customers. Enthusiasm is not a word that comes to mind. Our people want to see the company succeed, creating value for customers, improving our technology to greater yield.

We will provide the company with a clear direction of focus and the processes needed to take our products to the market, including fair value propositions and market segmentation covering what we sell, where we sell and how we sell; the increasing alignment of our sales and R&D resources to take full advantage of opportunities, both long term and short term; and we will put actions in place to become a more market- and customer-focused organization in order to ensure the long-term success and growth of the business.

So in short, we have a strong foundation from a company, technology and customer perspective, and there are lots of opportunities to explore. I'm convinced that Neonode has the technology, the resources and the capacity to achieve profitable growth. So our short-term action program will be as follows. We will focus on capturing the full potential of a licensing business, based on zForce CORE. This is our stable foundation, which is very important to us.

And we have revenues from a lot of strong brands and several markets, such as printer companies, automotive companies, et cetera. We actually have 59 million products in zForce CORE. I believe we can grow our licensing business by selling new products, projects to existing customers but also through new customer acquisition. This is a great and potentially growing profitable business, providing a steady cash flow, enabling the company's growth strategy.

We will grow customer-related development projects where we get NRE revenues and have a strong commitment from our customer to use our technology. The NRE revenues potentially represent the lost business opportunity in its own right but leading up to both sensor module sales and additional licensing. We see a significant revenue potential selling our zForce AIR sensor module. By working with the right customers and partners in close collaboration, we will lay the groundwork for substantial sensor module shipments over time.

The automotive industry is a key market and a significant beachhead for both our licensing and module business. We have 71 customers who shipped approximately 300,000 infotainment systems in the first quarter with our zForce technology, accumulating a total of approximately 3 million systems shipped since 2015. This is an area where we will continue to increase our presence. Our current Tier 1 customers already have the knowledge, tooling and supply chain in place to produce new infotainment system for new car models, resulting in significant shorter time to market.

Our zForce CORE technology has proven to offer the highest touch performance and reliability for automotive customers. We continue to refine our zForce CORE technology to ensure it continues to be the best choice for our customers. The Steering Wheel Project with Autoliv is progressing, and we have now entered into the commercialization phase, where several OEMs who actively engage in discussions and testing, with all 3 moving towards targeted vehicle program implementations.

We have entered into a new development project with an automotive OEM for external door sensors, which includes entry (inaudible). We see growing interest for our entry systems solutions and are engaged in sales activities with interested auto OEMs and their Tier 1 suppliers.

We also see a big future opportunity selling zForce AIR sensor modules. In addition to our current customers using zForce CORE technology, the new zForce AIR product allows us to reach a number of new market segments more efficiently, such as industrial, medical devices and home appliances, where we have a compelling value proposition.

And as a result, we are now engaged in a new and interesting market segment with a global OEM developing a touch solution for aircraft cockpit instrumentation panel using our zForce AIR sensor modules. And we are exploring and beginning discussions about new opportunities in selected strategic markets, collaborating with and building on our close relationships with key customers and partners.

So Lars, now I hand the call over to you.

Thanks, Håkan. You can find our first quarter earnings release and 10-Q available for download from the Investors section of our website at neonode.com. You can also find the slide deck that we present today at Neonode from the Investors section.

In the first quarter of 2018, Neonode adopted the new revenue recognition standard, ASC 606, which requires the company report all revenues in the quarter that corresponds to action customers face. Previously, the company reported revenues in the quarter in which the sales report was received from the customers. ASC 606 requires the company to estimate revenues in case where the actual customer sales support is not received by the financial reporting filing date.

The total net impact of the adoption is $230,000 reduction in total net revenues reported in the first quarter of 2018. You can see on Slide 3, the variance for the first quarter between old and new GAAP. I'll urge you to read our full 10-Q to understand the complete treatment and handling of the adoption.

I'm going to start again with a summarized view of our first quarter revenues and result. Our total revenues in the quarter is basically flat compared to last year but would have increased 9% if we stayed to the prior year, related to this change in revenue recognition rule. Our total license fees increased compared to same period last year even though we had $230,000 decrease due to the accounting change. Our first quarter is typically higher than the fourth quarter due to higher sales during the Christmas season for customer's products, such as e-readers and printers.

Previous to the accounting change, we report our customer fourth quarter sales in our first quarter when we receive the sales reports. I want to talk about the license fee in more detail in the next slide. AirBar sales decreased as expected from $200,000 to $46,000 in 2018. We do not see AirBar as a significant revenue opportunity going forward and are evaluating different options to monetize our investment, support and collaboration. Our net loss was $700,000 or $0.01 per share in the first quarter compared to $900,000 or $0.02 per share in the same period last year.

Our operating expenses for the quarter amount to $3.2 million and are on plan towards a quarterly run-rate of $3 million. Please be aware that our results going forward may have a material impact from the exchange rate variance between U.S. dollar and Swedish krona, while approximately 85% of our expenses is in Swedish krona and all revenues in U.S. dollars. The 10% variance in exchange rate would impact the result with approximately $300,000.

Our licensing is a solid and profitable business, which increased 10% year-over-year. We focus on capturing the full potential going forward. The increase would have been 80% if we restated to prior year.

Printer license fees in the first quarter from 5 OEMs increased by 40% compared to the same period in 2017. The increase is primarily due to Epson and HP. Epson did not ship any printers with our technology in the first quarter last year. They began shipping printers in the second. The product mix for HP is stable while we moved after larger screen sizes with higher per unit license fee. Our automotive licensing business increased by 20% in the first quarter of 2018 compared to the fourth quarter last year. This is mainly due to increased shipments of existing car models using our technology, the last release of new models. This increase is actually offset by a decrease of shipments in China from 2 of our Tier 1s, where they have chosen alternative designs for planned production. We believe, however, that what we're doing with the new release of zForce CORE will address this situation.

Our licensed customers shipped 2.9 million products during the first quarter 2018 and accumulated more than 59 million products since 2011.

I'm going to end by talking about the balance sheet and cash position. We believe we have sufficient cash to execute our business plan. We are implementing a tighter cash management and cost control, being more focused on key customer projects. Our total operating expenses for the first quarter accounted to $3.2 million, and we are targeting $3 million in the near term.

Our cash used by operations was $560,000 in the first quarter compared to $1.6 million in 2017. We have sufficient inventory to meet our expected near- and midterm demand for module sales. As of March 31, 2018, we had $4.9 million of cash and $2 million of accounts receivables. Account liabilities, including accounts payable, deferred revenues and accrued expenses, are well within plan, and our working capital is sufficient to grow our business.

I want to end with a comment about the upcoming Shareholder Meeting in June, on June 7, where we are offering shareholders to approve a reverse stock split as proposed in the proxy statement. All shareholders on the record date of April 11, 2018 will be able to vote. We believe that our NASDAQ listing is an important asset and are asking for your support.

Now I would like to turn the call back to Håkan.

Okay. Thank you, Lars.

So to conclude, we have a great technology that provides robust and flexible touch, gesture and module detection solutions, which provides a unique value proposition to our customers. We also have a solid foundation with the growing license business and have started to ship our first project related to sensor modules. And we are transitioning the company technology development activities to market-specific and customer-driven solutions.

We believe that the actions we are taking will allow us to increase our license business and grow our sensor module business, thus increasing shareholder value. This makes me optimistic about the growth opportunities going forward. Direction, focus, sales execution are key.

Thank you all, and I now hand over to the moderator for questions.

(Operator Instructions) Your first question comes from the line of Mike Malouf with Craig-Hallum Capital.

My first question is on the auto side. Can you talk a little bit about sort of as you look out over the next 6 to 9 months, particularly on the sensor side, what kind of opportunities do we have to get to revenues in that period? And then secondly, it sounds like you lost a Chinese customer due to a design change. Could you give us a little bit more color on that? And that I think you said that you might be able to get that back through the sensor modules, but I'd like some clarity on that as well.

Yes. With respect to the auto segment. I mean, we see rather strong interest actually on the external door sensor type of applications. And this project that we have ongoing and on a refinanced development project, which is stable over 12 months, and we see a similar type of interest with similar type of applications going forward. And we expected the Chinese situation, I think, perhaps Lars can fill in. But basically, how these guys work is they do have more than 1 solution potentially in play, and given where they sit, they choose cyber. And I think what we do now is clarifying our future road map with respect to our technology. We have to say we are refining zForce CORE, and we believe and we know that from a performance perspective, we are -- we have a very good product. So I'm too quite optimistic about that. We have the opportunity to win them back actually.

And on the door sensor side, is that something that..

Lars, here. Mike? Mike?

Yes.

Lars here. Yes, adding something to these 2 Chinese Tier 1s. They represented approximately $200,000 of the total automotive revenue in first quarter 2017 and now down to $50,000. So they are not out of game, and that's also why we basically believe that addressing in our -- with the zForce CORE facelift, that, that is something we bring back to customers that -- yes, basically, to all customers.

Okay. Great. That's helpful. And then when you look at the door handle opportunity, is that something that is potentially going to go-to-market this calendar year? Or is this more of a 2019 or 2020 opportunity?

The time line is always difficult because there are so much that can happen in a process like this. But hopefully, we will see some traction at least in the end -- towards the end of the year, I would say.

Okay. Great. And then Lars, maybe a question for you. You said that you're trending to get to that $3 million per quarter. When do you think, based on your plans, that you'll have a $3 million expense quarter? And do you think that's sustainable?

Mike, it's a little bit hard to hear what you say but the next question, bring up the loud a little bit. When it comes to expenses, we really are focusing pretty much on tight cost follow up and control. And when we have streamlined our expenses into customer-driven projects also and our refinance, not revenues, but financial payments, we then offset some of our expenses in that respect. So I'm quite confident that the $3 million run-rate per quarter, we will receive quite soon.

And your next question comes from the line of James Medvedeff with Cowen and Company.

Can you hear me? Sorry, can you hear me? Hello? I'm sorry, can you hear me? Hello? Can you hear me?

Yes, we can hear you loud and clear.

Okay. Great. I wanted to ask about the modules business, you -- the sensor modules. And I didn't -- couldn't hear exactly clearly that you -- you mentioned 2 new projects that you're working on. One of which was related to aerospace, and I didn't catch what the second one was.

So what you're talking about to us, 2 as you say. One was for a cockpit instrumentation panel project that we are running which is there in aerospace and then for the automotive space, where we have an external door sensor project going on.

And that's a new door project?

Sorry?

That's a project that you weren't already working on?

Yes. This is a new project that we are working on.

Okay. And secondly, you mentioned that NRE is a good business because not only because it generates revenue, but because it generates future business. But there is no NRE in this quarter. How should we think about those revenue streams in the next several quarters or years?

Yes. Well, we will see on a range of revenues coming out through this project. But I think the important thing is here is also that they are laying the foundation for future sensor sales. Lars, do you have a comment on this one?

Yes, Lars here. Yes, we -- if you record -- going back a little bit, we had stated earlier that we maybe see that our NRE revenues -- payment revenues will go down. But now the forecast is very much aligned to that, the projects we run, focused and selected, they will have NREs connected to them. And in order to have an NRE payments coming now and we expect more to come. But it's a little bit too premature to say what the markets will be, particularly NREs. And as we go forward and sign on new contracts, we will let you know more about those details.

James, this is Dave. Just to be clear, there's 2 things that happened with NRE. The first is they pay us the NRE, and it goes into deferred revenue until such time as whatever milestone that, that payment is associated with is completed. So we can get payments -- I'll go back to the Autoliv payments, for example. If you remember back a couple years ago, 18 months ago or a couple years ago, they paid us like $3 million upfront, right? And that was recognized into revenue over a 12-month period, really, 18 -- I think, 16 months period or something as those milestones of that cash relate -- was related to were completed and accepted by Autoliv. So the same dynamic is here. We may have cash come in, and it may not be recognized into the income statement for -- I don't know, it could be some time before that portion is complete and milestone is met. Does that make sense?

Yes, absolutely. In fact, that was -- that's the perfect lead into my next question, which is the deferred revenue declined by $1.1 million in the quarter, from 1 point -- it declined by about $1 million in Q1. And I wondered what was the cause of that and how much of...

That is -- okay, 50% of the deferred revenues is related prepaid license fees for some of our customers. We have been quite successful in getting that earlier. And the rest of it is basically related to deferred revenue recognition of all AirBar and module sales when there are agreements that they can return some part of it, and then we don't record the revenues until it is sold through, the sell-through, so to say, policy we follow or account payment recognition.

Okay. So is it safe to say that the cash has not yet come in for these new NRE projects that you're working on?

No, that -- it's not that NRE payment that they normally pay all upfront. They are normally -- previously, general guidance to be that half of it, say, for example, $100,0000 you install in NRE. We try to get 50% signing off the contract because of the commitment fee and the rest of it is linked to different milestones to the project. So we try to secure that. We will not find enough customers if we want to have a commitment fee and a certain amount already when they sign the agreement.

And at this time, you have no further questions.

Thanks, everybody, for joining us, and have a good day.

And this does conclude today's conference call. You may now disconnect.