Neonode (NASDAQ:NEON) provides infrared multi-sensing interface solutions that make handheld, consumer, and industrial electronic devices touch sensitive. NEON's cornerstone product is zForce, which uses beams of infrared light to make an optical touch screen. It provides high functionality at a low cost.
NEON's infrared touch screens have historically been cheaper for e-Reader manufacturers than capacitive touch screens. Amazon (NASDAQ:AMZN), Sony (NYSE:SNE), and Barnes & Noble (NYSE:BKS) have licensed and embedded the zForce touchscreen technology in their lower end models where cost has been a consideration, and used capacitive touch screens for its higher end models and tablets. However, now that capacitive touch offerings are able to be made cheaper, the zForce infrared technology is being shunned and eventually could go the way of the dodo.
NEON estimates that it holds 80% of the market for touchscreen interfaces in black-and-white eReaders.
Here is a list comparing the most popular eReaders and tablets. Notice in the "Touch/Rotating Display" row, every single eReader and tablet uses "Capacitive Multi-Touch" with the exception of the Nook Simple Touch and the Kindle Touch. They are the low end eReaders and use NEON's cheaper infrared technology.
However, now the Kindle Touch will no longer be using it. You can look on Amazon's website to see that you aren't able to order a Kindle with infrared touch technology. There's the Kindle and Kindle Keyboard 3G, which don't have touch screens, and there's the Kindle Paperwhite and Kindle Fire, which use capacitive touch technology.
This article by Kyle Wagner from Gizmodo, describes Amazon's new eReader. Here's what he has to say about using capacitive touch rather than infrared:
"It's also got capacitive touch, instead of the infrared (NYSE:IR) touch that every other touch reader had used until now. That will make it loads more accurate, but also thinner because it won't need the big dip between the bezel and the display. That big difference in height was there because the devices needed space to shoot the infrared beams across to pick up your finger. Don't need that anymore-and that means thinner Kindles."
Here is what a top Amazon reviewer, "Scott", said about the capacitive touch screen:
"Kindle Paperwhite now has a capacitive touch screen. This is almost worth the upgrade alone. The Touch used an IR-based touch screen, so it would register any movement as a touch, even if it wasn't from your body. I would frequently be reading in bed and move to get more comfortable, and the sheets would hit the display and cause it to skip to the next chapter. So then I would have to bring up the menu and go back. I was always careful about closing the cover when I moved to prevent an accidental "touch." I've always been very satisfied with the speed of the page turns on the Touch and never had a problem with it, but this has improved as well, and page turns now register a bit quicker."
Since Kindle is the most popular eReader and Amazon's eReader technology has been ahead of its competitors, it's probably just a matter of time before the other eReader suppliers like Sony and Kobo stop using NEON's infrared touch as well. This article predicts that Amazon will be phasing out the Kindle Touch.
Amazon Was Neonode's Biggest Customer
For the last two quarters, Amazon has paid over 50% of Neonode's revenues. For the entire year 2011, Amazon paid 40% of its revenues. Neonode has not even warned its investors over the loss of its biggest customer. It's also strange that the share price is still trading for about the same as it was before the news came out that the Kindle has switched from infrared to capacitive touch. NEON investors who haven't realized this will be in for a rude awakening on NEON's Q3 2012 earnings call when revenues and forecasts dive as the company explains that Amazon is no longer a customer.
From NEON's 2011 10K, $5.8 million was from license fees and $287,000 was from non-recurring engineering services. The license fees were solely from companies using NEON's zForce technology in their eReaders. Revenue concentration was with four customers which comprised of 98% of 2011 revenues.
- Amazon (Kindle, Fire) 40%
- Barnes & Noble (Nook) 26%
- Sony 21%
- KOBO 11%
NEON's Q1 2012 report shows license fees of $896K. The customers which accounted for more than 10% of revenues were:
- Amazon 55%
- Sony 16%
NEON's Q2 2012 report shows license fees of $1.6 million. The customers which accounted for more than 10% of revenues were:
- Amazon 53%
- Kobo 11%
- Sony 11%
It's interesting that Barnes & Noble is no longer a top customer in 2012 like it was in 2011. The Nook is the world's second most popular eReader, at 22% of the market. The Kindle has 62% of the market. This could mean Barnes & Noble is selling less of its lowest priced model, the Nook Simple Touch. It could also be moving away from NEON's cheaper, but inferior, technology.
Possible Reasons Why NEON's Stock Price Hasn't Plummeted Yet Despite Losing Amazon
1. Its Touch Screen Patent Is Possibly Being Infringed Upon
One possible reason why investors are still hanging on to NEON and keeping the share price up, is because they are hoping the company will make money from its touchscreen patent. There have been talks that Apple(NASDAQ:AAPL) might have to buy Neonode because the iPhone's "slide to unlock" feature infringes on Neonode's touchscreen patent.
In my opinion, I don't think Apple will buy Neonode, nor will there be a lawsuit. It has been almost five years since the iPhone has come out, and NEON hasn't filed anything against AAPL, or discussed a buyout. Why is this? The likely reasons are either 1. NEON only has $12 million in cash and a legal battle would be very costly, or 2. NEON could hire a law firm to take the case on a contingency basis. However, the law firm would have to be confident that they could win the case. No law firm has shown to be interested. Neonode executives didn't mention Apple in its latest earnings call and there weren't any questions about it.
2. Its Touch Screen Technology Is Breaking Into Other Sectors Besides eReaders
NEON has yet to show any solid headway into entering other markets besides eReaders. The company is up against very serious competition. Currently, it is estimated that there are 100+ capacitive touch suppliers that are competing in the space. Neonode seeks to compete in this space, and capacitive touch seems to be better than Neonode's infrared technology.
The three top capacitive touch suppliers are Atmel (NASDAQ:ATML), Cypress (NASDAQ:CY), and Synaptics (NASDAQ:SYNA). Most agree that these "Big Three" provide the best new product offerings and system expertise. Comparing the 2012 R&D spending of these suppliers to Neonode we have:
Atmel: $264m Cypress: $190m Synaptics: $110m Neonode: $2.5m.
It will be hard for NEON to compete in technology innovation with these companies.
From its 2nd quarter 2012 conference call, NEON's management seemed confident that it will enter the automotive industry. From the call:
Orin Hirschman - AIGH Investment
"But do you feel confident that you actually will have OEM built into the cars during the next year?"
Thomas Eriksson - NEON CEO
"As David said, that's up to our customers and exactly when they intend to launch their product and that might change. But it looks very positive, yes."
However, earlier this month it was reported that Tesla selected Cypress for its first fully-integrated touchscreen. It seems likely that the automobile industry will use NEON's competitors instead of NEON.
What Are Neonode's Design Wins Worth?
The company reported 23 design wins in Q2 2012 and 17 in Q1 2012 to total 40 so far this year. The company management is excited about these wins, but it is hard to measure how many will bear fruit (revenues). If Neonode's infrared technology can be cheaper than its competitors, then maybe it can find some customers. However, if capacitive touch technology can match the cost of Neonode's zForce technology, then I don't think companies will go with Neonode. It also takes a long time for design wins to go into production. From the Q2 2012 conference call, NEON's CFO, David Brunton said: "...the design win, to get into production takes anywhere from six to 18 months and automotive might even take 24 to 36 months depending on the model."
Generous Stock Option Awards
Finally, be aware of high share based compensation. As stated in the Q2 2012 earnings call, David Brunton confirmed that NEON had issued a whopping 1.5 million stock options last quarter, and didn't give any explanation why. In the Q2 2012 10-Q, it says the intrinsic value of the 1,471,200 outstanding stock options as of June 30, 2012 are $2.8 million. If management thinks the share price is cheap and good things are on the horizon, then they shouldn't be diluting the stock so much.