Neonode - Q3 2021

Transcript

Operator (participant)

Hello, everyone. Thank you for standing by and welcome to the Neonode's Q3 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session with the company's covering analysts. To ask a question, press star then 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. 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 (Head of Corporate Investor Relations)

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, Urban Forssell, and our CFO, Fredrik Nihlén. Fredrik will present the financial results of the company for the Q3 and comment on the equity financing we completed in October. Urban will comment on overall strategies, customer activities, and other market opportunities. Before we continue with this presentation, 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, intend, will, guidance, confidence, targets, and projections, 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. Such risks, which include, but are not limited to, the risk factors and other qualifications contained in Neonode's annual report on Form 10-K, 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 expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements. Before I hand the call over to Fredrik, 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-19 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 constraints that impacted our customers' businesses had a negative impact on our Q3 sales compared to the prior six 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 diverse sales pipeline, which Urban will discuss. 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.

At this time, it's my pleasure to turn the call over to Fredrik, who will give a Q3 financial update. Fredrik, please go ahead.

Fredrik Nihlén (CFO)

Thank you, David, and welcome everyone to our Q3 earnings call, also from my side. You can find our Q3 earnings release and the details of our financial performance in the Q3 and year to date 2021, available to download from the investor 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 $4.3 million. That is an increase of 23% compared to the same period last year. Revenues from sensor modules increased with 88% for the same period. Looking in isolation 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 Q3. Operating expenses for the Q3 decreased by 12% compared to the same period last year due to one-time costs in Q3 last year. The decrease by 19% compared to the Q2 is mainly due to a lower activity level during summer vacation period. The cost level we saw in Q2 this year is more in line with the expected cost level going forward. 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 TSMs. Net cash used in operating activities during the Q3 of 2021 was $1.6 million. Compared to the same quarter last year, net cash from operating activities has decreased with 12%. The decrease is mostly related to the timing of paying supply invoices. 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 twenty-sixth, and we received net proceeds of approximately $13.1 million from the offering after deducting placement fees, their 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 demand for contactless touch and Neonode touch sensor modules. We will also use the net proceeds to support the expected growth of a touch sensor module production volumes, which will tie up capital in component and finished goods. 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 a business and strategy update.

Urban Forssell (CEO)

Thank you, Fredrik. 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 improve our sales in these markets. As the first slide here, I want to share with you our vision statement is to transform the way humans interact with machines. Very happy about this vision statement as it ties back to also where we're coming from in Neonode's history. Remember that this company was founded as a smartphone company 20 years ago and was the first company to launch a gesture-based touch phone on the market, the Neonode N1, which was presented as early as 2002 at the CeBIT fair in Germany. This was a phone without the conventional keypads that all the mobile phones had at the time.

Later, Neonode, roughly ten years later, we helped HP, Lexmark, Canon, and all the other printer manufacturers to get rid of the buttons they had on their printers and replacing them by clever touch displays that allowed scrolling and, selecting different options in the printers, using a touch interface. Right now, as this picture shown here indicates, we work a lot with contactless touch, or as some prefer to call it, touchless touch. We are still involved in, human machine interaction or HMI, and we wanna transform the way humans interact with machines and to make it more convenient to enhance the customer experience and, bring more value to all the users. We are a deep tech company, and all our work is concentrated around two, versatile technology platforms.

One that is by now, I think, well known by followers of Neonode is zForce. It's a IR-based or infrared-based optical technology that supports touch and gesture sensing, and a very advanced involving optics, electronics, and software algorithms, in this platform. We also have developed over the last years a software platform for scene analysis. We call that MultiSensing, and this platform supports applications such as eye tracking, drowsiness, distraction monitoring in vehicles and other situations, and general occupancy and situational context monitoring.

Today, we have a certain focus on contactless touch, 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? As the name suggests, it's contactless, but touch-like interaction with displays, keypads, buttons, and holographic images. By touch-like, 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 the underlying machine without touching the display or the keys.

You hover your finger in front of it, 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 in elevators and other type of applications. Why is this interesting? Yeah, I've already touched on it. It's a lot, it's about safety and to avoid getting various types of infections from bacteria, from viruses, or in general, to have an unpleasant experience. I think the key point when we're looking at this slide is, think about one machine and many users. 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 or using a coffee machine or other kiosk. Here is where you see the very, very big advantage of contactless operation. You add then the just improved user experience that you can get with this type of interface rather than a conventional touch interface or physical buttons. It's a very, very compelling and strong offer that we bring from Neonode. Countless application areas. We have decided to go mainly towards the elevator and kiosk segments, and then especially advanced interactive kiosks that you can find self-service 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. There's other use in the surgery room, where typically nurses and doctors want to interact with machine in a sterile environment, and then touching a display, for instance, is not an option. Here, also contactless has an important role to play. 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 how happy you were about this experience passing through security. The same you see in shops is another example.

All these types of applications is what we are addressing with our contactless touch offers, and we think we 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. Originally developed for touch applications, it's ideal for contactless touch because of its optical way of operating and high performance. 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 operation, which is interesting in some kiosk applications. How can it look in a retrofit solution in an elevator? This is an example from our friends at Dewhurst. Dewhurst is a U.K.-based elevator control panel supplier. They work both OEM and in the aftermarket. For contactless touch, they have developed a technology called Halo, and they are promoting this under their own brand, Halo, with Dewhurst powered by Neonode. They have an increasing business around this. This is one picture showing how an installation can look like in a modern elevator. This is from a commercial building in London, and they have a sign there next to the control panel saying this is a touchless elevator operation now.

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 TSM, and this is one creating that touchless or contactless feature in this elevator. It has been marketed for some time, and Dewhurst is picking up speed. They are also approaching elevator OEMs with this solution, so they work both aftermarket and new equipment. Another example just 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.

What's interesting about this, you see in the picture that you can position the unit in a corner, or you can actually build it into the wall. The installation can be very neat if you have this type of arrangement. 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. 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 clear and compelling, and we have good response and market feedback from these types 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 kiosks is, sort of a sub-segment in itself, which is very interesting and where we have considerable traction now. 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 companies doing the kiosks for airports, or in other cases it could be the operators or the airlines or the train companies operating these transportation hubs. We see all different versions. We are still mainly doing retrofit projects here, but we have growing interest from kiosk OEMs as well. This is just one example.

We have other types of self-service kiosks in shopping malls, in supermarkets, in restaurants, and so on. 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 kiosks at their restaurants throughout Japan. These are just some examples of the progress we've been making in the last 6 to 9 months, I would say. We are happy to say that the interest is growing, and we are sort of building the momentum here.

Although the Q3, as Fredrik mentioned, was a little bit slower than we had hoped, we continue to believe that all these type of contactless touch kiosk and elevator applications will simply become more and more common and that our market share will grow. 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 a bar holding our touch sensor module, or it could be also two of them in some applications. With that, the display can then be used as a contactless display or a touch display. To the right, they have here a temporary guide with step one, step two, step three, instructing the user that this is how you use this contactless screen.

Just below the screen, you see a sign saying, "Contactless screen." It's very easy to recognize that this is something special. The feedback we have from this particular hospital, which is in Asia, is that 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 this solution. This is what we are working on, and these are some examples of success stories and larger and smaller projects that we have been involved in, and our pipeline have multiple other examples similar to these.

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 in North America. Like Fredrik said, when we talked about registered direct offering and what we will use the money we have raised through that offering, it's a lot about marketing and sales, continue to promote our solution and raise awareness and drive demand for this, because we think we have a 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. 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. The overall commercial value for both the buying customer and the end customer using it is very, very high compared to others. I will say that in some applications, mobile phone apps will also be taking market share going forward, that's for sure. It's a lot driven by the fact that different companies want to own the customers and the customers' data. That's why they have different types of apps being developed and deployed 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.

In many others, like in an elevator or in an airport check-in terminal and so on, where you 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. We are very, very confident here, and we are very, very motivated to continue our work to market and promote our solutions. We are also working in two very, very large markets, the elevator market and interactive kiosk market. There are around 19 to 20 million 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 as the main region where elevators are installed, especially China, but also other countries in Asia. The growth rate is somewhere 1 to 1.3 million new elevators a year. Again, Asia is leading the way, in particular with China is representing 63% of the annual growth. But remember, we have both a play with retrofits, and then we are targeting to grow our market share of retrofits on the installed base and then also target our to grow our market share in new installs with new elevators.

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, through retrofit installs and then gradually move into new equipment as well. 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, interactive kiosks is a super interesting market. We can easily count to 47 million, interactive kiosks as installed base. Now, I will say this, that, some of these 47 million interactive kiosks are the simpler type and probably not, our target market. But we are confident that at least half of this or say 20 to 25 million kiosks is our target market.

Some of these subsegments, like self-service kiosks and the self-checkout kiosks and so on, they show very, very interesting growth numbers and double-digit figures, and these are global averages. If you would look at certain markets, in particular in Asia and Europe, the growth of some of these types of self-service kiosks is like super-fast. Again, we can do both retrofit and new installs as for elevators. Interactive kiosk is another interesting market next to elevators. Just to show a little bit an example calculation about the addressable market, we have already explained that we have multiple application alternatives in elevators and kiosks. It's a fast-growing market with Japan and Korea leading the way.

If you just look at the example that we are showing here, it's easily calculated that our target market is or addressable market is worth more than $1.5 billion. If you would include more subsegments and so on, that number will grow. Our addressable market is a very huge one compared to our current turnover. 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 just some example calculation again, but if you think about the average gross margin, which we think is fully realistic, even in volume production of 35%, you 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. We are also encouraged by the fact that there is a large market out there and the potential is there. 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 grow first our top line and then also bottom-line results. We are building our business on three pillars, licensing, product sales, and sales of engineering services or NRE, non-recurring engineering. We see growth potential in all three.

With licensing, currently we have more than a dozen active license agreements, mainly with printer companies and automotive tier one 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 products with them, but also expand into new areas, new types of automotive applications into military and avionics and some industrial automation projects. By this, we think that at least in the mid and long term, we can grow the licensing revenues. In 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 two, three years, and this has two explanations. One, I've already addressed.

This is the large addressable market for us in elevators and kiosks. 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. That's a factor of, say, 10 or even more. The leverage from product sales on our top line results is very, very strong. We are building up a momentum now, and we are targeting to grow this business significantly in the coming 2, 3, 4 years. Also, NRE, as a consequence of our products business and our ambition to grow our licensing business, we are also exposed to opportunities to sell engineering services.

Of course, for licensing for Neonode, that's typically the requirement that we, together with our automotive tier one supplier, for instance, we develop a solution, and during that development project, we charge NRE costs to the customer. When the underlying vehicle or whatever the product is launched in mass production, we get a royalty typically per vehicle or per product sold. Here we see a vast number of opportunities to grow our business through increased sales of NRE and also some sales of prototypes and other types of concept and demonstrators. Overall, remember that our business model rests on the 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 NRE 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. I wanted to review two slides here, explain 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, meaning that 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 a 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 and installing them in these elevators and onto these kiosks. 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 kiosk OEMs who work in the aftermarket themselves. Typically, they are a little bit difficult to convince and harder to reach in this early phase that we are in still in many, many markets like in Europe and North America. The first phase is about retrofits, and typically we have to rely on partners to develop and install these solutions.

As the end customer's 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. We go to the new install 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. From there, we hope that we can really develop new solutions together with the customers, and then it's more R&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 ones that we have been used to in the last 10, 15 years.

I reduced a variant of this slide before, but the previous slide should be read together with this one. When we said before that the retrofit business is where it starts and typically rely on partner solutions. What we have done since last year is to expand our ecosystem of partners. 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.

We use them and have been using them successfully to reach mid-sized and also in some cases, larger OEM companies in these markets, or in some cases, even in certain segments. 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 mid-size companies and also to support our partners, of course. What we see, we are about to hit now is sort of the second phase in sales cycle where we have more direct engagements with the OEMs, and then it will be more work for our own salespersons to manage those accounts and to drive that business. Besides these, partner sales and direct sales, we also use online distributors like DigiKey in the U.S., China, and NEXTY in Japan.

We try to direct smaller customers to those and focus our own resources on the larger accounts where we have the bigger potential. 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, and it's to grow the awareness of 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. 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 scale from next year is to scale the business in our key markets, Japan, Korea, China, Western Europe, and America. We are also currently developing and learning more about the different application areas that we are involved in elevators and different types of kiosks. 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. This is a way, of course, for us to grow our top line and secure that Neonode comes out as a winner in the end. We are also investigating to add a second source besides our subsidiary, Pronode, to produce the TSMs.

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 business into new geographical markets and additional market segments. We are developing, looking at new hardware products and also extending our software offerings. There are also ideas for further accelerating our growth through strategic partnerships and acquisitions. 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. We fight relentlessly every day, every week to grow the business.

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 David to lead us through the Q&A session here. First, some concluding remarks. COVID-19 continues to bring on challenges for us as many other companies. Component shortages is slowing our customers down, and we see it clearly in the Q3. Both the automotive tier one suppliers that we are engaged with and the printer manufacturer customers that we have reported problems 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, or our partners couldn't go out and install the TSMs in new elevators and kiosks. In some cases, of course, overall economic uncertainty caused by the COVID pandemic and the new Delta variants and other variants coming have slowed down some decision processes. It's very clear that we have been hurt by this in the Q3, and we are still, to some extent, hurting by this in the Q4, like many other companies.

The second bullet is that the Q3 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, both new TSM opportunities and new NRE projects that we are quoting or that we have been awarded. We also have been identifying new licensing opportunities that we hope that we can capitalize on in the next few months to get new projects started and in the coming years to grow also our licensing revenues.

With the contactless touch business, where we of course focus on elevators and interactive kiosks, we are extremely well-positioned today to become a leader in this business with our TSM offerings and our general know-how, and also now with our well expanded partner network and global reach. We are well-positioned here. We are confident that we can grow this business significantly in the coming years. Because of this, and because of economic uncertainty, we have strengthened our cash position through the registered direct offering and the limited use of our at-the-market facility. We have secured the support from new interesting strategic investors in Sweden and Europe. I'm happy to say that the registered direct offering was oversubscribed, and it was a very quick and nice process for us.

By now we have the cash to finance the business growth in the coming years, actually. We are very, very optimistic for the future. With this, I thank you, and turn the floor back to David for the Q&A.

David Brunton (Head of Corporate Investor Relations)

Thank you, Urban. We'll now open the call for Q&A from our analysts. Go ahead and join the queue.

Operator (participant)

As a reminder, it is star then one to ask a question. You may withdraw your question by pressing the pound key. We will take our first question from Tyler Burmeister with Craig-Hallum. Your line is now open.

Tyler Burmeister (Equity Research Analyst)

Hey, guys. Thanks for letting us ask a couple questions here. Urban, first, you know, on the headwinds you're seeing, supply constraints and lockdowns, I was wondering if you could kind of break those out, you know, is one a bigger impact than the other? You know, to the degree you can, you know, what's the timeline of those improving? Is it Q4? Are those going to linger into next year? Any color there would be great.

Urban Forssell (CEO)

Yeah. First of all, I want to underline that a lot of the component shortages is hurting our customers, not me or directly or our production. We have secured components for our production, and we are running that normally. No issue for our own production or our own business there. We are have more of an indirect effect for these component shortages. As I'm sure many of you are aware of, in automotive, many tier one 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 than launching new products. That has slowed down some decision and launch processes, and this is hurting us in the Q3. Some of these effects are still visible here in the Q4. 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 third and Q4 last year. I think that we will see a rebound in next year. Q3 was slow.

Q4 is a little bit slower than we were hoping for when we ended the Q2. 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.

Tyler Burmeister (Equity Research Analyst)

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

Urban Forssell (CEO)

Yeah. With this customer, they have been very, very strict. Unfortunately, we are not allowed to anyhow or anywhere announce this business with mentioning their name or whatever product lines it's involved. It's one of the major elevator OEMs. The elevator industry is dominated by, say, 10 large OEMs or 20, then you have like 99.5% of the world market. 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. This started with a 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.

Then they realized that, 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. They saw an opportunity for them, and this is exactly what I tried to explain with the picture here with the sales cycle. It's very significant in the elevator segment. That's why we had the announcement in the press release the other week. This will, of course, impact our sales going forward and in the coming years. We can estimate more than one TSM per elevator on average because some elevators will have two TSMs to cover the whole control panel.

Obviously now we are working to convince other OEMs to follow suit and take after them. 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 OEM heard about us was sometime early last year. Only now they are ready and they are preparing for a launch next year. This is not uncommon with large industry corporations, and we see the same pattern also in kiosk for the large kiosk companies.

Tyler Burmeister (Equity Research Analyst)

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

Urban Forssell (CEO)

The only answer you will get is no comment. I refer to our agreement with Aequitas Technologies LLC, which we announced in an 8-K filing with SEC in 2019.

Tyler Burmeister (Equity Research Analyst)

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

Urban Forssell (CEO)

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

Tyler Burmeister (Equity Research Analyst)

Got it.

Operator (participant)

We can move to our next question. The questioner is Jesper von Koch with Redeye. Your line is now open.

Jesper von Koch (Equity Research Analyst)

Hello, gentlemen. Since the current revenue is at kind of depressed levels just before it post hockey stick acceleration, could you provide any guidance at all for 2022? Perhaps also give some comment on your illustration on slide 27 regarding like estimates.

Urban Forssell (CEO)

Yeah. 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 looking very, very promising for next year. I mean, personally, I'm really hoping and believing that we will see some kind of breakthrough in our business next year. Apparently, we have some headwinds in the Q3 especially, and to some extent, also in the Q4, which is a little bit slowing down the growth rate that we were hoping to achieve this year. The overall picture is anyway very, very bright and we are, and the team are extremely motivated to realize more of this potential in next year and the year to follow.

Personally, I think that we are on the verge of a breakthrough here, and we can start to see some interesting effects of this work that we've been doing last year and this year, clearly visible in next year.

Jesper von Koch (Equity Research Analyst)

All right. Thanks. Not regarding the large elevator deal announced, but just the elevator market as a whole, what you expect in terms of the take rate of the hall call terminals? How many TSMs do you expect per installed elevator?

Urban Forssell (CEO)

Yeah. Maybe I can answer this in the following way. Our solution is a very, very good choice for the control panels inside the elevators. Typically, there you would use 1 or 2 of our touch sensor modules per elevator, and the average being somewhere 1.5 or, I don't know, 1.3 TSMs per elevator. 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. Those buttons are referred to typically as hall call buttons, at least in American English.

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

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. 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 installation and the fitting, including the hall call terminals. It's very difficult to estimate, 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. You can have more than one TSM inside the elevator and also on the hall call buttons on each floor.

It's very, very difficult, and I shouldn't even try to guess where it is. This is an interesting twist to that elevator business that we are doing.

Jesper von Koch (Equity Research Analyst)

All right. Thanks. It seems that you have received really strong traction in the elevator segment, both toward like new installations and retrofits. Yesterday you announced like a good contract with a quick service restaurant, like the sushi chain in Japan. How do you experience the demand in the self-service kiosk in general compared to that of elevators?

Urban Forssell (CEO)

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

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 and global players are Diebold Nixdorf, NCR in the U.S., Glory in Japan, and companies like this. They are corresponding type and size of the large OEM elevator OEMs. There are hundreds, 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 self-ordering kiosks for supermarkets. Here's an overlap to the point of sales terminals and cash registers that some companies are specializing in.

Actually, you are suggesting that we have had the best traction in elevators. 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. You should just understand that the dynamics and the structure of these markets are fundamentally different, and that's why maybe the visibility is not that great. On the other hand, the customer base is much broader and gives us better stability going forward.

Jesper von Koch (Equity Research Analyst)

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

Urban Forssell (CEO)

Yeah. 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, ASICs, that we have designed and we are selling to our customers. Already today and going forward, the software portion of our offering and our portfolio will only increase in importance and breadth and depth. 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 TSM, so not the TSM itself. It's just a platform to do and to realize different functions for the end users.

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. With the MultiSensing 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 charge for adaptations through NRE projects, you license, and you take a royalty per unit, or you sell it as software as a service. This could be with automotive customers or military or industrial automation customers. Overall, the portion of Neonode's customer offerings and the portion of Neonode's revenues coming from software solutions will simply grow.

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. 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 they could be companies in our ecosystem today, where we see an opportunity to do a vertical integration and bring them on board in the Neonode team rather than being a partner to us.

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 may mean in 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. This is a further way to grow the business and increase shareholder value.

Jesper von Koch (Equity Research Analyst)

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

David Brunton (Head of Corporate Investor Relations)

Thank you, everybody, for joining us. With that, we wish everybody to have a good day and stay safe. Thank you. Bye-bye.

Operator (participant)

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