Neonode CEO Discuses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: Neonode, Inc. (NEON)

Neonode (NASDAQ:NEON)

Q1 2013 Earnings Call

May 8, 2013 10:00 AM ET

Executives

Daniel Gelbtuch - SVP of Corporate Finance and IR

Thomas Eriksson - CEO

David Brunton - CFO

Analyst

Mike Malouf - Craig-Hallum Capital

Robert Stone - Cowen & Company

Sam Ginzburg - FNY Capital Management

Orin Hirschman - AIGH Investment Partners

Thomas Joan - Millennium

Rob Stone - Cowen & Company

Mike Malouf - Craig-Hallum Capital

Yitzi Whitman - JH Darbie

Operator

Hello everyone, thank you for standing by, and welcome to Neonode’s First Quarter 2013 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. (Operator Instructions)

Thank you. At this time for opening remarks and introductions, I would like to turn the call over to Daniel Gelbtuch, our Senior Vice President of Corporate Finance and Investor Relations. Daniel, please go ahead and start the conference.

Daniel Gelbtuch

Thank you and welcome and thank you for joining us. On today’s call we’ll review our first quarter 2013 financial results, and provide a corporate update. Our update will include details of our design wins, technology developments, and new customer agreements that we recently announced. The prepared remarks will be provided by Thomas Eriksson, our CEO and David Brunton, our CFO. Before turning the call over to Thomas and David, I would 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, guides, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements.

These forward-looking statements do not guarantee the future performance that may involve or are 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 and 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’s now pleasure to turn the call over to Thomas Eriksson, our Chief Executive Officer. Thomas, please go ahead.

Thomas Eriksson

Thank you, Daniel. Good morning everyone, and welcome to the call. First of all, I would like to emphasize that I am excited by the technology and business developments here at Neonode. During 2013, we have made significant leads particularly in our PC related technologies and have experienced growing traction with new and old customers.

Although our Q1 revenues for life; they were in line with our internal expectations and I clearly note the proxy for our forward-looking prospects in new market.

Our initial new customers in the tablet print and handset markets still expect to start ramping in the second half of 2013. We have helped mostly customers already in production throughout the market entertainment products and expect our expanding Tier-One IT customers to ramp in volume as early as next year. Most significantly, we believe that Neonode will emerge as a key player in the Windows PC notebook space, within the coming years. That said, we will continue to point out that since we are a licensing company, with our growth prospects tied to new markets and customers, our visibility of precise rollout dates and ramps is still limited.

Now, I would like to spend some time talking about Neonode's positive development. Since the launch of our own integrated controller (inaudible) important market such as PC automotive mobile devices and corporate equipment. As of today, we’re working on 59 customer projects in our key market segments and have signed license and/or referenced to sign development agreements with Tier-One global OEMs in all of these key markets. Our traction is particularly strong in (inaudible) positive equipment sectors where our customers all agree we have the best solution in terms of performance and system costs.

Going forward we believe our technology has the ability to build just a constructive and compelling within the emerging PC touch market. In the light of the latest touch requirements of PC OEMs, we believe our solutions can potentially out of the market landscape for PC OEMs with our touch and proximity solutions for displays, keyboards, and track pads.

We are pleasantly surprised with the massive interest from both Tier-One PC OEMs and their semiconductor and software vendors. Along these lines during the first quarter we entered into a partnership with a premier PC semiconductor OEM to jointly develop a reference platform that incorporates Neonode’s MultiSensing touch technology.

As part of our strategy to address the entire touch market, nearing the advanced stages of developing our flash note based solution. In addition, we’re collaborating with Tier-One OEMs to introduce new and particular products that incorporate our proximity sensing solutions which control devices module with open (inaudible).

Meanwhile our next-generation controller manufactured by our semiconductor partner Texas Instruments will soon start sampling to our customers. This second generation optical touch controller integrated circuit is designed to improve performance, add new features, improve flexibility, reduce the power consumption and lower the total system cost (inaudible). I am getting some question related to our IT and certain regions (inaudible). As you all know it is quite complex and sensitive part of our business and therefore going forward we will have little bit to talk about it but I will give a brief update here. In conjunction with our legal and patent advisors, we have conducted an in-depth analysis of our IT position over the last year while actively filing for complementary follow-on and new patents. To date, we have 12 patents issued, and have 72 more patents pending. Our next step is to decide the final organizational structure to enable us to maximize the value of our IT. Until this decision is finalized, we will not comment further about this topic.

And now over to David who will talk about the financials.

David Brunton

Earlier today we filed our Form 10-Q with the SEC as well as released our first quarter financial results and the press release, both of these are available for download from the investors section of our website at neonode.com. For the first quarter ended March 31, 2013, our net revenues decreased 53% to $500,000 compared to $1.2 million for the same period in 2012. The decrease in license fees is due to a combination of normal seasonality demand for customer products and the loss of Amazon. It is interesting to note that license fee earned from our core customers excluding Amazon increased over 100% year over year in the first quarter.

Our net revenues for the three months ended March 31, 2013 include $0.5 million of technology license fees from six customers compared to $900,000 from technology license fees related to product shipments by four customers plus $300,000 in fees for engineering, design services for the same period in 2012. Cost of revenues for the first quarter of 2013 decreased 94% to $16,000, compared to $300,000 for the first quarter of 2012. In the first quarter of 2013, we recorded $500,000 of cost associated with engineering design services in our work in process account included in prepaid assets on the balance sheet. These engineering design service costs will be expensed as cost of revenue when the corresponding non-recurring engineering service fee or NRE currently included in deferred revenue is recognized.

Product R&D for the first quarter of 2013 increased 138% to $1.6 million compared to $700,000 in the first quarter of 2012, due to an increase in staffing and an increase in new technology, research and development activities.

Sales and market expense was $800,000 for both the first quarter of 2013 and 2012, general and administrative expenses for the first quarter 2013, increased 66% to $1.7 million from $1 million in the first quarter of 2012, primarily due to staffing increases and legal expenses related to patent filings, corporate and SEC compliance and customer contracts. Our net loss was $3.6 million or $0.11 per basic and diluted shares as compared to a net loss of $1.6 million or $0.05 per basic and diluted share in the same quarter last year. As of March 31 2013, we had cash of approximately $7.6 million, $800,000 of accounts receivable and working capital of $5 million. Our shareholder equity is $5.3 million as of March 31 2013, and as of March 31 2013, we have 33.9 million shares of common stock outstanding. In addition we have 4 million warrants and 1.6 million stock options for a total of 39.5 million shares fully diluted. Now I'd like to turn the call back over to Thomas for some closing comments.

Thomas Eriksson

Thanks David. To recap, we're gaining momentum in our corporate markets which now include PC, office equipment, automotive, tablets and mobile devices. This momentum will allow the company to accelerate growth in 2013 and beyond. We’re not only securing new design wins and reference development agreements but we are actually investing in customer technology development.

Finally on the IT front we are aggressively building up our patent portfolio and are increasingly focused on monetizing it. I would like to take this opportunity to thank our customers, partners, investors, and our very talented and dedicated employee for the trust and support. This concludes our prepared remarks and we'll open the call to questions, thank you very much.

Question-and-Answer Session

Operator

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

Mike Malouf - Craig-Hallum Capital

My question surrounds the PC manufacturer, the opportunity that they have. I imagine that you have some significant design changes to the PC to really accommodate your solution and I am just wondering does the new Texas instruments chip, will that be enough horsepower to run something of that size, how long will this take and may be just a comment on the competition, both on the IR side and on may be some of these new emerging metal mesh would be helpful because I know that at the Intel Developer Conference I think they have mentioned Flatfrog as a place that they want to go to and I love to know sort of how your solution compares with their systems both IR, thanks.

Thomas Eriksson

Our solution is actually more over of a scalable solution as our manufacturers are dealing the devices themselves. So we typically supply the new silicon you are talking to and then that component is coming from some of our chip suppliers. So, we can very fast scale production because our customers are not limited by our bandwidth. You also talked about the development of the chip, so this chip will make our solution much faster and much lower power consumption for these type of applications. So that chip is going to start sampling soon to our customers and we are going use that as also of our own chip to support this business but they are going to be used for example for different sizes of display.

Mike Malouf - Craig-Hallum Capital

And on a competition with regards to Flatfrog?

Thomas Eriksson

Yes, I wouldn’t comment on any of our competitors and what solution they have, I think our solution, we believe that would be very attractive to all of its PC companies out there. We are actively working with the different PC companies and the chip around those to support them of course.

Mike Malouf - Craig-Hallum Capital

And then I have a follow up question with regards to the printer market. That had always been sort of out there as the big ramp for you, is that still the major part of the ramp and how much visibility do you have on that as we enter the third and the fourth quarter and I think you have originally said that you could double the revenues and really break even this year. Is that still part of the plan?

Thomas Eriksson

Due to confidentiality we have with most of our customers it is almost impossible for us to comment on that. And statistically they roll out their plans but we are still positive.

Mike Malouf - Craig-Hallum Capital

And with regards to doubling the revenues and the breakeven, how does that work for you (inaudible)?

David Brunton

Yes, this is a Dave. We still are following that plan at this point.

Operator

Your next question comes from the line of Rob Stone with Cowen and Company

Robert Stone - Cowen & Company

I have a couple of quick questions as well, Thomas. I wonder if you could comment on when the new chip, if it’s sampling now when that might be ready for production.

Thomas Eriksson

It’s going to start engineering sampling soon and then it will be in mass production by the end of June.

Robert Stone - Cowen & Company

What do you need to do to address 10-fingers?

Thomas Eriksson

This is an evolution of our technology we have today. We are working on touch cells on the script for all sort of solutions for clamshell we give out the best cell type of designs, but also having new things like proximity solution, or near field detection.

Robert Stone - Cowen & Company

Does this require perhaps multiple chips for a large screen though?

Thomas Eriksson

I wouldn’t go into details exactly how these works. But for typically very large displays, yes, it would.

Robert Stone - Cowen & Company

Okay and so but on a notebook size display?

Thomas Eriksson

I think that depends on design and typically our controller can do up to 10-inch for one chip, above that to typically more.

Robert Stone - Cowen & Company

If you are making progress on bezel free, anymore color on that?

Thomas Eriksson

Yes, that’s still in development. We are working on that and we are in sort of advanced stages of development, and yes the reason we are doing that of course is to adjust a lot of the part of the markets, I know will have the technology we have today.

Operator

Your next question comes from the line of (Jerry Bookman) with FNY Capital Management.

Sam Ginzburg - FNY Capital Management

This is actually Sam Ginzburg. A couple of questions for you; could you first talk about your net cash position, what’s the first quarter cash burn and the most important question is do you all need to raise money this year?

David Brunton

Our cash burn in the first quarter was $1.6 million and I just want to remind you that in 2012 our total cash burn was 3.7 million. So typically in our business model as we move throughout the year the revenue will start growing especially towards the fourth quarter of the year. We have no immediate plans to raise money.

Sam Ginzburg - FNY Capital Management

If I could talk about the first quarter revenues, why were they low? And how does your non Amazon e-reader licensing revenues in the first quarter compared to the results of the first quarter ’12 and first quarter ’11?

David Brunton

Well, as I said in my prepared remarks the actual revenues from the other customers, I will call our core customers, without Amazon actually doubled compared to last year. Of course we missed Amazon this year but the other customers without them are actually doing quite nicely. The revenues that came in were within expectations of what we thought what they would be.

Sam Ginzburg - FNY Capital Management

Do you have chance to get back into them, and if you could talk about the relationship with them and did the door shut when you were designed out of the Kindle Paperwhite last September.

Thomas Eriksson

I mean we have an excellent relationship with Amazon and they are still a licensee of us. So, all I can say, of course we’re working on that.

Sam Ginzburg - FNY Capital Management

And last question, you recently announced your third licensee among I guess you’ve set a top ten, automotive systems OEMs. Do you have any projects with the others and you’re expecting to gain more licensees within the group, and are there any auto OEMs working on in car proximity sensing projects like the steering wheel you demonstrated when we were at CES.

David Brunton

I mean we have multiple projects with newest top ten entertainment companies out to make this, these OEMs and their Tier-One suppliers. So, of course there are our current licensees. And if you talk about proximity sensing, and it’s a bit interest in that right now for the overall industry to replace (inaudible) and control things with your hands. We have been working on other solutions like around touch for example and other type of systems for cars.

Operator

Your next question comes from the line of Aaron Martin with AIGH Investment Partners.

Orin Hirschman - AIGH Investment Partners

Just a couple of random questions, you had mentioned that you had signed an agreement with the PC semi-conductor company to develop the reference platforms. Can you talk to us any more indications; is that an end customer or that's a partner; is it a new partner or is it Texas Instruments again or if you can say and also just the timing in terms of those when those eight reference platforms when they are going to be ready for the end customers and does that mean you have to wait in terms of getting design wins or is there stuff going on right now?

Thomas Eriksson

This is partnerships with supply for that industry; of course we are talking to all of these companies to design reference, to design for this industry so it is of course in something we worked as a strategy to get into this business. It’s important for us as a company to be in all the reference design possible to attract these OEM's.

Orin Hirschman - AIGH Investment Partners

Is that a new partner that you have not announced?

Thomas Eriksson

This is a new partnership and it's not Texas Instruments.

Orin Hirschman - AIGH Investment Partners

Okay and just in terms of can they do designs and the PC OEM's do design; are they working, it sounds like they are working on designs but you already even in advance of that particular solution, meaning it's not dependent on that solution.

Thomas Eriksson

Yes, of course, we want to get into the this type of businesses this is a part to get in their best place.

Orin Hirschman - AIGH Investment Partners

Does that mean the design wins are ongoing at this point in terms of working with them?

Thomas Eriksson

On particular projects, as you know I can't comment on that but of course our goal is to get into this business as soon as possible.

Orin Hirschman - AIGH Investment Partners

Okay meaning we should not be surprised to see in the second half of the calendar year, PC laptops or tablets or whether it might be Neonode solution in it?

Thomas Eriksson

I can't comment on that exactly when they are going to roll it out but we're working on it and I believe our solutions is extremely attractive to the market.

Orin Hirschman - AIGH Investment Partners

You have mentioned before in prior calls about children's tablet market and children's type of gaming tablets; any updates there in terms of the design wins and if any of them going to production; I believe one have.

Thomas Eriksson

Yes we have one customer growing its production soon. Of course we, our targeted to work with that market as a whole. We think our solution is extremely attractive on the features we have for that market. For example we can use brush or a pen or a thing or any object and that’s important for that industry.

Operator

Your next question comes from the line of Thomas Joan with Millennium.

Thomas Joan - Millennium

Hi I might have missed this just two random questions here, one of them assertive to deferred revenue balance of that $3 million it is up a little bit sequentially if that adds 200,000 what’s type of customers are in this and while they grow?

David Brunton

Okay I could barely hear you but I think I heard you. Ask the question again.

Thomas Joan - Millennium

The deferred revenue item, it’s about $3 million but it’s up sequentially by…

David Brunton

Okay I got you, okay the deferred revenue is really made up about 2 million of that is made of three licenses fee customers that have prepaid some license fees and about $900,000 of it is made up of 17 different customers who paid NRE and we’re currently working on those projects for them and they’re across the board from automotive to some tablet stuff to some printer things to some light goods so it’s basically a lot of across the board projects across all markets at this point.

Thomas Joan - Millennium

And then finally just I don’t know if this was mentioned but the (inaudible) manual patent evaluation process. Is there any update there?

David Brunton

From a cost perspective or are you just saying in terms of general…

Thomas Joan - Millennium

In the terms of the results for costs so any updates you can provide on that?

David Brunton

No, there is no cost at all in the first quarter associated with that.

Thomas Joan - Millennium

And when should we be expecting results of that review?

David Brunton

Well as Thomas mentioned in his comments, well right now we have been advised by our legal and patent advisors to not comment on that topic, so we’re not commenting on it.

Operator

Your next question comes from the line of Rob Stone with Cowen & Company.

Rob Stone - Cowen & Company

Hi, Thomas, I just wanted to clarify something as a follow-up. obviously folks are very eager to know when you might be to able enter the PC market and I know you can’t comment on your customer specific launch plans but if I understood you correctly the new chip that should be ready for production towards the end of the year would be part of a PC solution, so from that is it reasonable to expect that the earliest PC designs might ship as probably next year?

Thomas Eriksson

Again, I can't comment on the plans of these PC customers, but the market is extremely dynamic and the tension we receive is quite intense, and I think all the OEMs are extremely motivated to of course get products out in the market quickly so I think that…

Rob Stone - Cowen & Company

But I mean for me from a technical perspective in order to achieve Windows 8 certification 10-finger touch there are certain technical requirement notwithstanding the eagerness of the OEMs we all understand that because Windows 8 laptops need to come down in cost and that's the way they can grow the market. So my question is a technically adequate Windows touch solution feasible without that new chip?

Thomas Eriksson

I mean, we have a current solution today. what we are working on of course is to improve what we have we do that all the time and of course as you said they are not important I think one of the most important thing for this is to reduce the cost for those customers. So that is our goal. It is a licensing company of course. It is to make sure we maximize our revenue in the form of royalties and reducing to build a material costs for the products, so that is absolutely what we are focused on.

Rob Stone - Cowen & Company

But you believe you have a solution in the meantime that would work with the current pattern?

Thomas Eriksson

I mean of course that is what we are working on and we have a silicon today that is out there in the millions of products on the market today and we have a follow on chip that will improve certain things so they are sort of complementary and of course we have a road map for that too to address different type of product, sizes of displays and other functions.

Operator

Your next question comes from the line of Mike Malouf with Craig-Hallum Capital.

Mike Malouf - Craig-Hallum Capital

Yes just a follow up to my earlier questions. You had said in the release that you are expecting a ramp in the tablets and the printers and the handsets, you kind of addressed a little bit about the tablets and the printers but I am wondering if you could comment a little bit on the handsets. It seems like a new expectations. Why do you expect that and if you could just give us a little bit of color on that that would be helpful?

Thomas Eriksson

I think again it's comment on individual progress is not something we can do, working with customers on that products right now, in the end, when they've been launched and their launch plan is not something we can affect and one thing I can say is that our technology is suitable for that business as well.

Mike Malouf - Craig-Hallum Capital

Is it just one handset provider or do you have multiple handset providers that are giving you indications of ramping in the second half of 2013.

Thomas Eriksson

I wouldn’t comment on that too, I can only say that we're working with several mobile phone companies right now.

Operator

Your next question comes from the line of Rick Solomon with (inaudible).

Rick Solomon

I just wanted to ask few questions about the partnership with new semiconductor provider, the reference design. Is that company an apps processor company (inaudible) or graphics company, can you tell us anything more about that.

Thomas Eriksson

It's a company supplying chips for the (inaudible). Of course the companies we work with are the same as is very confidential of course so we can't provide who that is.

Operator

Your next question from the line of Yitzi Whitman with JH Darbie.

Yitzi Whitman - JH Darbie

I wanted to know if you saw, if you excuse me I want to quote from the blog that's came out, Amazon, (inaudible) there's something here that I want to you to refute if it's not the case, and say that you, the CEO of Neonode announced that about Amazon, which was 26, Amazon was how much percent, 40% and then you had Barnes and Noble was 26%, Sony was 21% and Kobo was 11% of revenue, and after they lost Amazon they lost everyone else. I never heard of that, I only knew about the Amazon. Do you supply for the other (inaudible) you used to supply.

Thomas Eriksson

I actually haven't seen that blog, so it's hard for me to comment on it, but your last question I can say, yes we do. I don't know what you're referring to.

David Brunton

Other people of the company have seen this blog and it is absolutely not true. You're totally misinformed.

Operator

We have a question from the line of (inaudible), private investor.

Unidentified Analyst

Good afternoon, couple of questions. With all due kindness, being an investor in your company and a shareholder of your stock, I am finding that as being part owner of the company, I am not finding out anything. So, I am going to ask you two questions. the first one is January 23rd, 2013 there was a news article about an agreement with BYD company, it’s stating that you are expected to go in the mass production in the first quarter of 2013 with the BYD company and starting consumer electronics product and my second question more importantly is when do you estimate the company will be able to share a quarterly profit?

Thomas Eriksson

Let me answer the second part first. I think quarterly profit could be towards the end of the year at the earliest and it’s going to be highly dependent on our ability to gauge what tier 1 customers are looking for and we will continue to invest heavily and getting the right customers and that’s going to affect the outcome.

David Brunton

The first question, BYD a company that making a product for another OEM but it’s currently on the market the successful device, I can’t comment on but it’s a product that’s in introduction.

Unidentified Investor

And the Neonode agreement with BYD is producing revenues?

Thomas Eriksson

Not in the first quarter, they were delayed in their production rollout schedule but they have now entered production and they are starting to ramp up slowly.

Operator

At this time we have no further question so now I’d like to turn the floor back over to management for any closing remarks.

Thomas Eriksson

We want to thank you all for joining us for this call. Keep you posted on progress for 2013 in the future. Have a good day, thank you.

Operator

Thank you and this concludes today’s conference call. You may now disconnect.

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