Neonode Inc., a leading provider of advanced optical sensing solutions, has undergone a strategic transformation that positions the company for renewed growth. After a challenging 2023 marked by declining revenues, the company has made the bold decision to focus solely on its technology licensing business, phasing out its product sales operations.

Financials

The company's 2023 financial results reflect the difficulties it faced. Annual revenue declined 22% to $4.4 million, with license fees decreasing 15% to $3.8 million and product revenues falling 38% to $0.6 million. The net loss for the year widened to $10.1 million, compared to $4.9 million in 2022. Operating cash flow was negative $6.3 million, a 7% improvement over the prior year. Free cash flow was negative $6.4 million.

Quarterly results for Q1 2024 showed continued pressure, with total revenues of $1.0 million, down 19.1% year-over-year. License fees declined 32.7% to $0.8 million, while product revenues increased 96.1% to $0.2 million and non-recurring engineering revenues grew to $41,000 from $3,000. The net loss for the quarter was $2.1 million, compared to $1.4 million in the prior-year period.

Despite these near-term challenges, Neonode's leadership has charted a new course that leverages the company's core strengths in technology licensing. The decision to phase out the product sales business and focus solely on licensing represents a strategic shift that management believes will unlock greater value.

Business Overview

Neonode operates in two key application areas: Human Machine Interaction (HMI) and Machine Perception. The company's HMI solutions, based on its patented zForce technology platform, enable contactless touch, touch, and gesture sensing capabilities. Its Machine Perception solutions, built on the MultiSensing platform, utilize advanced machine learning algorithms to detect and track persons and objects in video streams.

Historically, Neonode has pursued a dual-pronged strategy, offering both technology licensing and product sales. The licensing business has targeted customers in the printer and automotive sectors, while the product sales business has focused on customers in the elevator, interactive kiosk, and industrial automation markets.

The Strategic Shift

In December 2023, Neonode announced a sharpened strategy that will see the company focus exclusively on technology and software licensing. This strategic pivot represents a significant organizational simplification, as the company will wind down its product sales operations and manufacturing facility.

The rationale behind this move is twofold. First, the licensing business aligns better with Neonode's core competencies and "licensing DNA," which the company has honed over more than 20 years. Second, the licensing model offers greater scalability and profitability potential compared to the product sales business, which has faced weakening demand.

Going forward, Neonode will operate in two primary business areas: IT & Industrial and Automotive. In IT & Industrial, the company will target sectors such as printers, interactive kiosks, medical technology, and industrial automation. In Automotive, the focus will be on commercial vehicles, light vehicles, and off-highway vehicles.

Automotive Momentum

One of the key drivers of Neonode's renewed optimism is the company's recent breakthrough in the automotive market. In Q4 2023, the company announced a significant design win for its driver monitoring software with a leading commercial vehicle manufacturer. This project, which will see Neonode serve as a direct Tier 1 software supplier, is expected to generate both NRE (non-recurring engineering) revenues and ongoing per-unit royalties as the software is deployed across the customer's various vehicle brands and models.

This design win has sparked renewed interest from other automotive OEMs and Tier 1 suppliers, who are now actively engaging with Neonode to explore opportunities for its driver monitoring, head-up display obstruction detection, and human-machine interface solutions. The company's long-standing experience and track record of having its technology deployed in over 8 million vehicles have bolstered its credibility in the automotive sector.

Licensing Opportunities

Beyond the automotive market, Neonode is also seeing promising licensing opportunities in its IT & Industrial business. The company's decision to phase out its product sales operations has opened the door for several of its former TSM (Touch Sensor Module) customers and value-added resellers to explore licensing the underlying technology. Neonode is currently in negotiations with these partners, aiming to secure licensing agreements that will allow them to produce the sensor modules themselves.

This shift to a licensing-focused model is expected to simplify Neonode's operations, reduce complexity, and enable the company to better allocate its resources towards the most promising opportunities. The company believes this strategic move will unlock greater profitability, as the licensing business typically carries higher gross margins compared to the product sales business.

Liquidity

As of March 31, 2024, Neonode had $14.3 million in cash and cash equivalents, compared to $16.2 million at the end of 2023. The company's working capital stood at $14.7 million, down from $16.8 million at the end of the prior year.

While the company incurred a net loss of $2.1 million in Q1 2024, management has stated that the current cash position and operating plan are sufficient to alleviate concerns about Neonode's ability to continue as a going concern. The company's focus on the higher-margin licensing business is expected to improve its financial performance going forward.

Outlook

Neonode's sharpened focus on technology licensing, combined with the momentum in its automotive business and growing interest from IT & Industrial customers, presents a promising outlook for the company. Management has expressed confidence in the potential to double the company's revenue several times over the coming years, while also targeting significant improvements in gross margins as the licensing model takes hold.

Conclusion

The strategic shift away from the product sales business, while necessary, has come at a cost, as evidenced by the company's 2023 financial results. However, Neonode's leadership believes this bold move will unlock greater value and position the company for sustainable, profitable growth in the years ahead.

Investors should closely monitor Neonode's progress in securing new licensing agreements, the ramp-up of its automotive design win, and the company's ability to capitalize on the growing interest in its technology across both the IT & Industrial and Automotive sectors. With a simplified operating model and a renewed focus on its core strengths, Neonode appears poised to embark on a new chapter of growth and value creation.