Neonode Inc. (NASDAQ: NEON) Third Quarter 2022 Results Conference Call November 10, 2022 10:00 AMm. ET
Participating companies
Urbano Forssell – Executive Director
Fredrik Nihlen – Chief Financial Officer
Conference Call Participants
Jesper von Koch – red eyes
Jesper von Koch
Hello and welcome to the Neonode Q2 2022 earnings call. And today we will start with a presentation of the company and a presentation of the monetary results, but the CEO and CFO of the company. Then we have a few minutes for moderated questions and answers through me and either me and the other company, or the company’s policy analyst, we’re going to ask questions.
That said, I welcome Urban Forssell to the stage.
Urban Forssel
Thank you, Jesper, to all online listeners welcome. And thank you for joining us. On today’s call, we will provide the third quarter 2022 currency effects and provide the corporate update. The update will come with commentary on our business strategies, ongoing visitor activities, and other pieces of interest.
Joining me today, on our call is our CFO Fredrik Nihlen, who will provide the main points of the monetary results. Once Fredrik has done that, I will come back and communicate about general strategies, consumer activities, and other operational topics.
Before proceeding with the main component of the presentation, I would like to draw your attention to this legal notice.
This presentation and similar oral and written comments from us may include forward-looking statements. Forward-looking statements come with data about existing expectations, strategy, plans, forward-looking monetary functionality or long-term events.
They may also come with statements about market opportunities, sales growth, monetary results, use of money, product progress and launches, regulatory affairs, and sales efforts. and its management, and involve a number of known and unknown risks, uncertainties and other points that would possibly cause the actual results, degrees of activity, functionality or achievements of the Company to differ materially from anything express or implied through such forward-looking statements.
Potential investors are urged to be aware of various risks, uncertainties and other factors. All forward-looking statements included in this presentation are made as of today. We assume no legal responsibility to update or revise any forward-looking statements. This presentation has been made through us, the company, based on its own data as well as data from public sources.
It is possible that some of the presentation data comes from data provided through other industry resources. The Company believes that this data is accurate and that the resources from which we receive it are reliable; However, we have not independently verified this data nor do we ensure the accuracy of this data.
Thank you for your patience. And with that, we temporarily move on to the next item on the agenda, the presentation of monetary results. Fredrik?
Frederick Nihlen
Thank you, Urbain. You can locate our benefits release and 10-Q on our neon. com in our IR section. In this presentation, I will only summarize the key points.
Third quarter revenue was $1. 2 million, a 26% increase over the same quarter last year. We saw a recovery in licensing earnings in the third quarter, primarily due to higher volumes from our printer and automotive licensing customers. We also saw a slight recovery in profit to $155,000, a 14% rollover, from the same quarter last year.
We are still affected by the lockdowns of the COVID pandemic and also by the extended cycle of launch and progression of the product of our visitors. Our gross profit and gross margin for the third quarter of 2020 48%. This is an accumulation of 20 percentage problems in comparison. to the same quarter last year. It has gone down compared to previous quarters, and this is explained through the product mix. – Open visitor orders.
Operating expenses for the third quarter of 2022 were $2. 1 million, a low of 22% compared to the same quarter last year. We are well aware of the costs and those are one-off effects that are diminishing, but we are also helped by the weakness of the Swedish currency. As we indicated in the last call for results, the maximum of our prices are in Swedish kroner.
Thus, our net loss for the third quarter of 2022 is $0. 8 million, compared to $1. 7 million for the last, for the newest record, compared to the same quarter last year. And this is due to higher utility and lower costs, as he explained in past slides.
Cash used in operating activities was $0. 5 million. This is a minimum of 69% compared to the same quarter of the previous year. This is due to an effect of currencies on inventories and also a lower net loss. In the first part of 2022, we purchased parts to secure TSM production and this strongly affected our cash flow.
For the third quarter, we did not purchase parts to the same extent. Cash and accounts receivable decreased to $1. 2 million in the third quarter of 2022, to $2. 7 million in the second quarter and 2. 4% in the first quarter.
And with that, I pass it on, once again, to Urban.
Urban Forssel
Moving on, the next item on the schedule is an update on strategy and activities. And for those of you who haven’t been following us for the past year, I just looked to stand out and our business as a whole. Combination strategy of licensing of generation and sale of products.
If you start with generation licensing, we’ll illustrate that on the left side of this slide. Today, we basically take care of the printing and automotive markets with our offerings. We have authorized two generation platforms, one that we call zForce, which is based on infrared generation and suitable for other types of applications, as I briefly explain; and multiple detection, which is a generation of camera-based scene investigation. The business style we apply here is to mix Array NRE engineering sales, non-recurring engineering and generation or software licenses.
In the other component of our business that we internally call our product business, we sell products that we call touch sensor modules or TSMs for short. They are a special achievement of our zForce generation platform. And they are ideal for contactless use and similar touch gesture detection applications. Here, we are now basically targeting elevator consumers and consumers in the interactive kiosk segment. And the main profit opportunity for us is to sell those products as popular products. There is also an opportunity to sell adaptations or NRE in this case, which we have used for the past two years, and we hope we can expand in the future.
Regarding zForce to understand what this platform is and what it can be used for, we just included an undeniable slide today. It is a proven and experienced generation platform, offering around 90 million products from leading printer manufacturers, automotive suppliers and other customers. . It can be used for touching on screens and other surfaces, gesture detection, contactless contact, or object detection.
Today, we are looking to revive this activity and are basically targeting a high-volume automotive market with this generation platform. And the two application spaces we have to the fullest today are front demonstration object tripping onion, depicted in this background symbol here Head-up presentations are more common in high-end cars, and we will see more of them in cars in general in the future. And then, it is imperative that you can stumble upon strange elements sitting on this screen and interfere. with the projected symbol.
The other domain we focus on is internal controls, whether on screens, but also on other surfaces, plastic glass or other internal panels. MultiSensing is a software framework for scene investigation that employs camera inputs. Here, in the automotive context, the focus is on the motive. Force and monitoring in the cabin. MultiSensing is a flexible and scalable platform, is hardware-independent, has a minimal hardware footprint and also works with cheap cameras, giving us an edge over the current competition, also because it is scalable and in a position for lifetime upgrades in cars that employ more over-the-air or other updates. We have generated some interest from automotive suppliers and Tier 1 brands for this platform where we seek to capitalize on and expand this business.
Touch sensor modules or TSMs are commercially popular products. And as I mentioned, it’s the zForce technology and, in particular, the reflective variant of this technology. These are popular electronic modules that we offer in other lengths. We produce them in our own factory in western Sweden, and ship to distributors, value-added resellers and consumers around the world today.
Let’s go back and expand our business strategy a bit. In previous calls for results, we explained our expansion strategy and are constantly refining it. And today, I will share an update of this expansion strategy in 3 undeniable steps. We’ve done, and what we’re still doing, in some cases, is looking for beachheads in certain key markets and segments. We also actively work with POCs or proof-of-concept projects or other demonstration projects to show the price of our technology. This applies to both our licensing business and our product business.
Today we are in a state where I can say, and I will show examples, that we have identified beachheads in the elevator and interactive kiosk segments for our TSM products and, in particular, with regard to contactless touch applications. In other cases, we are still racing to make sure we have a solid beachhead, so the current prestige of our licensing business is more than we are still running here to identify a strong beachhead, while in the product sector we have already been working for some time to evolve this business.
So in the product sector, you can see in the center pillar here at point number two that, in the long run, we’re looking to expand this business aggressively, but doing it in determined key markets and also cutting back and focusing efforts on sub key. -Industry segments of interactive kiosks and also elevators.
For our licensing business, the step of the moment is simply to upload other visitor projects to the first ones we are running today. Oblique sales through value-added suppliers and resellers, as well as other partners. To accentuate and drive our growth, we continue to think it’s a smart approach to mix direct sales with oblique sales through those partners.
And as a fairly small company with an opportunity in the global market, this is in practice the only way we can scale so fast. And also, as explained above, in previous earnings calls and in other presentations as a Western company founded in Sweden and the United States and operating in many Asian markets such as Japan, Korea, China, etc. It is almost mandatory to open doors using local partners in many of these markets.
We also have a transparent site where we need to stop by once we know and so on, and that’s just to expand into more segments and more geographic markets. But today, what we’re actually doing is focusing on steps one and two and looking to be very, very specific. And it’s also our burden-conscious approach. While at the same time we have a lot of potential, we are aware of costs and cash flow, and we are looking to balance that today and the key is focus. And we have been objective and we will be even more so and we will position our bets where the chances are highest to drive in the coming quarters.
To illustrate part of this strategy and the problems I say we have raised, I must give some examples. From elevator, today I need to focus on MAD elevator, our visiting spouse in Canada. It is a well-known elevator panel supplier for OEM and aftermarket markets. Today, two of the 10 most sensible elevator OEMs use MAD elevator panels in their popular offerings, whether for replacement or new appliances. In addition, MAD lift also offers its answers in the North American aftermarket and has, from what I see, create momentum in this aftermarket.
And in addition to the MAD elevator, we work with similar companies, one in the UK called Dewhurst and in South Korea, our wife Finetek plays a similar game there with OEM relationships and spare portion sales. That’s one example. And the technique taken through the MAD elevator is what we call in Neonode the technique of parallel aircraft. You use our TSM to assign an invisible detection box in front of the general elevator buttons. And when you manage to get out with your finger to touch a button, turn on that part an inch or so before your finger manages to press the button. Therefore, it is very intuitive. It is very fast and can be used.
And as this symbol shows, back for the blind, you are left with the railway text, which is a legal legal liability in many markets. And you can modernize it and you can also install it in new elevators, the same kind of solutions. MAD has evolved other offerings and we see the same with other consumers and partners. So, whether it’s upgrading and selling new gadgets, it’s a very, very good solution.
In addition, with elevators, we have several companies, especially in Asian countries, Japan, Korea, and China, that have developed other aisle calls and raised panel responses based on holographic displays. Here we show an example, a Chinese company, GSR. this example shows a typical lobby call module in which you, on the front floor, maybe or on any floor, will call the elevator and you; in this case, enter the number of the floor you need to pass to, and then simply enter The elevator.
Similar responses, of course, are implemented in internal elevator cabins, and we have many examples of other corporations doing this, as mentioned, whether in Japan, Korea, and China. We have corporations in Canada and also in Europe, providing similar holography-based answers. or other technologies. This includes new equipment, elevators and facilities, but also renovations, and many elevators live 50 years or more and are upgraded, refurbished and refurbished. And every time an elevator or construction is renovated, etc. , and our partners have the opportunity to interfere with a renovation.
And the smart thing with elevators is that this renovation module that you install regularly is the same module you can use in new elevators. So it’s very standardized that way. Therefore, we believe that we have a beachhead forged in elevators globally. Today, we have 4 of the 10 smartest elevator OEMs that work with our generation and provide them to new appliance consumers and aftermarket consumers. We also have mid-sized OEM consumers, and we have several panel and keypad corporations providing modules with our built-in generation.
In terms of interactive kiosks, retail stores and self-checkouts like this, the allocation with 7-Eleven Japan that I talked about in the last call for results, this allocation is progressing. Reviews are still very, very positive, whether it’s 7-Eleven in Japan, merchants and users. That is very positive. It looks great. We have high hopes for this, especially since the 7-Eleven logo is strong and global. spreading now and giving appearance effects, this small allocation that we have in Japan.
And the solution here is a holographic demo combined with a barcode reader and payment terminals, so that the interaction is very intuitive, very fast, simple, I tried it myself when I was in Japan in June, it just works perfectly. And it’s much faster than general automatic payment and in fact much faster than menu payment with the cashier. So, for all the reasons, this is what we think is an attractive new feature in convenience retail outlets and other retail outlets for self-service checkout and other apps as well.
Another sub-segment is point-of-sale terminals. Just to illustrate, we took this from the Holo Industries website, and recently issued a press release that they are thinking about ASKA, which is also a Neonode partner, that they are appearing a holographic POS payment formula for Mastercard our TSM products. And the same concept here is that you assign the symbol, interact with that symbol our TSM. And you have a contactless payment with a card. Everything is very convenient, we think you will see many more of those answers. Already two years ago, we presented in another call for results, a similar solution evolved through a Japanese company called Nidec Sankyo, and we also have other companies running on these types of POS Answers for retailers and other users.
Regarding the general kiosk application, I wanted to show you today this beautiful product from our German partner, HY-LINE, which is a keyless virtual keyboard. HY-LINE has the maximum of its consumers in the industry segment. But this great little product demonstrates the flexibility of our TSM technology. And obviously, you can also use it for the kiosk app. In fact, when we talked in the past about contactless contact for kiosks employing the parallel aircraft approach, it’s this approach. You can have a demonstration, a general demonstration this or as they did here as a plaque or any surface and assign or print symbols that constitute icons.
So, you don’t want physical keys or a screen, you can make it much less expensive, and you can set it up with the software alone. Therefore, it is very flexible. And that’s how HY-LINE now markets it to its consumers. And obviously, we are happy to help them promote this also internationally to send it to consumers outside Europe. Very attractive product, see more on HY-LINE online page if you are interested.
So, talking a lot about holographic presentations and this technique of parallel aircraft to touch without contact, I need to go back to our origin and that we are receiving new orders from consumers who use our TSM for touch applications. This is a secure data and payment kiosk from a corporate called Ink Aviation. We are very, very proud because they have developed a diversity of kiosks that are very thin and take up minimal area while offering a great price to our consumers at airports, grocery shopping in malls and the like. Here, they use our TSM essentially for: As a modification of their demo solution, they now provide interaction by using touch on this screen, making it very flexible. You’ll see a very neat integration and super cool view of this product.
Similarly, we recently announced an extension with our Swiss partner, Elix, which supplies presentations for MRI and X-ray systems. This is a variety of products used through a manufacturer of first-generation medical appliances and in five other products. They are two or 3 X-ray systems and two or 3 MRI systems that use the same type of demonstration in other sizes.
The point here was that doctors and nurses want and even are required by law in some markets. The right type of diagnosis. Then, this medical-generation OEM looked to offer touch interaction on the same screen. And our solution is essentially the only way to do that without interfering with screen contrast, brightness, and resolution. So, in collaboration with Elix, we developed a solution to renew its original screen that in the past was passive, now it is interactive. So a very, very good example.
And that’s playing, and we’re proud of it, even though in many cases we’re in favor of touchless touch. Even though we haven’t focused on it one hundred percent so far, I’m just saying it’s a domain where we think we have an untapped perspective, and we’re going to focus more on that in the future as well.
And we’re still affected by the effects of COVID, but thankfully, more and more countries have more or less returned to normal. You can travel, you can make stopovers at customers and we’re looking to do that more and more now. This one is a bit unusual, as the last two years have essentially been about dealing with meeting other people face-to-face. But we are organizing more and more events. In parallel, we continue to do online advertising and marketing campaigns that employ virtual media in other channels. . Here’s just a look at some of the occasions we’ve stopped recently and some we’ll be attending shortly.
In conclusion, I would like to point out that this is an upcoming occasion called Japan Build Expo in Tokyo in early December. Here is a picture of the stalls we will have at this fair. value-added resellers, Metatechno, NEXTY Electronics and Global electronics. We also invite and receive strong from our generation, ASKA 3-d and innovation [indistinguishable] partners. Both corporations develop, produce and sell holographic display boards. They are truly competitors, but we work with either, and they sign up for us in this program.
Eight other Japanese and foreign corporations also register for us at our booth and separately, adding giant corporations such as Maxell, Toppan, JDI and medium-sized corporations alongside them. In total, we demonstrate here with our consumers and partners in Japan, 15 other products, most of them are holographic demonstration products, but we also have others that demonstrate how to use our TSMs for touchless touch interaction, for example, the front of building systems.
As I mentioned before, POS formulas, POS formula sales, data kiosks, and elevator control panels. players like Maxell, Hosiden JDI, Kanda Kogo. And we are very pleased to be on this screen with them. And of course, in Japan and internationally, we and those consumers and our partners are looking to turn it around and use it as a showcase.
In the future, we will make more occasions like this in Japan, Korea and China, but also in Europe and the United States. Therefore, it is a small sample of our marketing work and business progress. And I hope you can enjoy it. Follow us on social media and ours for normal updates on screens and other campaigns and ads we do as I think you’ll enjoy it and they also involve a lot of information.
With that, we necessarily approach the end of the presentation. I just wanted to end with a few final comments. And after that, Jesper will come back and we’ll have a short Q&A session. Today, we publish monetary effects for the third quarter of 2022. The summary is that sales revenue and net effects advanced a lot, compared to the same quarter last year, this is due to the accumulation of sales, but also the control of charges. Cash has also advanced significantly.
And Fredrik gave the main reasons for this. In fact, we buy in the first quarter and at the moment, a lot of stored components, and it’s out of necessity, because some of those component suppliers force us to place giant orders, so the minimum order quantity we can order is actually quite large. . But now we are well supplied with all those components. So, for the third quarter, we didn’t have to buy anything. But also, we’re seeing the effects of our charge control and currency that literally advanced money this quarter.
While we see a light in the tunnel, we see that we have a transparent break in the kind of annoying trend that we saw from the third quarter of last year to the current quarter of this year, so in the third quarter we saw a much higher trend. point of activity even in China, where we have significant headwinds due to blockades. But in the third quarter, we received spontaneous calls from consumers and partners old and new in China. So, things are starting to move again.
But I mention that COVID-19 lockdowns in China are a challenge. And just yesterday, I read in the news that in the southern component of China around the Guangzhou area, they now have record COVID rates and plan to have a super strict no-stop lockdown. So, it just shows that this pandemic, unfortunately, is a serious challenge in China, at least. Semiconductor shortages and other supply chain challenges are affecting some of our automotive and print consumers. Volvo Cars is one of our end consumers, and they have reported challenges and will avoid production. Of course, those kinds of challenges hurt our sales, because if they produce fewer vehicles, our consumers who supply those infotainment systems to Volvo would likely sell less of their products.
Also, we’re a little surprised, but now we’re learning to adapt to that, to buy either in the licensing business, where we knew we’d have long sales cycles and long progression and launch samples. But we see the same thing in the product sector in some cases. One of those leading elevator OEMs that has now introduced products that it has developed in-house, are launching it now and soon in this business, presented a fully functional prototype and right in the spring or middle of 2020.
Now, two years later, they are in a position to start and grow. That’s a fact, and there’s nothing we can do to replace that because it’s a multi-company, it’s like a Fortune two hundred company. They have, of course, their processes of quality assurance and preparation of launch and operations plans, etc. But obviously it affects us and slows us down a bit.
So, as I said before, we are now focused on scaling the business. In the product sector, we have created solid beachheads in elevators and kiosks. Now we want to expand that. And in the licensing business, it’s more about securing forged beachheads and then climbing. And we have promising initial customers who are very supportive of our generation offerings that we’re working very, very hard with to finalize evaluation projects and other progression projects that in some time we’re going to start generating new royalties.
So, overall, I’m quite optimistic, although I can sense that some of you investors find it frustrating that our progression has been slower than expected. I admit, I’m also a little frustrated at times, but I’m also very, very motivated and I think we’re on the right track and we’re starting to see a trend being replaced here in the third trimester now. We also expect to report smart effects in the fourth quarter. And then, of course, we need to continue this trend next year.
Thank you so much. And then I invite Jesper back to the level for Q
Q&A session
Operator
Q – Jesper von Koch
Perfect. Thank you very much for that presentation. So, I mean, let’s start with your, I mean, pretty positive words and final words that seem to be, okay, it’s been very slow for a while, but now things are starting to move. Are they basically new consumers?Or are existing consumers the ones who start placing orders in those MSWs?
Urban Forssel
Of course, it’s a combination of both. But in many cases, in fact, we have had relationships. We’ve received some orders from those customers, but maybe just for evaluation or maybe just small increase orders, and then some barely perceived in the last 12 months, and then they’ve come back now, so it’s a combination. But we must realize that when you work with, say, one of the 10 most sensible elevator companies, we are talking about companies with many thousands, or even more. employees, billions of US dollars in revenue. These are massive corporations. And they have global operations. And in other areas, they don’t communicate with each other. So, there is also this problem. And they are, of course, cautious and monitor market trends.
But what we can say now in the third quarter, we also have confirmation of, say, the lily pad effect, so one of the most important, in fact, the five most sensible elevator OEMs are back now. They evaluated the technology. , also proposed it before, albeit somewhat passively. Now they have said that they need to start actively selling that and scale it up. And I think it’s also because they see what the competition is doing. stable effect for which of course we have been prepared and for which we have worked.
But I agree that it has taken a little longer than expected, but I am firmly convinced that we are on the right track here and that this is now the basis for serious progress in the next two years.
Jesper von Koch
Yes because, I mean, as you discussed earlier, it has: in the first part of 2020, it accumulated a stock of $ 4. 3 million. So, I mean, how long can you buy? I mean, sure, you can buy it for a long time, but when will it get down to generating sales?
Urban Forssel
Yes, it’s probably next year or let’s say 24 months, we have enough stock. So, some of those minimum order quantities that I talked about earlier, are like $10 million or $50 million from an unmarried component. Now, our MSTs run out at $53 according to TSM. Il, so there’s also a proportion of how fast we consume that. But yes, we were forced to buy some, not all, but some parts in very, very large quantities.
And on the other hand, now that we have them, we can buy them. And we can also, when I mentioned that in the long run we’re looking to have a source production component at the moment, we can, of course, percentage some of our factors with that production component as a component of the industry agreement. That is our record. I don’t see it as a big disadvantage. It’s like we had it, it collected money in the first and last quarter of this year, but now we have it and we’re going to consume it in the next few months, let’s say, 18, 24 months.
Jesper von Koch
So, also, I mean, he visited some of the elevator OEMs as consumers and their progress. Could you mention any of your other major consumer deals that you see in a trend to move to larger volumes?
Urban Forssel
So, lift, I would say, we’re solidly in a beachhead situation, we’re evolving and it looks pretty good, whether it’s in Japan, Korea, China and Europe, so there’s a lot going on there. Interactive kiosk, you will have to understand, this segment is much more fragmented from the beginning. Many players, whether regional or national, and their products are also somewhat fragmented. Therefore, they have a number of other kiosks. And they can look even if it’s a big one. – one of the big companies, global companies, are going to have a product in Japan, another in France and the third in Canada, and it is still marked in the same way. That’s why we localize that it is more diverse.
But we explained earlier that we still see this market as a pyramid, where in the back we have many small customers, possibly there are giant companies, but one program may be small, but we have to load others. And it’s slow still actually going up. If I can give some examples, one that I can mention is with our partner, MZ Technology in France, they work with a company called ION Group, they are a leading provider of kiosks for passport verification, identity verification and the like. There is one domain in which we have high hopes for self-service outlets.
Similar to this assignment of 7-Eleven in Japan, several such assignments, either in Asia and Europe and some in the United States. This assignment from Mastercard may also come to fruition. And then it’s like a selling point again. So there are self-service retail outlets, transportation, we’ve talked about these kinds of self-service self-service kiosks there, it has the main drivers, I think, for the next period.
Jesper von Koch
So, as I perceive it, it turns out that you can. . . Or you can feel the volumes coming in elevators, while seeing traction in other segments, but it’s harder to quantify the price.
Urban Forssel
Oui. Et I think what we have is that it won’t be a single miracle solution, as if a visitor stepped in and, at some point, ordered, 2 million MSWs, it will be slow, but normal even in the component. of those giant companies, because today everyone works just in time. They don’t buy anything. So they order as they deliver or produce, more and more. And hopefully, then more orders and more frequent, but it is imaginable that here it will definitely evolve.
Jesper von Koch
Well, then we have another query from one of the other analysts. So that’s okay. Well, and it’s all about OpEx. And I mean, it dropped from $2. 8 million in the quarter to $2. 1 million. So how much of that is the exchange rate effect?And how much more cost-conscious are you?
Frederick Nihlen
Well, knowledge of the charges is one of them, but we have also had a currency evolution that is favorable for us. So, of course, it’s largely the effect of currency, but it’s also that we’re aware of charges and we cut prices and do things purposefully.
Jesper von Koch
It is ok. So, we don’t seem to have additional questions from other analysts. Having said that, thank you very much for this call to the convention and I wish you well.
Urban Forssel
Thanks.
Frederick Nihlen
Thanks.