Neonode's (NEON) CEO Thomas Eriksson on Q2 2016 Results - Earnings Call Transcript

| About: Neonode, Inc. (NEON)

Neonode, Inc (NASDAQ:NEON)

Q2 2016 Earnings Conference Call

August 08, 2016 10:00 AM ET

Executives

David Brunton - Head of Corporate Investor Relations

Thomas Eriksson - CEO

Lars Lindqvist - CFO

Remo Behdasht - VP Business Development & Strategic Alliances

Gunnar Fröjdh - VP Automotive Group

Operator

Hello, everyone. Thank you for standing by. And welcome to Neonode's Second Quarter Ended June 30, 2016 Earnings Conference Call. 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.

David Brunton

Welcome, and thank you for joining us. On today's call, we will review our three and six months ended June 30, 2016 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest.

Before turning the call over to Thomas, I would like to make 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 subject to risks, uncertainties and other factors that may affect Neonode’s business, financial position and other operating results, which include, but are not limited to, the risk factors and other qualifications contained in Neonode’s Annual Report on 10-K, Quarterly Reports on 10-Q, and other reports filed by Neonode with the SEC to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements.

At this time, it is my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode. Thomas, please go ahead.

Thomas Eriksson

Thank you, David, and good morning everyone. First, I would like to introduce the team we have on the call today. We have Mr. Lars Lindqvist, our CFO; Mr. Remo Behdasht, who is running our AirBar business; and Mr. Gunnar Fröjdh, who is running our Automotive Group. They will provide an update on the respective business units later in this call.

We’ll start today’s call with some comments from our CFO, Mr. Lars Lindqvist. Please go ahead, Lars.

Lars Lindqvist

Thanks Thomas. I wanted to direct your attention to the 10-Q and earnings press release filed earlier today. I am pleased to tell you that our quarterly license fee revenue increased 25% over last year, and we have 13% increase in total revenues for the first half of the year. We expect our license fee revenue to continue to increase, and up cost efficiencies to result in a lower operating cost structure. On top of this, we expect to have revenues from AirBar starting in the third quarter. All-in-all, at the start we believe to be profitable in the fourth quarter.

As expected, our NRE fees decreased compared to last year. For the past few quarters, we have been talking about fundamental change to our business model from fully custom designed, that include NRE fees to standardized sensor modules to generate less NRE fees. We’re now marketing sensor modules to all our existing and new customers. Last year, our existing customers shipped 11.3 million devices, and in the first-half of this year, 7 million devices were shipped using our technology. Over time, we believe the next generation of these devices will use our sensor modules. In addition to the licensing and embedded module business, we are very excited about the market release of AirBar, our first consumer electronics product, the touch enabled notebook PCs.

We expect our sensor modules and consumer electronic products to generate more revenue and much higher gross margin dollars than are currently royalty paid license fees. And we expect to see continued growth in all our market segments. As a result of our new strategy and business model, we improved the overall cost efficiency of our operations. Our total operating expense for the quarter were $3.5 million compared to $3.8 million for the first quarter of 2016, a decrease or a reduction of 1%. This operating cost reduction is a direct result of the transition from custom design solutions to standardized sensor modules.

Reporting further the other cost efficiency effects over the coming quarters, our total operating expense target is $3 million per quarter, which we expect to reach in the fourth quarter. To finance our growing manufacturing and distribution module business, we are looking into various financing opportunities. Now, I would like to turn the word back to Thomas.

Thomas Eriksson

Thank you, Lars. With respect -- over the past few quarters, I’ve been talking about the transition from pure licensing to selling completely fully tested sensor modules. Our customers have been asking for this and have seen the potential in our technology. Over the past few years, we have been investing in research and development to provide our technology and capitalize that into our multi-touch modules. This includes developing new ASIC, new software a new laser based optical component and selling out state of the art robotic production facility.

So, what does this mean? We have developed a touch and gesture optical sensing technology and packaged it into single module that can be integrated into product as a single component. This means that integration of our solution will be significantly simplified for our customers. The first product that we delivered to customers using our embedded sensor module is AirBar. We are on plan to begin shipping AirBar by the end of this month. Remo will go into greater details later on the call about AirBar. I am also very excited that we signed an agreement supply of tailgate sensor modules with U.S. auto OEM. This is great start. Gunnar will provide some color about our automotive business later on.

So what does it mean in real finance terms? Exchange from pure licensing providing sensor modules will increase our revenue and margins, and also reduce our total costs. And let me show you how. We’re currently working with some of the largest OEMs in the world, and to-date collectively these customers have shipped over 38 million devices with our technology. Right now, we have the technology, customers, and volume, but licensing our technology, we’re still leaving the largest part of the value chain profit to the component suppliers and manufacturers.

We intend to capture this profit for Neonode but selling complete standardized sensor modules to our current and new customers in each market segments, so there is -- they can install it into the devices. This delivery of sensor modules open up exciting new opportunities for us while at the same time it provides an increase in unit revenue and profits; in a nutshell, most other benefits. We move Neonode up in value chain and capture additional margin. It's also win-win situation. Our customers will have each year less costly total solutions, and we will increase our margin dollars.

The expected profit contribution is significantly higher compared to our license fees. It provides ability to use distribution partners to sell and expand our market presence. We have integration of sensor modules it's easier and much faster than our current custom solutions. Market specific standardized offerings means much less custom designs and that equals lower our cost or at the same time expand our market opportunities. It gives us ability to integrate other technologies into our sensor modules to provide the latest functionality increase revenue opportunities. This is just not an idea it's action plan for the whole organization and all is starting to realize some rewards.

We’re now marketing our sensor modules to customers in all our target markets, while at the same time, expanding opportunities in new exciting markets such as virtual reality, self driving cars and for future home. So at this point, I will turn over the discussion to Gunnar for an automotive update. Gunnar, go ahead.

Gunnar Fröjdh

Thank you, Thomas. In the automotive business, we are seeing exciting developments with steadily increasing revenues as new car models featuring our technology are being launched. Our automotive revenues grew from 570,000 to 670,000 or 18% from the last quarter, 0.5 million cars using our sense technology were shipped first-half year of this year. We are well on our way to our goal of 1.3 million cars or approximately 5% market share.

Looking into the future, according to statistics, our addressable market will grow to 35.7 million touch enabled infotainment systems in 2019 compared to 5.8 million five years ago. The feedback from our customers is excellent. The new top selling Volvo models are all based on the SPA platform of which we are urged. Volvo is being placing order for their infotainment system and how easy and responsible is to use, not only with a finger but also with gloves and long fingernails, thanks to our unique technology.

The transition to our sensor module based technology has been highly accepted by the industry, the combination of highly adaptable high performance sensor that is easy and convenient to integrate as a key factor. They really like sensor technology enabled sensor create new innovative and unique features with shorter development cycles in their cars. We’re now expanding into new areas where our modules enable us to offer unique and important functionality at competitive prices.

In the auto entry systems market where we are able to verify our strategy with recent finding of our first OEM agreement for tailgate sensors we are running development projects with the market leaders in the entry system market and have strong indications that several contracts will be signed in the coming quarters. Our steering wheel sensor has shown high interest within our industry with several trials ongoing. The co-development with Autoliv of the steering wheel sensor targeting a fully tested and certified solution has met its milestones and will continue going forward.

We’re targeting to capture 5% market share of the steering wheel market, which is estimated to reach 100 million units by 2020. Without exception, the auto OEMs we’ve been meeting with are very excited about our sensor modules. In addition to touch, they have identified a large number of applications where our sensor offers unique functionality. For example, one of the applications is for door handles and represent the potential market of approximately 400 million units by 2020, we are targeting a 2% market share of this growing door handle market to use our sensors to enable touch and gesture operations.

The end result of all the activities is really exciting to me. I can approach any player in the automotive market and give them a touch solution that makes a difference to them and their customers. Back to you, Thomas.

Thomas Eriksson

Thank you, Gunnar for that great update. So I’d like to now move over to an interesting AirBar update by Remo Behdasht. Remo, go ahead.

Remo Behdasht

Good morning, everyone. AirBar is cost effectively touch enabled non-touch notebook PC. The existing PC market is estimated by Microsoft to exceed 600 million units worldwide. After that another 140 million notebooks sold every year and you have a huge market opportunity for AirBar. We believe we can capture 5% to 10% of this market. Over the last year, we have worked to complete AirBar as a product and established a global distribution network to ensure AirBar is available to all PC users.

With Ingram Micro, the world’s number one technology products distributor to access leading retailers globally, we are working with the biggest and the best and setting out sales up to take full advantage of the AirBar opportunity. Our strategy is to fulfil and ship AirBar to our U.S. and European customers as the first push through retailers via Ingram Micro. This will be followed up by most of Asia, India, China, and then the rest of the world.

For the U.S., we will bring AirBar to the market through an impressive line up of retailers including Amazon, Best Buy, Walmart, Dell.com, Newegg and many more. All of these retailers will range AirBar via the online stores initially and move to their physical stores where possible soon after. When an AirBar customer places an order on Amazon, Best Buy, Dell, or Walmart online stores, Ingram Micro will actually fulfil and ship the orders to each customer. For the AirBar customer, it will be as though the product comes from the retailer’s owned warehouse.

This is how we’ll achieve unlimited scalability because through this model we can consolidate our inventory yet give all retailers access to AirBar seamlessly. In Europe, we will launch via Amazon, Media Markt, Saturn, and a series of key European retailers. We believe this roll out strategy is the best way to penetrate the market, create awareness and increase sales. Our global objective is to produce quality products while ensuring that AirBar is available to all users who want to put touch in their PCs.

And now, I would like to give you a brief glimpse of what it's like on the front line when presenting AirBar to retailers. This is what retailers tell us. Currently, 80% to 85% of notebooks sold don’t have a touch screen, and the reasons are simple. Customers want notebooks which are touch -- with touch but don’t want to pay the premium for it. They don’t want to compromise on battery life and product with annoying glair. However, this is not what they seek in the market today. Furthermore, retailers are telling us that most of what consumers do with notebooks involve launching applications, surfing the Internet, streaming content and using cloud based services.

All of these common tasks are perfect for AirBar and satisfy what consumers really want. Retailers see AirBar as an excellent accessory for existing PC owners and a perfect product to up-sell as an attachment with each new notebook. It is through this enthusiasm that we believe AirBar will be a success. The Microsoft marketing team responsible for converting more users for Windows 10 are big fans of AirBar because we enable existing notebook owners to experience the full power of Windows 10. Retailers have told us they see AirBar as a new and exciting revenue stream to add a boost to their PC sales and product portfolio.

Another lucrative opportunity for AirBar has to do with Chromebooks. We have had interesting interest from education and school districts wanting AirBar in their Chromebooks allows number of school districts some moving over from iPads to Chromebooks. And although the teachers and the students want touch enabled Chromebooks, the cost difference can be few hundred dollars each for each device. And school budgets just can’t allow for this. With AirBar, schools can give their students the most advanced technology that their budgets will allow.

We believe education is going to be an important opportunity for us, and our addressing this market by working with Ingram Micro’s value added self retailers like CDW. In the next weeks, we’ll start our PR campaign, which involves CD AirBar with key new sights during interviews and running review programs leading us to the holiday season. We expect that this, in conjunction with some strategic bundles and marketing with PC OEMs, will create strong awareness of our products and pull customers to the AirBar retailers. From here, we expect to move into 2017 with great global sales momentum. Finally, I would like to say that as a person responsible for the global expansion of AirBar, I am very excited that we are on the crust of exploding into the market, so stay tuned.

Once again, thank you and we will update you with AirBar progress in the coming months. And now I would like to turn the call back over to Thomas for some closing comments.

Thomas Eriksson

Thank you, Remo. I also like to thank everyone for listening to our call. We will keep you posted with our progress. And I would like to say have a very good day, and thank everyone.

Operator

Thank you for participating in today’s conference. This does conclude today’s call. You may now disconnect.

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