Neonode Inc (NEON) 2018 Q2 法說會逐字稿

Hello, everyone. Thank you for standing by, and welcome to the Neonode's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) I would now like to direct your attention to the accompanying PowerPoint slide deck that you can view when you log on to this call. The company will control the [application] with the slide deck to coincide with their prepared remarks. Thank you.

At this time, for opening remarks and introductions, I would now 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 second 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 are -- 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 historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guide, confidence, targets, projects or 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 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. My first quarter with Neonode has been very exciting and encouraging, with a lot of customer, partner and employee interaction. And it is clear to me that we have a technology that is much in demand. The technology and the value it provides is very tangible and can be used for a variety of industries and use cases. This is the platform we need to build and capitalize on. We need to show with concrete use cases our technology can be used to help trigger the imagination of a customer. I will later go into more detail how we plan to capture new business and elaborate on current customer development activities, but it is encouraging to conclude that we are engaged in several area and development projects across different markets.

As you have seen, our revenues came in lower than the same quarter last year. However, due to improved cost controls, operating expenses were less than $3 million and as a result, the net loss amounted to $1 million, which is in line with last year. Lars will discuss second quarter financial results in detail later on. But first, let me reiterate our short-term action program to achieve profitable growth.

After my customer meetings and company review, I am even more assured that Neonode has the technology, the resources and the capacity to achieve profitable growth. Let me elaborate. We continue to focus on capturing the full potential of our licensing business based on zForce CORE. This is our foundation, which is very important to us. We have started to update zForce CORE to increase performance, decrease the cost structure and to look at new implementation models for easier and faster integration of the technology to decrease customer costs and time to market. This will enable us to grow our licensing business for organic growth from existing customers after releasing the new models, to new projects for existing customers and through new customer acquisition. This is a profitable business that provides steady cash flow and we intend to grow thus enabling us to execute the company's growth strategy. We have increased the number of customer related development projects in our pipeline, which potentially will bring us increased NRE revenues and customer commitments to our technology, leading up to both sensor module sales and additional licensing business.

I will go into this in more detail later on, on further slides. We have participated in a number of high-profile events during the second quarter, among them Sensor Expo in California demonstrating in a concrete fashion how our zForce technology can be used and [evaluate grid.] Based on the feedback we received, there is a lot of interest across industries for our technology. The key will be to show concrete use cases and collaborate with customers and partners implementing our technology. This will provide the groundwork for substantial [sensor ownership] at the time.

We have identified a number of key trends across our targeted key markets where our technology offers unique solutions and we believe we have the competitive edge. Our sensor technology enables our customers to unlock product differentiation without degradation of user experience [satisfaction.] We have robust technology platforms with the zForce CORE used in licensing and zForce AIR used in sensor modules, both of which provide very efficient solutions to enable our customers' different use case requirements. Fast interaction; high performance touch interaction for any displaying surface providing solutions ranging from high-end display in cars, medical devices, home appliances to rugged and environment independent industrial display. Therefore, zForce CORE and AIR technology provides superior task perform. The individual use case will determine which technologies will best support the customer solution.

In addition, zForce AIR provides additional way to interact with the device and expands our market opportunity to include use cases that require neither interactions, enabling advanced gesture controls to identify an object such as a door or allowing interaction where the object surface cannot be touched for safety or sanitation reasons and object sensing, object detection to avoid collision with an object or to be pinched by an object by dynamically sensing moving object, creating a competitive advantage for our technology.

We have several development projects in our pipeline with customers across current and new industry segments at various stages of maturity, depicted by the color coding in this slide. This slide shows projects that have met our use case evaluation criteria. These are customer cases where we are in close cooperation and in some cases, sharing development costs, demonstrating the customer commitment. I will not go through them all but will give you some highlights of what I believe are the most important cases.

In the automotive industry, the pace of introduction of new technologies increased and driven to a large extent by the electric vehicle players in the market. Currently, there are more than 300 new players in the EV market with very aggressive plans, where we have the opportunity to secure new business with proven developed solutions primarily using our AIR technology. Our cooperation with Autoliv is progressing well, with several newer rear and [stop and] steering wheel evaluation projects that we believe will come into fruition in the next 3 to 4 years.

Our zForce DRIVE technology is seen as a key component in future autonomous cars. Entry systems is a key area for AIR technology, where we've seen increased interest from a number of OEMs and Tier 1. We have started deliveries of external door sensors collision detection to the automotive OEM discussed in the Q1 results. In addition, we are engaged in several implementations with tailgate opening solutions. Our zForce AIR technology is uniquely positioned to support these functions due to its ability to work, among other things, in harsh conditions. We expect these projects to start shipping out the next few years. As you know, the automotive industry is complex with long design cycles, but when you're in, you're in for the long term. This is why automotive is a very important market to us.

Our global aeronautics customer, who has developed a solution for an aircraft cockpit instrumentation panel, is in final stages of obtaining FAA approval for market deployment. We have shipped pre-production sensor modules in preparation for volume production. We also see interest from an additional aeronautics customer using our touch sensors.

Another market where we see opportunity is for medical devices. We are engaged together with partners with the med tech provider for display solutions. We have delivered prototypes and are in final choosing of the solution. Our technology is well-suited for the medical device market because of the sensors' ability to work in sterile environment. We believe that this can prove to be a substantial market for us going forward. The versatility of our technology enables us to address different industries with similar solutions. As you can see from the slide, we get requests from different industries that have similar use case requirements. This provides us with the pathway to sell to multiple industries where time to market is potentially faster. In addition, we see increasing sales of our development kits through our partner DigiKey. Today, more than 100 customers from different industries are evaluating our sensor technology, providing a platform for future opportunities. As you can see, we have a lot of customer activities going on and I will keep you updated on our progress.

And now I turn over to Lars.

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

I'm going to start by giving you a summarized view of our second quarter revenues and results. Our total revenues for the second quarter decreased $453,000 or 90% compared to last year. The expense decreased in all 3 of our reported revenue-generating activities: license fees, sensor modules and NRE. Our total license fee decreased $204,000 or 10% because they have some adjustments to first quarter revenues that we recorded in the second quarter, and we saw a decline in license fee revenues. I'm going to talk about that a little bit more in details on the next slide.

Sensor module sales decreased $128,000 or 60% due to slowing sales of AirBar. This decrease was expected. On a positive note, sales of sensor modules to B2B embedded customers increased by 18% or [$18,000.] Although not a huge number, this is an encouraging sign and we expect to see continued increase in B2B sensor module sales as we focus our sales effort on our selected market segment. We have been evaluating different option

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to efficient sales and marketing of AirBar to 1 of our retail savvy partners. The revenue generated from NRE [to sign] activities decreased $128,000 or 80%. NRE revenues typically fluctuate between comparable reporting periods due to the number and price of projects completed.

In second quarter of 2017, we recorded $100,000 of NRE from our steering wheel development projects without Autoliv. That project was completed in Q4 2017.

Our operating expenses for the quarter amounted to $0.9 million compared to $3.1 million for same quarter last year. We are on plan. Our net loss was $1 million or $0.02 per share in the second quarter 2018 compared to $1 million or $0.02 per share loss in the same period in 2017. Please be aware that our results going forward may have a material impact from the exchange rate variant between USD and SEK. While approximately 85% of our operating expenses are in SEK [and/or] revenues in U.S. dollars. The 10% variance in exchange rate will impact the result with approximately $300,000.

So our total license fee revenues decreased 10% year-over-year. The decrease was due to a combination of adjustments to first quarter reported revenues along with the decrease in revenues from 2 Chinese automotive customers. Our licensing business is a good foundation, which focus on capturing the full potential going forward.

Printer license fees in the second quarter increased by 4% compared to last year. However, the second quarter was negatively impacted by $200,000 adjustment related to reported first quarter revenues for one of our printer customers. Absent this adjustment, license fees from our 5 printer customers would have increased by a total of 23% year-over-year. Our automotive license business decreased 42% in the second quarter of 2018 compared to same period in 2017. Historically, the automotive market in China was a dominant part of our license fee revenues. The second quarter was affected by license fee reported adjustment of $100,000 to some of our Chinese automotive customers. The decrease excluding this adjustment would have been 27%. However, the decrease is primarily due to a strategic decision the company made in early 2016 to shift from selling license agreements to focus on selling sensor modules only. As a result, 2 of our Chinese Tier 1 customers choose alternative designs for revisions of their infotainment system in certain car models that previously used our technology. Their strategic decision has been changed and we are reengaging with all of our current and new licensee customers and believe this together with the work we're doing with the new release of our zForce CORE will allow us to grow future license fee revenues.

Volvo continue to release new car models, and we had an increase year-over-year of 150%. Suzuki is deploying our technology in all car models that include touchscreens such as Vitara, Swift, S-Cross, Ignis.

Second quarter is typically challenging for the Chinese and Indian automotive markets due to seasonality effects in these markets. Customers like Volvo have more diversified market mix and are not typically affected by seasonality issues. Our license customers shipped 2.7 million products during the first quarter 2018 and accumulated more than 61 million product shipped since 2011.

I'm going to end by talking about the balance sheet and cash position. We believe that sufficient cash to execute our business plan. We have implemented cash management and cost controls. We are focused on customer finance development projects and are no longer doing speculative projects. Our total expenses, operating expenses for the second quarter, [all comes] to slightly less than $3 million, which is on plan. Our cash used by operations was $900,000 in the second quarter compared to $1.4 million in 2017. For the first half of this year, we had a cash use of $1.4 million in total. We have a sufficient inventory to meet our respective near and midterm demand for module sales. As of June 30, 2018, we have $3.7 million of cash and $1.8 million we have of accounts receivables, which gives us cash equivalent of $5.5 million.

Our current liabilities excluding accounts payable, deferred revenues and accrued expenses are well within plan and our working capital is sufficient to grow our business.

At the last shareholder meeting in June, shareholders approved the proposal to give our board the authority to do a reverse stock split in the range of 1-for-5 to 1-for-15 shares. NASDAQ gave the company an additional 180 days [to June,] the stock price deficiency and the board continues to review alternatives to maintain our NASDAQ listing.

Now we'd like to turn the call back to Håkan.

Okay. Thank you, Lars. So to conclude, basically our interest for our technology and the U.K. use cases this allows. Our zForce technologies have robust and flexible task gesture and object detection, providing unique value across several industries. As a result, we see a significant increase in customer projects [at least to pursue]. We have a clear business plan and we are in control of our operating costs and we have sufficient cash to execute our business plan.

Our licensing business is an important foundation for our growth strategy and will be continually improved to service our customers' requirements. To capture new business, we are taking clearly defined actions to make the value of our solutions even more visible through concrete use case demonstrations and implementations. We have made progress expanding to customers in new industry segments and are engaged in several exciting projects using our sensor modules. I'm optimistic about the growth opportunities going forward. We are taking the steps necessary to enable our customers to understand the value of our technology, how it can be used and be easily implemented. This gives me confidence that our plan to add B2B sensor module sales to our licensing business is on track and can be achieved.

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

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

I'm wondering if you could just focus a little bit more on the automotive side, particularly on the module entry side. I know you've been working a lot on door handles and rear entry systems and it sounds like you're getting into the prototype stage. But if you could just give us a little bit more color on timing of that and the size of that, and what the opportunity is on that? That will be helpful.

Yes, thanks for the question. Yes, I mean, this is a very interesting area for us because it cuts across more or less [dense suppliers] in this market space. It also gives an opportunity, I would say, for retrofitting because that -- this type of technology can be done after the car is being lifted in a serving situation, for instance. So we're looking at various types of implementations. One on the platform itself but also as [replicated] type of project. So this has become a very important use case. We see a lot of interest from those players in this space to actually discuss this with us. So this is a very active discussion that we're having and we have some very concrete cases that we are working with.

Okay, Okay. Great. And then maybe one question for Lars, we -- can you talk a little bit about -- and you said that you have enough cash to sort of get you to your share goals. Can you expand a little bit on that? When you take a look over the next few quarters, are you going to need to have some inflows of cash and is that in your expectations? And then specifically, on the inventory side, what is the makeup of your inventory right now. Is that all AirBar and are you just kind of sort of fill that over time? Or what's the plan with AirBar?

Hello, Mike. Well, let me first explore on your first question about the cash and how it is going to look going forward. That if we look into basically, the first half of the year as to sum up and starting with saying that the first quarter, there were adjustments to the result of approximately $300,000 of affecting the cash flow. If you took that out of the first quarter, we would basically have closed first quarter minus $1 million instead of a minus $700,000 and then adjust the second quarter with the [correct reports.] Then we would basically have made $2.1 million in license fee revenues and we would have made the result of $700,000. And $700,000 for us if we -- is basically also to view as a type of cash equivalent [carriage cost.] It means that you are $1.4 million use in cash [versus] $700,000 a quarter basically, where we stand just now. If we then say when it comes to the inventory, well, it's not basically AirBar inventory. It is sensor module inventory and because we did write down that basically, the key part or the majority part or basically all of the AirBar-related inventory, we made the provision of in the first quarter estimated [in the call.] So if you look forward a little bit on "Okay, where are we heading? Where are we going?" Well, we do expect inventory has a downturn mainly in the automotive with the Chinese customers, which we try to recap. We do expect NRE -- not NRE, license fees to increase over time, especially for the printer, which is a nice development and also automotive, where we can recapture and a nice auto flow with Volvo. and Suzuki. So maybe it could be -- okay, a couple of hundred thousand dollars there. Or over time, say, I'm not talking about next quarter, talking about looking a bit forward. Then we're looking into the program -- customer programs that Håkan presented. That illustrates that there are quite a lot of things ongoing where we naturally focus very much but we do also basically try to get decent NREs out of these projects, as we already have a part of that planned out. We expect to maybe have coming back a little bit NREs we have for maybe 2 to 3 years back. But maybe in the ballpark of 100,000 to 200,000 a quarter going into 2019. Maybe in that [ballpark] and then the third part, actually, sensor modules where we do expect to see an increase. It will take some time [but that's okay.] We'll also have some short and mid-term customers that we expect to get the revenues from going forward. Does that then give you answer on your question, Mike?

Yes. That's very helpful. Good color.

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

I have a couple of questions. So looking at expenses, good job on controlling them but the question that I have is whether we have reached the bottom in expenses or if there is additional downside, like you can trim them further?

Hi, James. Lars here. Well, I think that we -- what we have done is basically that [when we're leaving] little bit to say -- to much futuristic project and try to focus more on customer-focused projects. We have had the possibility to be more focused in our development work so I would say that the level we see, we have a target to reach around $3 million. We are a little bit below and we maybe even get a little bit lower, but the target is to set that at this level. And we may even have to add some staff to the queue some of the projects that we are dealing with. But I think, as we reported guidance, I would say $3 million is a level that we try to keep a tight control over.

Okay. And then you mentioned an aeronautic project, that I think you said is in the final stages of FAA approval. Normally those FAA or getting approved for an aircraft is even more difficult and time-consuming or time -- it takes more time than getting approved for an auto project. So could you just talk a little bit more about this opportunity and sort of where it stands and how big it might be?

Yes, well, the information we have received with respect to the timeline for the FAA approval actually comes from the customers. I mean they should be the experts on this part. It is about the instrumentation panel in the aircraft. And obviously, from a volume perspective, there is a limit to how many aircrafts are there out there that are being produced. So obviously that will sort of decide how many unit in the end that will be served and basically, we do not control our customers the sales process but we see this as a very interesting reference for our technology. And as I mentioned in the slide deck, we're also now getting I should say requests and the interests from other players in the aeronautic industry that will take a little bit -- who want to take a look at our technology to see how that could fit their systems.

So is it a license or a sensor?

Sorry. Did a...

Is the project that you're working on, will it be a license or will it be an actual sensor module?

Hi, this is David. This is a sensor project.

Okay. And then just one more on that, I assume this is a private, what do you call it, general aviation. This isn't a big commercial aircraft, right? This is either military or a general aviation aircraft?

I would say it's on the commercial side.

Sorry? Could you, I'm sorry, could you repeat that?

This is David. It's a commercial application. And as far as your FAA question you asked earlier, they've actually submitted it for qualification some time ago. So this is not like it's just now going to the FAA. So this process has been ongoing now for 1 or 2 quarters, I would say, at this point.

If I can just squeeze one more in. I'd like -- if you could give a little more detail on the Chinese automotive programs? That wasn't exactly clear if they went away, maybe they terminated, maybe they've been designed out of the next generation of cars from those people. Could you just give a little bit more color on what happened there?

Well, that is -- I can do that. And within automotive, it's a little bit mixed because we have a very nice developments with the Suzukis and Volvos and new programs and so forth. But it is a -- it's a consequence of decisions taken early in 2016, that [well, really,] the licensing [just choose] for the sensor modules. And there's always then the risk that your customers feel that well, " they want to take care of us," so to say. But we are not [artists] -- not to cancel agreements that have significantly lower volumes than some of the programs or car models we have been, so to say, [designed] out of. But we are [targeting faster,] recapture these customers so an active area of engagement at the [outset with them and so forth.]

And your next question comes from the line of [John Nelson,] and he's a private investor.

Besides the Chinese Tier 1 manufacturers -- automotive manufacturers, are you engaged with other potential auto manufacturers in other countries? And if so, could you name those countries such as U.S., Japan, Korea, Germany, et cetera?

Well, I will not name our Tier 1, but I can tell you say like, we have 8 or better 7, 8 Tier 1s. They are the biggest in the world, I would say, and that is everything from Germany to Asia, and many of them are in China, actually, but this is a mix. And Volvo, as you know is European -- is based in Sweden, most of the organization so for -- there is a mix of them. But I will say, we have agreements today with all major Tier 1s in automotive for us for different type of applications, but this specifically is for infotainment system.

Okay. Very good. And I wanted to compliment Håkan on his purchase of -- insider purchase of stock recently, and just wanted to say that I think it would be a good sign of confidence if the other board members also stepped up as a show of confidence in the company's future.

Thank you for that comment.

(Operator Instructions) We do have a question from Yitzy Weitman from JDAR (sic) [J. H. Darbie].

I wanted to ask about this deal with Chigoo for the cTrolley. I don't think there is much on the revenue, but is there more of those type of deals coming?

I mean that is part of the pipeline. I hope you can hear me by the way, I have issues with my control here. But yes, well, as you can see from the slide where we are describing a little bit what is happening in terms of our pipeline, we have a number of cases in various stages of maturity. Chigoo is using us, is using our technology. They are sort of developing according to their internal plan and, we hopefully, we'll see some deployments going forward. And but rest assured, we are [pondering] on the market, meeting customers every day trying to grow the pipeline and also progress the opportunities through the pipeline, which we tried to show here in this slide.

Is there still any value, in patent value that the company has? Years ago, this was a discussion. If there anything to that -- any value left?

Yitzy, this is Dave. I mean you never know, right? Patents are those things that have a -- sort of a -- they can be valuable or they can't. So we evaluate that periodically and we have an evaluation going on now of our patent portfolio in general. So I mean you don't bank on anything like that because it's -- you never know, right?

Right. The patent is the patent still...

The patents still have life on them so it's hard to say. It's not included in our model, let me put it that way.

Okay. I just wasn't sure -- what did you tell me about the Chigoo deal? Is that a continuing revenue or that was a onetime deal or that's a continuing -- they continue to use and buy components?

Yes. That's a continuous deal and obviously, the volumes now depends upon their sales activity. But it's not a one-off. It's a continuous deal that's going to grow according to their sales growth.

And at this time, we have no further questions. I would now like to turn the call back to David for any closing remarks.

Thank you so much for joining us today, and have a good rest of your day.

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