Neonode-Powered Volvo Sensus Wins Prestigious Award - Is BMW's IDrive Next?

| About: Neonode, Inc. (NEON)

Volvo (OTCPK:VOLVY) recently announced that they have been awarded the prestigious 2013 Red Dot Award for their new in-vehicle connectivity system, called the Sensus Connected Touch. As noted in a press release by Neonode (NASDAQ:NEON) on March 11, Volvo's Sensus is powered by Neonode's optical infrared touch technology. As mentioned on NEON's Q2 conference call, Volvo started generating revenues for Neonode in late Q2.

This Sensus system is currently a dealer-installed upgrade for almost all 2014 Volvos (including the V40, S60, XC60, V70, XC70, and S80), is a factory-installed feature on the 2014 XC90, and can be retrofitted into any 2011-2013 Volvo with a seven-inch display. The key benefit of this award-winning system is that it possesses a slick and high-speed multi-touch interface that can be operated with a gloved hand (a key advantage of Neonode's optical touch technology).

Most importantly, from my perspective, this prestigious award and successful roll-out should put to rest any speculation that there could be an ambient lighting issue with Neonode's optical technology. I would have thought that this concern was already laid to rest with Neonode's successful penetration of the e-reader space, which has been penetrated by ~15M Neonode-powered devices without a single touch-related return (management proclaimed this fact publicly on numerous occasions, including during the Q2 conference call). As we all know, plenty of e-reading takes place outdoors, so ambient lighting interference is unacceptable. If it was an issue, it would have surfaced by now.

More importantly, this Red Dot award further validates Neonode's burgeoning automotive business prospects. The company already announced named-deals with Alpine (OTCPK:AELEF) on July, 12, 2012, Volvo, BYD (OTCPK:BYDDF) on Jan. 23, 2013, and Visteon (NYSE:VC) on Sept. 18, 2013. They have also announced a bevy of licenses and/or design wins with the majority of Tier One automotive system OEMs and global carmakers. Desay SV Auto Ltd. -- which is one of the largest in-car-entertainment (ICE) OEMs in China and sells into popular brands like Volkswagen (OTCPK:VLKAY), GM-Buick (NYSE:GM), Chery, and SAIC Motors (600104.SS) -- is likely also become a Neonode customer, as the company is marketing its new HD Touch series of optical infrared ICE displays.

As management explained at the recent Craig Hallum conference, there are at least five revenue opportunities in each vehicle:

  • Center-Stack Telematics: For in-dash infotainment displays like Volvo's award winning Sensus, Neonode's optical touch technology is far superior to capacitive solutions. Neonode's optical touch is about 15% the cost of capacitive, has superior optical properties, does not require expensive capacitive additives (i.e., anti-glare films, shatter-proof glass, and special heat-resistant lamination), and natively supports gloves. Hovering capacitive technologies, which in theory enable gloved operation, actually result in false touches, which is not a desired result particularly in a moving vehicle. Neonode clips a royalty of at least $3 for each of these units, and is starting to dominate (this will be evident in the second half of 2014) an 80M+ global auto market. Management has indicated that their customer will be ramping in the second half of 2014, with some Chinese OEMs in the first half of 2014.
  • Door Handle Sensors: According to management, the door handle sensor could be the largest unit opportunity for NEON in the auto space, as over 250M handles ship annually (including the trunk), with sensor penetration (for keyless entry and locking) likely exceeding 50% in 2015. With a total system cost of $4-$5, relative to inferior (they don't work well with gloves) capacitive sensors at $12+, this looks like a no brainer opportunity for NEON in late 2014. With all indications that this will be a $1-$2 royalty, this alone could be a sizable eight-figure opportunity over the next two years.
  • Rear-Seat Video Entertainment: While this is likely a smaller unit market, and will certainly be more competitive, Neonode should be able to make some hay here -- especially since flush is not an issue.
  • Proximity Sensing Steering Wheel: Although this next-generation proximity-sensing product seems a little farther off, management has indicated that some major Tier One luxury brands are quite interested.
  • Round Dial Sensors: The telematics control dial made famous by BMW's iDrive, is starting to integrate trackpad mouse-like control to the top of the dial. I believe there is a strong likelihood that BMW is evaluating Neonode's round touch sensor for this application.

With automotive clearly on its way, particularly in China (~17M vehicles in 2013) and Europe (~12M vehicles in 2013), Neonode's revenue prospects should be substantial for 2014 and 2015 -- especially if car door handles start to ship during the second half of 2014. My 12-month NEON price target of $15 is based on a sum-of-the-parts analysis of the core operating business ($13 per share) and the User Interface patents ($2 per share).

My conservative 2015 earnings estimates for Neonode are revenues of $65M (Printers = $20M; PC = $15M; Auto = $10M; White Goods = $5M; Children's Tablets = $5M; eReaders = $4M; Handset = $3M; Android Tablet = $2M; NRE = $1M), operating expenses of $20M, pretax income of $45M, taxes of $10M, net income of $35M, EPS of $0.87, and a PE of 15x. This equates to a 12-month target of $13 for the core optical touch licensing business. With regard to the UI patents, I believe the amount of potential infringement exceeds $1.7B, using a $1 per unit licensing baseline.

Assuming that there is a 65% chance of litigation success, prevailing IP-acquisition discounts are 10%-15% of target damages, while pre-Markman settlement rates hover in the 10 cents per dollar range. So it seems as if a $2 per share valuation ($80M) for the UI unit is reasonable. As a result, I would be buying NEON shares before a potential UI spin-off, and ahead of the upcoming ramps of new non-e-reader revenues (printers, laptops, children's tablets, and auto).

Disclosure: I am long NEON. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.