Neonode - Q4 2021

Transcript

Operator (participant)

Hello, everyone. Thank you for standing by, and welcome to Neonode's Q4 and Full Year 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session with the company's covering analysts. To ask a question, please press the star then the number one on your telephone keypad. If you would like to withdraw your question, please 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 Investor Relations. David, please go ahead and start the conference.

David Brunton (Head of Investor Relations)

Welcome, and thank you for joining us. On today's call, we will review our Q4 and full year 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, our CFO, Fredrik Nihlén, and our Director of Marketing, Alana Gordon. Fredrik will present the financial results of the company for the fourth quarter and full year 2021. Urban will comment on overall strategies, customer activities, and other market opportunities. Alana will give insights into the work we do to strengthen our brand, create demand for our products and solutions to grow our sales. Before we continue this presentation, I'd 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, guide, confidence, targets, projects, 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, uncertainty, 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 10-K, quarterly reports on 10-Q, and other reports filed by Neonode with the SEC, to which your attention is directed. Therefore, actual outcome and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or objection or obligation to update these forward-looking statements. I will now give the presentation over to Urban, who will describe the highlights of today's presentations. Urban, please go ahead.

Urban Forssell (CEO)

Thank you, Dave, and welcome to this call also from my side. Highlights of today's presentation. Like many companies, we experienced continued headwinds during the fourth quarter due to the COVID-19 pandemic. Lockdowns and travel restrictions slowed our sales and hindered our business development work. Several of our customers also had to navigate supply chain challenges due to lack of semiconductor components, which also affected our sales negatively. Some of these issues started to diminish at the end of the year, and our license revenues rebounded nicely. We also grew our sales pipeline with several new interesting opportunities in all three regions we are active in, APAC, EMEA, and Americas. We continue to navigate the challenges the pandemic brings with a focus on growing our business and work relentlessly with continuous improvements in all areas of the business to strengthen our competitiveness.

We feel we are very, very well-positioned to grow our product business and also to revitalize and grow our M&A and licensing business during 2022 and the years to come. Alana and I will return to these topics later in the presentation. Now, without further ado, I give the word to Fredrik, who will present the financial results for the fourth quarter and the full year 2021. Fredrik, please go ahead.

Fredrik Nihlén (CFO)

Thank you, Urban. You can find our fourth quarter and full year 2021 earnings release and 10-K with the details of our financial performance during the year 2021 available for 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 revenue for 2021 reached $5.8 million. That is a decrease of 3% compared to 2020. Product revenues for 2021 was $1 million, an increase of 1% compared to 2020. During the second half of 2020 and continuing into the first half of 2021, we saw a positive trend for our revenues. In the second half of 2021, we experienced a slowdown in sales, primarily due to global supply chain constraints, and more specifically, semiconductor component shortages affecting our customers within the printer and automotive markets.

The slowdown in sales was also an effect of the strict lockdowns imposed by the government in several countries where we're active. For instance, Japan, Korea, and China. On a positive note, our license revenues rebounded in the fourth quarter of 2021, leading to an increase in license revenue of 4% for full year 2021 compared to 2020. Our gross margin for products was 4% for 2021, which is a decrease from last year of 13 percentage points. The gross margins was heavily impacted by one-time effects in the fourth quarter of 2021. The one-time effects consists of write-downs of our remaining inventory of AirBar and lost revenues and extra costs due to a quality issue related to our TSM.

The quality issue is now resolved, and the relationship to the affected customers have been restored, which is proven by new purchase orders that we have received from these customers. If we look at the gross profit and gross margins only for TSM and adjust for the one-time effects, we can see a positive trend for the gross margin, with 52% in the fourth quarter of 2021. Long term, as volumes continue to increase, we will probably see a pressure on the margin, but short to medium term, we are confident that our margins in the product business will be at the levels we saw in our adjusted gross margin during 2021, that is around 40%. Operating expenses for full year 2021 increased with 8% compared to 2020.

The operating expenses in 2020 was lower because we, during 2020, got governmental support at the same time as we introduced cost measures due to the pandemic. During 2021, we have invested in marketing and product development and also hired several new competent team members. This increased our operating expenses, but these investments are strategic and will strengthen our medium and long term. These investments are fully in line with what we communicated regarding how we intend to use the net proceeds of the registered direct offering we did in October 2021. Summarizing the outcome during the fourth quarter and full year, we arrived at the following P&L.

We had revenues of $5.8 million, an operating loss of $7.1 million, and we end up with net loss of $6.5 million for full year 2021 compared to $5.6 million in 2020. Net cash used in operating activities during 2021 was $7.7 million compared to 2020 net cash from operating activities has increased to 36%. The majority of the increase comes from purchase of components to secure future production of our TSMs and increase capacity in personnel to continue delivering on the strategy and continue to create greater awareness and drive demand for contactless touch. I will now turn the call over to Urban, who will give a strategy and business update.

Urban Forssell (CEO)

Thank you, Fredrik. In the following slides, I will review some topics regarding strategy and also our business development work. This is to tie back into communication we have done in earlier earnings calls and also to give insights into what we are working on day-to-day to improve our top line and also the net results at the end. Our vision is to transform the way humans interact with machines. When Neonode developed the Neonode N1 smartphone 20 years ago, we did that by removing the buttons from the mobile phones and instead introducing user interface with a touch display. We also later helped printer manufacturers and other companies to remove buttons from their products and replace them by touch display interfaces.

Now we are doing this for kiosks and elevators by simply taking out touch from touch. That's why we are talking about contactless touch, a new way of interacting with machines. I believe this is very true to our vision and explains a little bit the backdrop to what will follow now in the next slides. Everything we do at Neonode is focused around smart, intuitive, multimodal human machine interaction solutions, such as touch, contactless touch, and gesture sensing. We are also dealing with object detection. With touch, obviously, the finger is the object that we detect. But with our technology, we can also detect other types of objects, dead objects, not fingers and hands from humans. In some years, they are also working on camera-based human analysis.

This spans sort of the technology universe that we are working on. Our two technology platforms, C4 and multi-sensing, underpins everything we do at Neonode. This picture, this heat map tries to illustrate then how our strategy is focused around contactless touch for elevators and interactive kiosks, which we have communicated, the last 18 months or so. We also worked more and more with digital signage and similar, and this is like a neighboring segment to interactive kiosks and many of our customers are actually active in both. That's why it's very natural for us to also extend the focus a little bit to digital signage. Automotive is a market segment that Neonode has been addressing for at least ten years, and we continue to see great interest there from for our technology from different customers.

This is like a heat map showing the scope and the focus of our work, and especially in our marketing and sales work. This focus is very, very clear, as you will see from my latest slides and also Alana's presentation. zForce is Neonode's advanced optical touch technology. This is a technology platform that consists of IP solutions and know-how around optics, electronics, special chips and software and algorithms. It's a true multidimensional technology platform. We have been working with this since the foundation of the company 20 years ago, and we are still refining and improving on this. We have sold over 85 million licenses of zForce to printer customers and automotive Tier one customers and other customers. Some of these customers are still our top three customers like HP, Epson, and LG.

We also have other large corporations on our customer list and further small companies that are licensing this zForce technology. zForce also underpins our touch sensor modules that we use today to grow our product business. The touch sensor modules are ideal for elevator and kiosk applications. They work well and is very suitable for both retrofits and new installs. We will show more examples of how the touch sensor modules can be used and the value they bring to customers. We talk a lot about contactless touch and why we think that is important. First of all, it's a new way of interacting with machines, and it follows the general trend of more contactless or touchless machine interaction. Voice control, face recognition that you have on your mobile phone, for instance, are other examples.

Contactless touch is in the same category of solutions that it has a growing focus in the industry and also among consumers. It offers a way to interact with machines without touching. Of course, that limits the transmission of pathogens, and it's also more hygienic in general, and it could be really convenient. With our particular flavor of contactless touch, you also preserve the familiar interface you have with touch displays and also, say, buttons in an elevator, where you simply are used to extending your finger and pressing the button for the right floor you want to go to. That behavior and that interface is preserved with our technology, but it's even more convenient because you don't have to press the button or touch the screen.

We can also work with situations where you have gloves on your hands or you can want to point or click with other objects like a stylus pen or anything. As mentioned, our touch sensor modules are commercial, off-the-shelf available standard products, easy to use, easy to integrate, and offers a great flexibility for integrators and OEM customers alike. Obviously, I like this quote. It's from Otis, the world's largest elevator OEM, with headquarters in the U.S. This is from their website, where they simply say that today, more than ever, elevator passengers prefer to avoid touching elevator fixtures and buttons as much as possible to reduce the spread of germs and viruses.

This is exactly the story we are telling and shows that, also in the U.S. and among large corporations in the U.S., like Otis, they are fully aware, and they see the demand and the sort of pull from the end customers for new ways of interacting with elevators in this case. We have more quotes and like this and other testaments that we are on the right track, and it's really encouraged us to continue to push contactless touch in our TSM business. With our TSMs, the touch sensor modules, you can basically go two ways to realize a contactless touch interface. You place our sensor module in front or above a display or a keypad, a keyboard to create what we call a parallel plane solution.

Our Touch Sensor Module then projects an invisible light screen in the infrared frequency range, so it's invisible to the human eye. It's indicated here by light stripes. If you extend your finger and interact with that two-dimensional light field, the sensor detects and positions that object very accurately and very fast. Another way to use our TSMs is with holographic displays. In those applications, the trick, which is not a trick, it's obvious, you should direct and align the Touch Sensor Module so that the interaction area overlaps the projected image that floats in midair. By using our Touch Sensor Modules, then you can make those projected images interactive. For instance, if you are showing a webpage, you can click on the links on that webpage, but only by extending your finger into midair..It's very good experience. It's actually quite cool. I will show some examples shortly. Contactless touch has many application areas. We are focusing on elevators and interactive kiosks. What are those applications? Here we show just a sample. The interactive kiosks, that's anything from coffee machines, vending machines, ATMs to information kiosks, to check-in kiosks at airports, self-checkout in supermarkets and so on. Of course, also elevators where we focus on the elevator control panels. We see more and more of these applications. With our touch sensor modules, I repeat, you can do both smart, easy retrofit solutions, and you can work with OEMs and create new equipment solutions.

I will next review three recent examples of how different companies are using our touch sensor modules to create contactless touch interfaces for their kiosks and products. First example is from Japan, where 7-Eleven now are rolling out self-checkout kiosks with holographic displays that allows the customers to scan the product they want to buy and also pay for them truly contactless. Here's a picture trying to illustrate the holographic image that's projected from the projector below and up and floating in midair. The same window projecting up also contains the scanner to scan the barcodes on the product. With this particular kiosk solution, you can then pay with a contactless with your mobile phone or a credit card without touching anything. It's very compact, and 7-Eleven is now rolling this out on a wider scale throughout Japan.

Obviously, we hope that the rollout will continue to other countries and eventually worldwide. Super nice application. I recommend if you Google Seven-Eleven Japan and holographic, you will see just a number of interesting and nice articles about this project and the rollout that's ongoing in Japan right now. Just one example of a practical application on holographic displays. Next example is from Korea. Here, a company called MarketON have developed different holographic products for elevator applications. This is the particular if you think of a floor selector in a high-rise building, using a holographic display. I believe this is like a podium that will fit in the lobby of a hotel, for instance. Before you enter into the elevator, you select the floor you want to go to with this particular product.

Next, I will show a short 11-second video where you see it in action. It's an amateur video taken by one of our salespersons, but I think you get the picture, and it's quite nice to see this in action. Here you see the user, he's actually turning the knob, but the knob is just a holographic image. If you are not standing in front of it, you don't see it. It's really convenient here to select the right floor, and it works really well. That was two examples of holographic displays. I need to go back. That didn't show. It doesn't show here. I'm sorry for that. I see it showing for you. The third example I want to review with you is from a Japanese sushi chain.

We worked with a Japanese company who developed a retrofit solution for their self-ordering kiosks. These kiosks have multiple purposes. You can reserve a table or a seat at the restaurant, you can order food and beverages, and you can also pay. Our sensor module in this case is inside the little holder you see just above the displays on these kiosks, and they have been rolled out during the fall in over 450 restaurants across Japan. This is already out there, and people are experiencing contactless touch in Japan since 3-4 months at least. We hope that we see more and more of these type of applications, retrofit and obviously holographic.

We have presented in earlier earnings calls about our partner network, and we work with a hybrid go-to-market strategy where we combine sales through partners. Here's a snapshot of our current, most important partners. At the same time, in parallel, we are approaching customers and driving sales with our own salespeople around the world. We are super happy with that hybrid approach, and some of the examples I just showed are developed and happened with help from our local partners in Japan and Korea. I also said in the third example, this is a direct customer engagement we had with a Japanese company. It shows that we are doing both, hence that's why we call it hybrid go-to-market strategy.

Especially in Japan and Korea, this has been very good and strong and helped us actually reach new customers and tap into those markets in a way that we never could have done as a Western company. Especially the last couple of years with all the lockdowns and restrictions for traveling and so on in these countries, we would never be where we are today without our partners. We have also recently added Sabre. I want to highlight Sabre from Singapore. Super good value-added retailer in Singapore with a great network both in Singapore and neighboring countries and Taiwan. EIL is from Hong Kong. Similarly in Hong Kong and China, they are very strong and with a good network, and also representing other manufacturers in China.

They help us penetrate the Chinese market. In Europe, I wanna mention MZ Technologie in France, a very active company helping us to grow our business in Europe and especially in France, with different type of kiosk applications underway here, and they're looking very, very promising. The value-added resellers and distributors and other partners, they not only help us drive sales, but they also do a lot of promotion, both online and in physical shows, as Alana will come back to, and it's really a win-win. They are doing this to promote their business and grow their business, and at the same time we follow along. Obviously, if they win more businesses in their local markets, we are happy and we win too.

We see a lot of traffic to our website through the work that our partners are doing and vice versa. It's really a win-win. They help us increase awareness for our solutions and drive demand, which is very critical for us when it comes to contactless touch, which is a new type of solution, and they need to push and show how it can be done and different examples like the ones I showed before help of course. A lot of these type of demonstrators and product launches are being developed and launched by our partners in different local countries. Switching to MultiSensing. Remember, this is our second technology platform next to zForce.

This is a software-only platform where we have developed advanced AI algorithms to detect and track people in video streams from cameras. We do camera-based scene analysis, and the focus is automotive applications for driver monitoring and in-cabin monitoring or occupancy monitoring. We also look at applications in retail for analytics functions where we see a growing interest to do smart advertisements in real time inside stores depending on people flow, people mood, and the customer profiles that we can scan. This is super interesting as well. With this platform, we have another way of growing our NRE and licensing business, and it's looking quite interesting going forward. Also, to combine this, I must say, with our touch and gesture sensing technology, zForce. For instance, in smart kiosk application and smart digital signage applications.

Our business model rests on three pillars, licensing, product sales, and NRE. NRE, non-recurring engineering. We have good chances of growing all three in 2022 and the coming years, and we are hard at work in making this happen. It is also looking quite promising, and we feel encouraged by the progress we are making every quarter. NRE supports our licensing business because typically licensing is, for instance, look at automotive applications. Once we have secured a business, it starts with a typically application development project during 2-3 years, where we support our customers to develop their features and their applications. Could be both hardware and software design and testing that we help them with. For this, we can earn actually quite substantial NRE revenues.

NRE sometimes also is possible to do with our TSM or Touch Sensor Module business to help them create software solutions and other applications or adapt whatever products that the touch sensor module should be fitted into. The bigger potential we see still in growing the products revenues now because of COVID-19 and other issues during the second half of last year, we saw like a move sideways on the products sales. We still believe that we have a great chance to, starting this year, to significantly grow that business. With a higher average sales price for our touch sensor modules compared to a typical royalty we get from the licensed technology, we think that the biggest growth potential this year and the coming three, four years is with the products business still.

We are aiming very, very high as the diagram on the right indicates. We are also happy and working hard to see that our licensing business is about to get some new life. Our existing customers rebounded nicely and actually sold more products in the fourth quarter. Now, of course, with the crisis in Ukraine and other things happening in the world, we have to see if we are having new issues because of that. We saw a nice rebound, and more importantly for us working in here at Neonode is that we have a huge interest today in our technology offerings from new customers, both automotive and from other industries. That involves both object detection, gesture sensing, and driver monitoring, for instance.

That's what we are working on, and regarding increase in the royalty revenues, it's probably some years out, but in the meantime, we can earn NRE revenues. It's a good combination there. We are typically bound by very, very strict secrecy agreements or NDA, so we can't disclose any details about our customers and their projects and the launches. Anyway, to give you some insight and comfort in the work we're doing to develop and grow our business, I'm sharing here a snapshot of our current sales pipeline. As you can see from the summary in the left column, we have actually quite a lot of opportunities ongoing. In elevators, for instance, we work with several integration and solution providers worldwide.

They are typically then creating retrofit solutions and offering them both to real estate companies and service companies, and you know, sometimes to OEM elevator OEMs. We also work with several control panel OEMs, for instance, MAD Elevator in Canada and Newhurst in the U.K., and our partner Finetek in Korea is also in that business. These are three of the top 10 control panel OEMs in the world, and they have already heavily invested in and developed several products that use our touch sensor modules. Also today, we are engaged with several of the top 10 elevator OEMs, and of course working here to develop solutions with them and launch them in the market, and it's underway.

With kiosks, we have an even broader portfolio of customers and opportunities we are working on, and that's also due to the fact that kiosk industry is much more fragmented than elevators. But I'm glad to say that we are now with kiosks more close to several of the large kiosk OEMs in Japan and Korea and also in Europe and U.S. This is a springboard for us to significantly grow our sales volumes in the years to come. Some of these OEMs are targeting to launch both retrofit solutions for their own kiosks and also do new equipment solutions. That's a double tap opportunity with some of these.

ODMs, I will mention this, for instance, in North America and also in Southeast Asia, we have direct engagements or indirect via partners with some major ODMs that are developing solutions integrating our touch sensor modules into different types of kiosk products. Regarding NRE and licensing, if you look to the right, automotive stands out as still one of the most important segments that we should work in for Neonode, and we currently have multiple engagements with OEMs and tier ones. For instance, related to head-up display obstruction detection, which is a very interesting new area that we have started to work on since mid last year. Driver monitoring, we talked about before, and we still are working, and we hope to be able to announce some news there shortly.

We see quite big interest in our gesture sensing solutions, which is now being sought after by more and more customers. We also have other licensing and NRE opportunities with printer OEMs, avionics OEMs, even some retail companies that want to license this technology. Overall, when we say that our sales pipeline is strengthening quarter by quarter, we really feel that, and we have numbers to prove it. We will see growing sales as a result of this from this year and into the following years. To grow further, of course, we are not resting here. We are continuing to invest into marketing and sales. Again, Alana will share some insights into that. We continue to expand our partner network.

For instance, in Germany and the DACH countries, we are looking for some additional partners. We are fine-tuning how we work with our partners. We are trying to scale our business in the key markets in Japan, Korea. We are increasing the focus now since mid last year on NRE and licensing opportunities, for instance, in automotive and military. Also in parallel to just growing the current sales with the current products, we are developing new variants and new software. In January, February timeframe, we, for instance, released a totally new software platform we call the Touch Sensor Module Firmware 2.0. Some of you have seen the announcements, and there's a nice video that you can check, and you find it on our website and in social media. Please have a look.

With that, as to my final slide today, I will turn the call over to Alana, who will share some insights into our marketing.

Alana Gordon (Director of Marketing)

Thank you so much, Urban. It's a pleasure to be here today. Urban has invited me here today just to give a bit of insight into the work that we've been doing here in the marketing team at Neonode. In particular, the work we're doing to position Neonode and also to develop the brand, but more specifically, to talk about the work that we're doing to help build the early-stage sales pipeline. Behind the scenes, we've now set up a more strategic communication framework that we're working with. This has been based on the recent successes that we've had and also where we see, future growth opportunities. It is in line with our corporate strategy, of course, so we will continue to focus on our defined application areas, which is, of course, elevators and kiosks.

Now we will have more direct connection with our targeted segments. You can see these in the top line on the slide, mainly aviation, retail, hospitality, and also automotive. This framework has allowed us to start building a much stronger brand reputation within these sectors, and it's also allowed us to have a much more concentrated communication towards our target audiences. With this framework, we also are able to be more calculated when it comes to where and to whom we distribute our content. This allows us to get the best possible engagement from our prospective customers. Today, I'll just give you a brief insight into the two sectors that are highlighted in green, aviation and automotive, just to shed some light on where we see some success with this approach. Our lead times can be quite long.

This journey that you see on the slide here started back in August last year. Basically, what we started to do was position Neonode as the go-to partner for airport solutions. We started to create quite a lot of content pieces and advertising, showcasing our knowledge and expertise within this area. We clearly focused on kiosks, of course, but we also expanded into other opportunity areas within the aviation sector, for example, smart trolleys and security improvements. By focusing on the entire sector, we were also able to expand even further and then talk about the entire airport experience within itself. For example, talking about how we can improve the retail and restaurant experience within the terminals using contactless touch.

As mentioned, this work has been going on since August last year, and at the beginning of this year, we shifted our focus a little bit further down the customer journey and worked more actively with lead generation. As you can see on this slide, we started to change our focus when we came to content production, and we started publishing evidential examples of our success. This just recently has now resulted in us receiving inbound leads from aviation customers, which is a really fantastic result. This quarter, we're trying the same journey for automotive. As Urban pointed out, this is a very important sector for Neonode. We have started to promote our credibility within this sector. We have ten years of history, so we have been promoting and talking about our smart steering wheel solutions and also touchscreen solutions for entertainment screens.

Soon, we'll start focusing more on the lead generations, and we will start publishing, and pushing content and advertising for new opportunities that we see within this sector. For example, with the new in-cabin monitoring legislation, we see a great opportunity for helping the industry to comply with these new safety regulations using our technology. Also, as Urban mentioned with object detection, we also see an excellent opportunity for head-up displays. With this publication and the monitoring tools that we now have in place, we already see a notable increase in visits to our website from automotive customers. Early indications show that we're heading in the right direction with this particular approach. My last slide is just to talk about that it's not just digital marketing that we're investing in, we're also investing in brand awareness in the real world.

We're very happy that the restrictions have started lifting around the world. This slide is just a very few snapshots of our team out there in the real world, raising our brand awareness and building relationships with our prospective customers and also our partners. In the photos, you can see some pictures from the Self-Service Innovation Summit in America and also the Transports Publics event in France. With that said, I will hand it back over to you, Urban. Thank you.

Urban Forssell (CEO)

Thank you. This brings us close to the end of our presentation today. I will just round off by some sharing some concluding remarks. Our TSM sales were slow during the fourth quarter, but our license revenues rebounded and grew slightly during the full year 2022 compared to 2020. As a result, the total full-year revenues 2021 were similar to the full-year revenues 2020. Obviously, we are not satisfied with that. We are working here to grow the business. The pandemic continues to bring on challenges for our sales and business development work. During the fourth quarter, we nevertheless strengthened our sales pipeline and found several new interesting opportunities, both touch sensor module opportunities with elevator and kiosk customers and interesting NRE and licensing opportunities with new customers in both automotive but also some other segments.

During 2021 and the first month of 2022, we have strengthened our team with several new competent persons and improved on our product platforms. We've also invested in marketing and strengthened our ecosystems of value-added resellers and other partners. Through these investments, we are well-positioned and prepared to capitalize on the growing interest for our touch sensor modules and our two technology platforms, zForce and MultiSensing. We are eager to take on the rest of 2022 and the following years. With that, over to you, Dave, and Q&A.

David Brunton (Head of Investor Relations)

Thanks, Urban. I'll now open the call for Q&A from our analysts. If you have any questions, please, I think, you hit star one or something to ask a question. Thank you.

Operator (participant)

At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. We will take our first question from Jesper von Koch with Redeye. Your line is open.

Jesper von Koch (Equity Research Analyst)

Hi, guys. In Q3, you talked about component shortages being dampening your licensing sales. Now you say that the supply and demand situation is more balanced. Would you say that the current revenues from printers and automotive is at more normalized levels?

Urban Forssell (CEO)

Yes. If you asked me, certainly if you asked me three weeks ago, I would answer like this. We saw actually a strong rebound, and it shows to me at least that the underlying market has like a stable nature and the demand for printers and automotive is like on a stable level, where it was a little bit held back in the third quarter due to lack of semiconductor components and other issues for our customers. It then rebounded nicely in the fourth quarter, and actually the full year licensing revenues were a little bit up compared to the year before. Yes, it's stable. Now, with the Ukraine crisis and the general economic downturn that we can expect from this, we have to see. Underlying demand is stable.

That's my feeling at least.

Jesper von Koch (Equity Research Analyst)

All right. Thanks. You continue to be optimistic about your driver and in-cabin monitoring solutions, but have so far not announced any design wins there. Could you talk a little bit about the things that you see that make you optimistic?

Urban Forssell (CEO)

Yeah. We continue to work on this. We are a small team, but we have some good relationships mainly with companies here in Europe that we are exploiting. We think that on our scale that we can actually significantly grow this business and that will help us actually grow both our top line and our bottom line in the coming years. We continue to work on this. We are fully aware that we have competition and for many of the big programs they are already nominated and won by competition. We still see several opportunities actually, and this is certainly not a mature market.

Some OEMs have and also tier ones are telling us that they are looking for solutions that have more the properties that we can offer. Limited footprint, very fast deployment and very controlled development cycles. We use extensively simulated data and also our algorithms are tuned and packaged in a very, very practical and smart format that supports efficient and controlled development of new features. We are also promoting this, as I mentioned in the presentation, to retail customers and exploring different use cases here that are quite interesting, where we see a lot of dynamic advertisements and smart kiosk, smart signage applications where our technology fits very, very well also.

Jesper von Koch (Equity Research Analyst)

Okay, thanks. In your slide with the sales pipelines, sorry, the sales pipeline of licensing opportunities, you didn't show any military opportunities. I was wondering, should this be interpreted as if the previously announced large military customer already being a customer or that this opportunity has more or less been lost?

Urban Forssell (CEO)

I will not comment on this. Actually, most of the customers that we are targeting here in this space, we call it military and avionics. I will say that most of the companies are within avionics, and they do both military and civilian applications. That could be cockpit displays and other types of systems that sit in the cockpit that the pilots operate. It could also be for airlines, you know, civilian aircraft, for the crew in the cabin and also in some cases for the passengers. Indeed, military avionics is still within scope and we still have several opportunities there.

Here, if you think it's a long lead time in automotive, I can tell you that the lead times in this space with military and avionics customers, it's much, much longer. We are optimistic that in the medium long term, we can grow this, and we still have this customer you're referring to that we did some projects with before and still one of our customers, and we continue to have a close relationship with them.

Jesper von Koch (Equity Research Analyst)

All right, good. As you mentioned in the presentation, we just the other day announced the partnership with Seven-Eleven Japan. Could you talk about the current status on that project and the potential and also the timeframe that you see for this customer?

Urban Forssell (CEO)

Yeah. I must say that we have here supported actually through NEXTY, our distributor and partner in Japan, together with six other companies who have developed these kiosks and are launching them on behalf of Seven-Eleven Japan. Started out small. Right now they are installing these kiosks in maybe a few hundred kiosks in different cities in Japan. What we feel is that the customers, they like it, and also Seven-Eleven has commented also publicly very positively about this pilot and the next step. The potential here, for instance, with Seven-Eleven Japan is something like 20,000 convenience stores throughout Japan, and they may have multiple self-checkout kiosks. It's a sizable opportunity just with Seven-Eleven Japan.

Of course, 7-Eleven is a global chain, and we hope to expand. I can say that some of the other opportunities we have with self-checkout terminals in Japan are with competitors of 7-Eleven having similar numbers of stores with each multiple self-checkout terminals. Self-checkout terminals with holographic or with other parallel plane approach is a major opportunity for Neonode worldwide. We hope that this project with 7-Eleven and the publicity it generates will then stimulate others both in Japan and the rest of Asia and actually the rest of the world. There's a nice pickup of our press release and also other announcements and articles being written about this launch.

This is, yes, a way for us to grow awareness and push things with Alana and her team and also with our partners and their work in this area.

Jesper von Koch (Equity Research Analyst)

Good. You mentioned some, but are there any other customers whose progress you would like to highlight, like, especially much, for the coming quarters and so on?

Urban Forssell (CEO)

Yeah, we have built up a good momentum, and I must say that I can't disclose any customer names at this point. For instance, in Japan, we are actually engaged with four or five of the largest kiosk companies and also several elevator manufacturers, and the same in Korea and other markets that we see. We have started now seriously to penetrate the OEM customer base. Some of them are, as I mentioned during the presentation, they are developing in parallel both retrofit solutions for their kiosks and elevators, but also new solutions for new equipment. That's a major breakthrough.

We are now into that phase when the big players they see a demand, and they see an opportunity for them to launch new features, new products on the market, and that will certainly help us grow the sales volumes going forward. I'm also super happy about our relationship with MC in France, and they have some very interesting projects underway, and we hope to be able to announce some of this in France and Europe very soon. Also in the U.S., there are some major opportunities with contract manufacturers. We also have a special relationship with a company called Holo Industries in California, who also design and sell holographic displays for different types of applications. Could be point of sales, could be hospitality applications.

Some of their opportunities that they are pushing are also very, very interesting. There's actually quite a lot of things brewing here, and we hope that we can share more news about this, shortly actually.

Jesper von Koch (Equity Research Analyst)

Okay, thanks. About the elevator OEMs and your work towards penetrating that space, what do they have any projections about, like, what they're seeing in terms of like penetration rates of contactless touch elevators going forward? Do they say anything?

Urban Forssell (CEO)

Yeah. Everyone we talk to is of course having their own opinion. But we are working here to create awareness for Neonode and our particular solutions, and also to create demand for contactless touch solutions in general. That's now happening, as this quote I shared from Otis proves. We can also go, you can go into almost any of the major OEMs' websites and check for clean mobility solutions and so on. They are now actively promoting this and talking about this in a similar way as Otis is doing. It's like a snowball effect. It starts out very, very small and slow, but we are feeling that the ball is getting bigger and bigger and picking up speed. We are trying to push this every way we can.

Elevator manufacturers, they belong to the category of big industry companies. They are not the fastest movers. Of course, when they develop and launch something, it must be also well tested and proven, and it's a lot of things to it. So some of the engagements, we are actually almost more than a year in development projects, and it still is, like, ongoing. The bigger the companies get, the longer the sales and development cycle also gets. So that's why I talk about the snowball effect, and we hope and we actually think we will see then this growing faster and faster and picking up speed during this year and into the following years.

Jesper von Koch (Equity Research Analyst)

Okay, good. Last, perhaps, question for Fredrik about OpEx, which was about 10% higher in Q4 than in Q3. What is the reason behind this, and do you see this level as more sustainable?

Fredrik Nihlén (CFO)

Yeah, I think we have some one-time effects in Q4 related to our production seasons and people there, and we will be more stable in future.

Jesper von Koch (Equity Research Analyst)

Okay. Both COGS and OpEx was affected by the quality issue?

Fredrik Nihlén (CFO)

Yeah.

Jesper von Koch (Equity Research Analyst)

Okay, good. Great. Thank you very much. That's all for me.

Operator (participant)

We will take our next question from Walter Lingenheim with Pareto Securities.

Walter Lingenheim (Analyst)

Thank you, and thanks for interesting presentation. I was wondering if you're able to provide any update on the agreement that you announced during the fall with a major elevator OEM. I think it was stated in the press release that you expected the rollout to start this year. Has it started yet, or when do you expect that to kick off?

Urban Forssell (CEO)

Yeah, that's an ongoing relationship, and their rollout has started. Also in that case, I would say I will use the metaphor of a snowball effect. Everything was developed, tested, and approved like mid last year, and they then decided to go ahead with a launch. They are proceeding as far as we know, and we have asked them, can we please share some information with the other customers and investors? They said no. They are very keen on controlling how this is now presented to the market and launched. Those who know, they have been able to see their solutions in actually the national elevator show, and in some limited marketing so far. We expect that it will grow more.

Recently we heard with the same customer that they are quite satisfied with the technical solutions and the designs, and they are broadening this now to also offer this as a retrofit option. Their new OEM solution, they will also start offering the retrofit for their existing customers. Actually that looks quite promising, and that can grow. When this is more openly marketed and announced, I think it will increase the pressure on others to follow. I think it's natural that we will see then a pickup of interest from other customers when this is more publicly announced.

Walter Lingenheim (Analyst)

Yeah. Got it. More general question on product sales. As you mentioned, you were negatively impacted by lockdowns during the second half of last year. Now this year, I mean, the pandemic situation has improved. What effect have you seen so far in 2022 on product sales of, I mean, removal of lockdowns and so on?

Urban Forssell (CEO)

We are actually quite happy now to see that after two years of very strict lockdowns and not being able to visit and meet with customers face to face, we have now in Europe and in the U.S. several meetings already this year, and we are planning more meetings and also some trade shows we will go to in Europe and in North America. Japan is starting to open up just a little bit, and we were planning to go there ASAP, but then with the Ukraine crisis, all the airspace is locked down and it's been virtually impossible to travel from Europe to Asia these days. Overall, things are going back more to normal. Even the Ukraine crisis, I think people will find a way that they can, for instance, fly from Sweden to Japan eventually.

It's really helping us. That's why partly we are very optimistic to grow and find new NRE and licensing customers from this year. This is certainly helping now that the restrictions are being lifted.

Walter Lingenheim (Analyst)

Yeah. Thank you. Final question, in terms of geographical sales, I mean, in the product sales segment, you have had the most sales in Asia so far, in terms of touch sensor modules. Do you expect this to continue? I mean, if you look a few years ahead or will you see, I mean, if maybe three years ahead, what kind of split do you expect in terms of geographical sales?

Urban Forssell (CEO)

We think that East Asia with Japan, Korea, Greater China, and also countries like Singapore, Malaysia, there's a lot of people living there, and they are quite rich countries, and they have a lot of IT systems and kiosks and similar. Probably they will continue to lead the way for the rest of the world. Actually, we think that we have sizable market opportunities also in Western Europe and North America. I don't know. 40, 30, something like this, a long-term relationship. One way to look at it is we have to see where are the biggest IT markets overall. Then usually U.S., Western Europe, China, Japan, Korea, India, maybe, these are the top markets.

That's why we also have presence there, and we are developing partnerships in those regions. So far, and also this year, next year, we think that Japan, Korea will lead the way for other countries. Right now, if I'm taking a bet, I would also bet a little bit on France, actually. We have some interesting opportunities coming up in France and some good customers there. Stay tuned there for news regarding new businesses in France.

Walter Lingenheim (Analyst)

Okay. Sounds good. Thank you. That was all for me.

Operator (participant)

We will take our next question from Christian Schwab with Craig-Hallum. Your line is open.

Tyler Anderson (Analyst)

Hi, guys. This is Tyler on behalf of Christian. Thanks for letting us ask a couple questions. First question, Urban, a follow-up, and I'm sorry if I missed it. On the 7-Eleven opportunity in Japan, you know, as far as a timeline for ramp, how should we be thinking about that, you know, going from this kinda pilot level to more units? Is that a, you know, next couple quarters kinda thing? Is this a multi-year kinda ramp? How should we be thinking about the timeline of that?

Urban Forssell (CEO)

No. Obviously, I don't know. You have to ask 7-Eleven. My impression is that they really wanna ramp this up during the year. They're so far very happy with the initial tests they've done, and they are pushing our partners in Japan. I mentioned it's actually a consortium of six, seven companies working together here. They are getting push from 7-Eleven to launch this now. I would say that 12 months should be the timeframe that we should look at for that nationwide rollout with Seven-Eleven Japan.

Tyler Anderson (Analyst)

That's perfect. I appreciate the color. You know, could you maybe kind of, you know, comparatively size some of these opportunities? It sounds like the 7-Eleven opportunity, 20,000 stores, you know, is probably, you know, maybe a more significant opportunity than the sushi restaurant. You know, could you kind of, you know, maybe rank order or comparatively size the different opportunities across kiosks as well as your elevator win?

Urban Forssell (CEO)

I will not give you any detailed numbers or something, but obviously we believe very, very strongly in several of the different sub-segments in the interactive kiosk space. Retail and point-of-sale self-checkout super interesting. As you have already realized, there are actually quite a lot of these supermarkets and minimarts and convenience stores. If you then multiply it by a certain number of self-checkout terminals per store, and you can say, "Okay, that's gonna be a good opportunity." For instance, in Japan, we already have solutions developed for some competitors of 7-Eleven, and we hope that 7-Eleven's launch will push them to start to launch as well. That's the snowball effect and the water lily effect that we are hoping for.

Transportation kiosks or aviation, as Alana called it in her slides, there are, besides airports, you know, subway stations, train stations, bus stations, and similar, where we can do ticketing, check-in, baggage drop, information kiosks and so on. That's another sizable opportunity, I would say that, where we have a large market. We have both installed base in and around airports and bus stations and so on. The growth rate for self-service kiosks in those airports and train stations is just exploding if you look on a global scale. Restaurants. Anything from fast food restaurants to coffee shops and, in hospitality, we also include then hotels and check-in, check-out terminals in hotels, which is more common that you have to do yourself.

We wanna remove all the employees in the lobby and let you do all the work. Elevators, retail kiosks, transportation kiosks, and restaurant kiosks are probably the top four segments if you're looking at within elevators and interactive kiosks.

Tyler Anderson (Analyst)

That's great. I appreciate the color. All right, that's all for us. Thanks, everyone.

Operator (participant)

There are no further questions on the line at this time. I will turn the program back over to our presenters for any additional or closing remarks.

David Brunton (Head of Investor Relations)

We wanna thank you all for joining us for our call today. I also wanna let you know that if you're in Stockholm on March 22 and interested in any kind of follow-up to this call, you are invited to come to the Neonode offices and meet with Urban, Fredrik, and Alana and other members of the Neonode team. Details will be posted on our website at neonode.com and on social media during the next few days. If you're in town, you know, swing on by, and you can take a look at what's happening at the headquarters and all kinds of stuff. That ends the call today. Have a very good day. Thank you.

Operator (participant)

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