Neonode Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2021

There are 6 speakers on the call.

Operator

Hello, everyone. Thank you for standing by, and welcome to the Neonode's Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session with the company's covering analysts. Thank you.

Operator

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.

Speaker 1

Welcome and thank you for joining us. On today's call, we will review our Q3 2021 financial results and provide a corporate update. Our update will include details of our business strategies, customer activities and other items of interest. On today's call is our CEO, Ervin Forsell and our CFO, Fredrik Nylund. Fredrik will present the financial results of the company for the Q3 and comment on the equity financing we completed in October.

Speaker 1

Irvin will comment on overall strategies, customer activities and other market opportunities. Before we continue with this presentation, Let's move this slide up here. Before we continue with this presentation, I would like to make the following remarks All statements in this conference call other than historical facts are forward looking statements. The words anticipate, believe, estimate, expect, can, will, guides, confidence, targets and projects and other similar expressions typically are used to identify forward looking statements. These forward looking statements do not guarantee 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.

Speaker 1

Such risks, which include, but are not limited to, the risk factors and other qualifications contained In Neonode's Annual Report on Form 10 ks, quarterly reports on Form 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 Before I hand the call over to Frederick, I'd like to summarize some highlights of today's presentation. Neonode, like many companies, faced a few setbacks in our Q3 due to the COVID-nineteen pandemic when our first Key mover Asian markets went into lockdown to contain the spread of the Delta variant. The combination of the lockdowns and global supply chain that impacted our customers' businesses had a negative impact on our 3rd quarter sales compared to the prior 6 months. The company is navigating the headwinds by continuing its marketing and sales work and increasing our partner network, which has resulted in an increase in a diverse sales pipeline, which Irvin will discuss.

Speaker 1

We are well positioned to become the leader in the growing contactless touch market. To provide a strong base of support For growth, we strengthened our cash position through a successful capital raise directed to long term investors in Sweden and Europe. And at this time, it's my pleasure to turn the call over to Frederic, who will give a Q3 financial update. Frederic, please go ahead.

Speaker 2

Thank you, David, and welcome, everyone, to our 3rd quarter earnings call, also from my side. You can find our 3rd quarter earnings release and thank you with the details of our financial performance during the Q3 year to date 2021 available to download from the Investors section on our website, neonode.com. In the interest of time, I will only summarize The key points here. Our total revenues year to date reached $4,300,000 That is an increase of 23% compared to the same period last year. Revenues from sensor modules increased with 88% for the same period.

Speaker 2

Looking isolated at the Q3 2021 compared to the Q3 last year, We can see a slowdown in sales. Our revenues decreased primarily due to the overall global supply chain constraints and more specifically, semiconductor component shortages affecting our customers within the printer and automotive markets. This combined with renewed pandemic driven lockdowns in our key markets impacted our revenues negatively in the 3rd quarter. Operating expenses for the 3rd quarter decreased to 12% compared to the same period last year due to onetime cost in Q3 last year. The decrease by 19% compared to the 2nd quartering It's mainly due to a lower activity level during the summer vacation period.

Speaker 2

The cost level we saw in Q2 this year Our total gross margin year to date 2021 was 86% compared to 90% for the same period 2020. The decrease is related to higher share of product sales, which drive cost of sales, whereas licensing has 100% gross margin. Gross margin for products was 31% year to date, which is the same level as last year. We expect to see an increase in margins coming quarters as we have updated the price lists for TSLs. Net cash used in operating activities during the Q3 2021 was $1,600,000 Compared to the same quarter last year, net cash from operating activities has decreased with 12%.

Speaker 2

The decrease is mostly related to the timing of paying supplier invoices And some update on the registered direct offering. In October, we sold 1,808,000 shares of our common stock at a price of $7.75 to certain Swedish and European investors. The registered direct offering closed on October 26, And we received net proceeds of approximately $13,100,000 From the offering of the deducting placement fees, the placement, agent fees and offering expenses. The offering was oversubscribed, and we are happy to welcome new and old strategic Swedish and European investors. We intend to use the net proceeds of the offering for continued investments in sales and marketing to create greater awareness and drive the expected growth of the touch sensor module production volumes, which will tie up capital in components and finished goods.

Speaker 2

And last, the net proceeds will also be used for general corporate and working capital purposes. I will now turn the call over to Urban, who will give our business and strategy update.

Speaker 3

Thank you, Frederic. Today, I will review some slides describing our vision, our technologies and our business strategies. I will also describe our key markets and how we work to increase our sales in these markets. At the first slide here, I want to share with you our vision statement is to transform the way humans interact with machines. I'm very happy about this vision statement as it ties back to also where we're coming from and Neonode's history.

Speaker 3

Remember that this company was founded as a smartphone company 20 years ago and was the 1st company to launch a gesture based Touch tone on the market, the Neonode M1, which was presented as early as 2002 at a CBIT Fair in Germany. This was a phone without conventional keypads that all the mobile phones had at the time. Later Neonode, roughly 10 years later, we help HP, Lexmark, Canon and all the other printer manufacturers to get rid of the They have on their printers and replacing them by clever touch displays that allow scrolling and selecting different options in the printers using a touch interface. And right now, as this picture shown here indicates, we work a lot with Contactless touch or as some prefer to call it, touchless touch. So we are still involved in human machine interaction or HMI, And we want to transform the way units interact with machines and to make it more convenient to enhance the customer experience and bring more value We are a deep tech company, and all our work is concentrated around 2 Versatile technology platforms.

Speaker 3

One that is by now, I think, well known by followers of Neonode is C Force. It's a IR based or infrared based optical technology that supports touch and gesture sensing and the very advanced involving optics, electronics and software algorithms in this platform. We also have developed over the last years a software platform for seam analysis. We call that multi sensing, and This platform supports applications such as eye tracking, browsing as distraction monitoring in vehicles and other situations and General occupancy and situation or context monitoring. Today, we have a certain focus on contactless touch.

Speaker 3

And as you have heard from me and other people representing Neonode in previous conference calls, This is our main focus since last year and where we also see the biggest potential in the coming years to grow Our top line but also to significantly improve our margin and our general cash flow situation. What is contactless touch? Yes, as the name suggests, it's contactless but touch like interaction with displays, keypads, Buttons on holographic images. By touch alike, we mean that you typically point with a finger Or another object like a pen or maybe you have a key or something. Here, you can then interact with underlying machine without touching the display or the You hover your finger in front of it.

Speaker 3

And with our technology, that is that can be interpreted as a touch or a click As we have become accustomed to on the computers. This is very convenient, and it adds Safety, security and in general, an improved customer experience when you Interact with different types of kiosks and elevators and other types of applications. Why is this interesting? Yes, I've already touched on it. It's a lot it's about And to avoid getting various types of infections from bacteria, from viruses For general to have an unpleasant experience, and I think the key point when we're looking at this slide is that Think about one machine and many users.

Speaker 3

So we talk about kiosks and elevators in public spaces. It can be at an airport, in a shopping mall, at the hospital, in an office building where you have many different Persons coming in and using the elevator, using a coffee machine or other kiosk. And here is where you see the Very, very big advantage of contactless operation. And if you add then just improved User experience that you can get with this type of interface rather than conventional touch interface or physical buttons, It's a very, very compelling and strong offer that we're doing from Neonode. Countless application areas.

Speaker 3

We have decided to go mainly towards the elevator and kiosk segments and then especially advanced interactive kiosks That you can find self storage kiosk, point of sale terminals, different types of vending machines. I mentioned elevators. We see applications in hospitals and clinics. It could be for, obviously, Visitors, patients coming to that hospital and for instance, in Sweden, it's very common that you sign in Using a self-service terminal, and there's other use in the surgery room where typically nurses and doctors We want to interact with machine in a sterile environment and then touching a display, for instance, is not an option. So here also contactless has an important role to play.

Speaker 3

We also see different types of information displays Like you would have, for instance, when you exit airport security and they typically have a station where you can Tell me how happy you were about this experience passing through security, the same as in shops is another example. So all these types of applications is what we are addressing with our contactless touch offers, and We think they have a very, very strong offering in our touch sensor modules, which are embedded sensor modules that we produce In our subsidiary, ProNode, in the West Coast of Sweden and originally developed for touch applications, It's ideal for contactless touch because of its optical way of operate And high performance. So we can sell and we are selling and deliver this as a standard commercial off the shelf product today, And we can scale it up very quickly because our operation at ProNode uses State of the art automatic production machines tuned for this specific product range. Overall, we offer a cost effective and easy to implement solution that's ideal for both retrofit solutions and new designs. The technology itself is very, very advanced and it's both fast, precise and for instance, it supports advanced multi finger How can it look in a retrofit solution in Elevate?

Speaker 3

This is an example from our friends at Dewhurst. U. S. Is a U. K.-based elevator control panel supplier.

Speaker 3

They work both OEM and in the aftermarket. And for contactless touch, they have developed a technology called HALO, And they are promoting this under their own brand, HALO, with Junehurst powered by Neonode. They have an increasing business around this, And this is one picture showing how an installation can look like in a modern elevator, and this is from a commercial building in London. And they have a sign there next to the control panel that says this is a touchless elevator operation Now and if you look closely, you see on the right of the button that the person is pointing at, there's a little holder for our CSM, and this is one creating that touchless or contactless feature in this elevator. It has been marketed for some time and the dual is picking up speed.

Speaker 3

They are also approaching elevator OEMs with this solution, so they work both Aftermarket and new equipment. Another example is to show how you can also do it. This is still a retrofit solution Developed by a company called Jardine Schindler, it's a joint venture to Schindler in China. They, in turn, work with some friends of ours called HKPC in Hong Kong, and they have developed and installed a number of these retrofits for elevators in and around Hong Kong. And what's interesting about this, you see in the picture that you can position the unit in the corner Or it's actually built into the wall.

Speaker 3

So the installation can be very, very neat if you have this type of arrangement. So basically, it will be an invisible solution if you build it into the wall, and it works together with Standard control panels, so very small adaptations needed. But of course, if you look at new Installations with new elevators, you can do even nicer installations that are totally invisible and works very well. The use case in elevators is, I think, very, very clear and compelling, and we have good response and market feedback From this type of solutions with different companies that we are engaged with in North America and Europe and Asia. I've been talking about Changi Airport in previous earnings calls, and still airport kiosk is and it's Sort of a subsegment in itself, which is very interesting and where we have considerable traction now.

Speaker 3

We can expand this maybe to call it Transportation hubs, so including airports, train stations, subway stations, bus stations and similar. There is a strong interest from different companies. Some could be the airport companies or The company is doing the kiosks for airports or in other cases, it could be the operators or the airlines or the Train companies operate in these transportation hubs. So we see all different versions. We are still mainly doing retrofit projects here, but we have growing interest from kiosk OEMs as well.

Speaker 3

And this is just one example. We have other types of self-service kiosks in shopping malls, in supermarkets, And restaurants and so on. And for instance, we recently came out with a press release about A new project where a certain sushi chain in Japan are using our technology to create Contactless touch self-service kiosk at their restaurants throughout Japan. And these are just Some examples of the progress we've been making in the last 6 to 9 months, I would say. And We are happy to say that the interest is growing and we are sort of building the momentum here.

Speaker 3

Although the Q3, as Frederic mentioned, was a little bit Slower than we had hoped. We continue to believe that all these types of contactless touch kiosk and elevator applications will I want to end this little tour of examples by showing this picture. I like this very much because it's very, very clear. If you look closely, above the display here is They are holding our touch sensor module or it could be also 2 of them in some applications. And with that, the display can then be used as a contactless display or a touch display.

Speaker 3

To the right, we have here a temporary guide with step 1, step 2, step 3, construction the user that This is how you use this contactless screen. And just below the screen, you see a sign saying contactless screen. So it's very easy to We recognize that this is something special and the feedback we have from this particular hospital, which is in Asia, It's very quick for new users, patients and staff in that hospital to sort of understand and use this. It's a very, very positive reaction, and they have placed like follow-up orders to equip further kiosks In the hospital with the solution. So this is what we are working on, and these are some examples of Success stories on larger and smaller projects that we have been involved in and our pipeline had multiple other examples similar to these.

Speaker 3

And we have had the biggest and the best traction so far in Asia, but I'm happy to say that Interest is increasing also in Europe and North America. And like Frederic said, when we talked about We received direct offering and what we will use money we have raised through that offering. So it's a lot about marketing and sales, continue Because we think we have a very, very strong right to win. With our solution, here, A small summary. Our solution in the first column has several strong features compared to other Example, technologies or solutions.

Speaker 3

It gives a very intuitive user interface. It's easy to use. It's also easy to install, and it's very fast and precise. So the overall Commercial value for both the buying customer and end customer using it is very, very high compared to others. I will say that in some applications, Mobile phone apps are will also be taking market share going forward, that's for sure.

Speaker 3

And it's a lot driven by the fact that Different companies want to own the customers and the customers' data. So that's why they have different types of Apps being developed and deployed, so that you should have like frequent flyer programs or Customer loyalty programs, and they want you to use that to do your business with the company. In some cases, I'm sure that This will be very, very common and that will have a significant market share, but in many others, like in an elevator or in Airport check-in terminal and so on where we have the same terminal for multiple airlines and so on. Our solution is very, very straightforward and it's quick and it brings a lot of value both to the buying customer and the end users. So we are very, very confident here, and we are very, very motivated to continue our work to market and promote our solutions.

Speaker 3

We are also working in 2 very, very large markets, the elevator market and interactive kiosk market. There are around 19,000,000, 20,000,000 elevators in the world, so a huge installed base. Europe used to be Sort of the dominating market for elevators, but in the last 20 years, of course, Asia has Overtaken Europe has the main region where elevators are installed, especially China, but also other countries in Asia. The growth rate is somewhere 1,000,000 to 1,300,000 new elevators a year. And again, Asia is leading the way, in particular, with China's representing 63% of the annual growth.

Speaker 3

But remember, we have both a play with retrofits and then we are targeting to grow our market share retrofits on the installed base And then also target our to grow our market share in new installs with new elevators. And This is a gradual work. And as I will explain in just a minute, the first step in our approach and in our strategy is to Penetrate the market to retrofit installs and then gradually moving to new equipment as well. But over time, We will still continue to do retrofits because of this huge installed base and the long lifetime of elevators, which Can easily be like 30, 40, 50 years or longer. Also, our interactive kiosks is a super interesting market.

Speaker 3

We can easily count to 47,000,000 interactive kiosks as installed base. Now I really say this that Some of these $47,000,000 in Dragon Kiosks are the simpler type and probably not our target market. But we are confident that at least half of this or say $20,000,000 $25,000,000 kiosks is our target market. And Some of these sub segments like self-service kiosks and self checkout kiosks and so on, they show very, very interesting growth numbers Double digit CAGRs, and these are global averages. So if you would look at certain markets, in particular in Asia and Europe, The growth of some of these types of self-service deals is like super fast.

Speaker 3

And again, we can do both retrofit and new installs as for elevators. So interactive kiosk is another interesting market next to elevators. And just to show a little bit an example calculation about the addressable market, we have already that we have multiple application alternatives in elevators and kiosks. It's a fast growing market with Japan and Korea leading the way. But if you just look at the example that we are showing here, it's easily Calculated that our target market is our addressable market is worth more than $1,500,000,000 And if you would include more subsegments and Sean, that number will grow.

Speaker 3

So our addressable market is Very huge one compared to our current turnover, and that's why we feel that we are on the right track. We have a huge potential, and we can grow. We can also make a lot of money looking at some just example calculation again, but if you think about the average gross margin, which we think is It's really realistic even in volume production of 35%. We see the types of Possible gross profits that we can generate with our business. Now we are very far from this today, and We use this as a motivation for our work to grow the business and we are also encouraged By the fact that there is a large market out there and the potential is there.

Speaker 3

So we are working harder and harder every day as we Learn more and we grow our team and we grow our partner network to penetrate these markets and to capture a bigger market share and to simply First, our top line and then also bottom line results. We are building our business on 3 pillars: licensing, product sales and Sales of Engineering Services or MRE, nonrecurring engineering. We see growth potential in all three. With licensing, currently, we have more than a dozen active license agreements, mainly with Fintech Companies and Automotive Tier 1 Suppliers. In the future, and what we are working on is to, of course, continue to support our current customers and to have follow-up projects with them, but also expanding to new areas, new types of automotive applications, inter military and avionics And by this, we think that at least in the mid- and long term, we can Grow the licensing revenues.

Speaker 3

And short term, it will be flat or slightly decreasing because of the legacy character of this business. The product revenues is where we see the biggest potential To grow in the coming 2, 3 years, and this has two explanations. 1, I've already addressed, This is the large addressable market for us in elevators and kiosks. So the volume potential is interesting. Also here, we have a higher average sales price than what we typically get in royalty per product from licensing.

Speaker 3

And that's a factor of, say, 10 or even more. So the leverage from product sales Our top line results is very, very strong. And we are building up the momentum now, and we are targeting to grow this business Significantly in the coming 2, 3, 4 years. And also NRE, as a consequence of our products business and our And vision to grow our licensing business, we are also exposed to opportunities to sell engineering services. And of course, for licensing For NeoNodes, that typically is a requirement that we together with our Automotive Tier 1 supplier, for instance, we develop a solution.

Speaker 3

And During that development project, we charge MRE costs to the customer. And then when the underlying Vehicle or whatever the product is, is launched in mass production, we get the royalty typically per vehicle or per product sold. Here we see a vast number of opportunities to grow our Business through increased sales of MRE and also some sales of prototypes and other types of Concept and the Demonstrators. So overall, remember that our business model rests on Three pillars, licensing, product revenues and NRE, and we see potential to grow all three of them, Especially in the mid- to long term, short term, it's mainly MRE and product sales that has the potential to grow significantly, And this is what we are concentrating on this year and the coming couple of years probably. We get a lot of questions about our business and how we work.

Speaker 3

So I wanted to review 2 slides here explaining a little more in detail how we work and why. The sales cycle in the type of industries and businesses that we do typically looks like this. Initially, it starts with a retrofit opportunity, We or someone else could develop a solution that could be retrofitted onto an existing elevator or existing kiosk. Typically here, we have to rely on partner solutions. So another company developing Custom retrofit solution for a particular type of kiosk or a particular type of elevator and also going out in the field with technicians and engineers Installing them in these elevators and onto these kiosks.

Speaker 3

That's why in that phase of the sales cycle, our Target customers are integrators and tech companies. In the occasional case, also Elevator and Kiaxed OEMs will work in the aftermarket themselves, but typically they are a little bit Difficult to commence and harder to reach in this early phase that we are in, still in many markets like in Europe and North America. So The first phase is about retrofits, and technically, we have to rely on partners to develop and install these solutions. As the end customers' interest and demand for contactless solutions grow, What we typically are seeing is that this will, for different reasons, stimulate the OEMs to step in, and They want a piece of that business. And then we go to the new installed space where we can attract elevator and kiosk OEMs to Pick up our ideas and buy our touch sensor modules and installing them in new products.

Speaker 3

And from there, We hope that we can really develop new solutions together with the customers, and then it's more R and D, and then it's more or less 100% an OEM type of business. Similar to Neonode's business with the printer manufacturers and the automotive Tier 1s that we have been used to in the last 10 to 15 years. And I will use the variant of this slide before, but the previous slide should be read together with this one. So then we said before that the retrofit business is where it starts and typically we rely on parking solutions. What we have done since last year is to expand our ecosystem of partners.

Speaker 3

Some we have Signed up as our value added resellers, other are just other product and technology companies that we cooperate with. Typically, they work in a particular market, say, the Japanese market, Korean market or German market. I have to give you a few examples. They typically also have an existing customer base and that we can tap into. And we use them and have been using them successfully to We reach midsized and also in some cases, larger OEM companies in these markets or in some cases even in certain segments.

Speaker 3

With our own sales force, which is somewhere around a dozen people today In Sweden and in different countries around the world, we focus on large and midsized companies And also to support our partners, of course. And what we see we are about to hit now is sort of the 2nd phase in sales cycle where we have more direct engagements with OEMs and then it will be more work for our own sales persons to manage those accounts and to drive that business. Besides these, partner sales and direct sales, we also use Online distributors like Digi Key in the U. S, cereal in China and mixed in Japan. And we try to direct smaller customers To those and focus our own resources on the larger accounts where we have the bigger potential.

Speaker 3

Besides the ongoing work to market and sell and to grow the business Through these measures, we also have other initiatives to ensure that Neonode continues to grow. Right now, we are focusing on marketing and sales and expanding our partner network. It needs to grow the awareness of On Neonode and our contactless touch solutions and the TSM offerings that we have, it's starting to Pay off, and we have a more and more interesting pipeline. And as we have been telling in previous earnings calls, we are building our business pipeline step by step. In the next phase, what we are looking to really save from next year is to scale the business In our key markets, Japan, Korea, China, Western Europe and America.

Speaker 3

We are also Currently developing and learning more about the different application areas that we are involved in, in elevators and different types of kiosks. And we are expanding our offerings and tuning our offerings, and we are also, in some cases, vertically integrating more Solutions that our partners have been doing into our own offerings. And this is a way, of course, for us to grow our top line and We are also investigating to add a second source Besides our subsidiary, Tronon, to produce the TSMs and typically we are looking at some candidate Partners for producing the TSMs in Asia, closer to our main markets in Japan and Korea and China. In the future, we have already several ideas for how to continue to expand our In the new geographical markets and additional market segments, we are developing, looking at new hardware products and also extending our software offerings. And there are also ideas for further accelerating our growth through strategic partnerships and acquisitions.

Speaker 3

So Please stay tuned. We have a lot more to show in the next couple of years, And we are hard at work in realizing all this potential and developing our business step by step, And we fight relentlessly every day, every week to grow the business. And By this, I'm basically at the end of my presentation, and I just wanted to end this Call and then turn it back to Dave to lead us through the Q and A session here. But first, some concluding remarks. COVID-nineteen continues to bring on challenges for us as many other companies.

Speaker 3

Component shortages is slowing our customers down, and we see it clearly in the Q3, both the automotive Tier 1 suppliers that we are engaged with and the printer manufacturer customers that we have have reported performance in the production or sales due to component shortages. Of course, that's hurting us. We also see that the strict lockdowns that we have, for instance, in Taiwan, Korea and Japan during the Q3, They really hurt us in other ways as well, where we and our partners couldn't even visit companies in the same cities, and we couldn't go out Our partners couldn't go out and install the TSMs in new elevators and kiosks. And in some cases, of course, overall economic uncertainty Caused by the COVID pandemic and the new delta variants and other variants coming has slowed down some decision processes. So it's very clear that We have been hurt by this in the 3rd quarter, and we are still, to some extent, hurting by this in the 4th quarter, like many other companies.

Speaker 3

So The second bullet is that the 3rd quarter sales was slow, but year to date revenues show anyway strong growth, and we are happy for this. We have a very, very interesting sales pipeline, and especially in the last couple of months, it's been going fast in the right direction. So Both new TSM opportunities and new MRE projects that we are quoting or that we have been awarded, And we also have been identifying new licensing opportunities that we hope that we can capitalize on in the next 1st month to get new projects started and in the coming years to grow also on our licensing revenues. In the contactless touch business, where we, of course, focus on elevators and interacting kiosks, we are extremely well positioned today to become a leader in this business With our PSM offerings and our general know how and also now with our Well expanded partly network and global reach. We are well positioned here.

Speaker 3

So we are confident that we can grow this business significantly in the coming years. And because of this and because of Economic uncertainty, we have strengthened our test position through the registered direct offering and A limited use of our at the market facility, we have Secured the support from new interest in strategic investors in Sweden and Europe, and I'm happy to say that The registered direct offering was oversubscribed, and it was a very, very quick and nice process for us. And by now, we have the cash to finance the business growth in the coming years actually. So we are very, very optimistic for the future. And with this, I thank you and turn the word back to David for the Q and A.

Speaker 1

Thank you, Irvin. We'll now open the call for Q and A from our analysts.

Speaker 3

Go ahead

Speaker 1

and join the queue.

Operator

We will take our first question from Tyler Burmester with Craig Hallum. Your line is now open.

Speaker 4

Hey, guys. Thanks for letting us ask a couple of questions here. Urban, first, on the headwinds you're seeing, Supply constraints and lockdowns, I was wondering if you could kind of break those out, is one a bigger impact than the other? And then To the degree you can, what's the timeline of those improving? Is it Q4?

Speaker 4

Are those going to linger into next year? Any color there would be great.

Speaker 3

Yes. First of all, I want to underline that a lot of the component shortages is hurting our customers, It's not Neonode directly or our production. We have secured components for our production, and we are running that normally. So no issue for our own production or our own business there. We have more of an indirect effect for these component shortages.

Speaker 3

So As I'm sure many of you are aware of, in automotive, many Tier 1 suppliers and OEMs are reporting that they are Slowing down production and they have challenges to find the right components. This is hurting our royalty revenues. The same situation is with several of our printer customers that are reporting slower sales due to component shortages. The product sales or the touch sensor module sales, There we have heard from a couple of Asian customers that because of component shortages, They are prioritizing other programs and typically then existing production rather Launching new products, so that has slowed down some decision and launch processes, and this is putting us in the 3rd quarter. And Some of these effects are still visible here in the Q4.

Speaker 3

I'm not an expert in this, but it seems that If I compare with last year, we had a very, very strong slowdown in the Q2 and a good rebound in the 3rd Q4 last year. I think that we will see a rebound in next year, but Q3 was slow, Q4 is a little bit slower than we were Hoping for when we ended the Q2, but let's see. We are anyway confident that with the newly raised cash and the Interesting sales pipeline we have that we can weather this out and we can continue to grow slowly but steadily. That's great. I appreciate the

Speaker 4

color there. Then you recently announced a win with a Major elevator customer that's going to deploy AirTouch solutions in all their new elevators. I was wondering if you could add any color there about What's the size of that win and maybe what other customers of similar size, how many customers of similar size might you have in your pipeline?

Speaker 3

So with this customer, they have been very, very strict. So unfortunately, we are not allowed to Anyhow or anywhere announced this business with mentioning their name or whatever product lines it's involved, but It's one of the major elevator OEMs. And the elevator industry is dominated by, say, 10 large OEMs or 20, then you have like 99.5% of the world market. So it's Fairly easy to understand how this market is structured. We are happy of this business because It's evidence that our strategy that I've outlined here just 5 minutes ago is working.

Speaker 3

This started with retrofit business that we did and this OEM took notice of what different Solution providers and tech companies were doing and installing in their fine elevators, and then they realized Hey, we can do this as well and actually we can do it better because we can then from the factory, make sure that the installation is Nice and tidy and like super professional. So they saw an opportunity for them, and this is exactly What I tried to explain with the picture here with the sales cycle. So it's very significant in the elevator segment, And that's why we had the announcement in the press release that week. And this will, of course, impact our sales going forward and in the coming years. And we can estimate more than one GSM per elevator in average because some elevators will have 2 TSMs to cover the whole control panel.

Speaker 3

And obviously, now we are working to convince other OEMs to follow suit and take after them. So In elevators, this proves that our strategy is working and that our approach has been correct, and it also shows the long sales cycles because I think the first time this elevator or what I heard about us was sometime early last year. And only now, they are ready and they are preparing for a launch next This is not uncommon with large industry corporations, and we see the same pattern also in kiosk One of the large kiosk companies.

Speaker 4

That's great. I appreciate that color. And then last one, I suspect you can't comment much on your ongoing patent litigation, but I think it's been a point of focus for investors recently. So I just wanted to Give you an opportunity, any comment, update, thought on the patent litigation? Thanks.

Speaker 3

And the only answer you will get is no comment. And I refer to our agreement with Equitas Technologies LLC, which we announced in an 8 ks filing with SEC in 2019.

Speaker 4

Perfect. Fair enough. Thanks, Irvin. That's all for us.

Speaker 3

I'm sorry, but we can't comment on this.

Speaker 4

And we can move to our next question.

Operator

The questioner is Jesper Van Gogh with Redeye. Your line is now open.

Speaker 3

Hello, gentlemen.

Speaker 5

Since the current revenue is at kind of depressed levels just before Could you provide any guidance at all for 2022 and perhaps also Give some comments on your illustration on Slide 27 regarding like estimates.

Speaker 3

Yes. We will not give any concrete guidance, but We are actually very motivated by the influx of new opportunities and the strength of our pipeline, which is So looking very, very promising for next year. So I mean, personally, I'm really hoping and believing that We will see some kind of breakthrough in our business next year. Apparently, we had some headwinds In the Q3 especially, and to some extent, it was in the Q4, which is a little bit slowing down The growth rate that we were hoping to achieve this year, but the overall picture is Anyway, very, very bright, and we are and in the team are extremely motivated to realize more of its potential in next year and the year to follow. So personally, I think that we are on the verge of breakthrough here, and we can start See some interesting effects of this work that we've been doing last year and this year, clearly visible in next year.

Speaker 5

All right. Thanks. And also not regarding the large elevator deal announced, but Just the elevator market as a whole, what do you expect in In terms of the take rates of the whole call terminals, how many TSMs do you expect per installed elevator?

Speaker 3

Yes. So maybe I can answer this in the following way. So Our solution is a very, very good choice for the control panels inside the elevators. And typically there, you would use 1 or 2 of our touch sensor modules per elevator And the average being somewhere 1.5 or 1.3, 1.3 TSMs per elevator. But then as Jesper points out, and I think it could be worth For more of you listening in to this call, to note that there's also an opportunity for Neonode with all the buttons on each Floor in the buildings where you have the elevators, and those buttons are referred to typically as whole call buttons, at least in American English.

Speaker 3

Typically, you would then use one of our shorter TSM and have a similar contactless touch operation of those buckets. That's another additional opportunity. And then depending on how high the building is, how many floors you have, The more of these hold call buttons you will also have. Now it's not guaranteed for the elevator company or Neonode that you can supply The whole call buttons with the elevator. And it's what I'm learning more and more here is that it's very different.

Speaker 3

In some cases, The elevator OEM supplies the whole solution. And then in some of these, we have an opportunity to participate with our contactless touch offering. But in other projects, the elevator companies just tasked with supplying the elevator itself and then the Real estate owner works with another installation company or other tech company to do the rest of the installation and the fitting, including the whole terminals. So it's very difficult to estimate. But what I wanted to say as a Final message on this is that we have an opportunity which is larger than one TSM per elevator in the elevator market.

Speaker 3

So you can have more than one TSM inside the elevator and also on the hold call on each floor, but it's very, very difficult and I shouldn't even try to guess where it is, but This is an interesting twist to that elevator business that we are doing.

Speaker 5

All right. Thanks. And then it seems that you have received a really strong traction in the Elevator segment, both towards like new installations and retrofits. And yesterday, you announced like a good contract with a quick service restaurant like The substitution in Japan. So how do you experience the demand in the self-service kiosks in general compared to that of elevators?

Speaker 3

Yes. You should know the following that these two markets are Fundamentally different. So the elevator market is totally dominated by the 10 or 11 largest OEMs. They make up for more than 95% of the world market. And if you add 10 more, then you have basically all of it.

Speaker 3

So very few companies sort of dominate the elevator the new elevator business. In kiosks, It's so much more fragmented. We talk about thousands of kiosk OEM companies. Of course, there are these global giants and some I can just name drop them. These are I'm not indicating that all of them or even some of them are our customers, but some of the big names in kiosks Global players are Diebold, Nixdorf, NCR in the U.

Speaker 3

S, Glory in Japan and companies like this. They are corresponding type and size of the large OEM elevator OEMs. But then there are 100, if not Thousands of smaller and medium sized kiosk companies, some work only in certain geographical markets, Like in China or in the U. S. Or in France, some work only in certain verticals like in Sales Boarding Pios for Supermarkets.

Speaker 3

And here is an overlap to the point of sales terminals and cash registers that Some candidates are specializing in. So actually, you are suggesting that we have had the best traction in elevators, but I would say that we are at least in the same shape in kiosks with Already secured engagements with several medium sized and smaller kiosk OEMs and working to penetrate also Some of the larger kiosk OEMs. But you should just understand that the dynamics The structure of these markets are fundamentally different, and that's why maybe the visibility is not that great. And On the other hand, the customer base is much broader and gives us better stability going forward.

Speaker 5

All right. And then my last question about Your last little gambit there in the end regarding your potential software offering of yours and the potential M and A. Could you elaborate on your thoughts going forward?

Speaker 3

Yes. So what we are very clear about is that Neonode is a deep tech company. We have both hardware technologies, In our case, even optical expertise and patents around optical designs, Electronic designs, we have dedicated integrated circuits, 86 that we have designed and that we are selling Dear customers, but already today and going forward, the software portion of our offering And our portfolio will only increase in importance and breadth and depth. So we are thinking about Using, for instance, our touch sensor modules in new types of applications, where the big differentiator will be the software that we deliver with the So not for TSM itself. It's just a platform to do and to realize different functions for the end users.

Speaker 3

We are also developing more and more configuration tools to support our different customers to have a Quick and straightforward integration and launch of contactless touch solutions. And with the multi sensing software platform, obviously, it's 100% software that we are delivering, and it will be By now, a traditional software business model where you typically you charge for adaptations through NRE projects, You license and you take a royalty per unit or you sell it as software as a service. And this could be with automotive customers or military or industrial automation customers. And Overall, the portion of Neonode's customer offerings and the portion of Neonode's revenues coming from software solutions will simply grow. And here we have a huge potential also to expand into new areas and maybe team up with other Software companies and combine our offerings with them.

Speaker 3

It could be in kiosks or we could enter into neighboring segments. We don't have any concrete acquisition targets or plans, but we are entertaining thoughts about Partnering with other companies, it could be other tech companies or it could be Companies in our ecosystem today, where we see an opportunity to do a vertical integration and bring them on board in the So right now, in the Strategic development plan for the company, it's not top of our list, but as I showed you the previous slide, It's there in the future, and the future maybe mean a couple of years from now. I think this company, having stabilized and grown our own business Organically, by executing on the strategy that we put in place beginning of last year, we can also start to look at some New partnerships and even some acquisitions, and this is a further way to grow the business and increase shareholder value.

Speaker 5

All right. That's it for me. Thank you very much for your answers.

Speaker 1

Thank you, everybody, for joining us. And with that, we wish everybody to have

Operator

Thank you for your participation. This does conclude today's program. You may disconnect at any time.

Powered by Quartr
Earnings Conference Call
Neonode Q3 2021
00:00 / 00:00