Neonode delivered a report that was far better than our low-set expectations. Product sales quadrupled from last year’s low level, and license sales was solid. The outlook for 2023 also appeared optimistic, and the company reiterated that it expects to exceed an annual turnover of USD10m in a few years. We sense that product sales will continue to ramp up in 2023, and we also believe one or a few significant design wins in automotive could arrive in the next couple of quarters.

Total revenue was USD1.87m, +32% Y/Y. This was well above our estimates of USD1.35m. Product sales delivered a record-strong quarter, but license sales was also ahead of our estimates. Total EBIT was USD -1.26m – worse than our estimates of USD -1.06m. A write-down on inventory explains much of the deviation and slightly higher OPEX than expected.

Sales of touch-sensor modules came in at USD0.48m, almost double our estimates of USD0.25m. The beat is obviously strong but should be seen in light of our low expectations. Sales from several customers contributed to positive sales development.

We anticipate this sales level to be further accelerated in 2023. However, product sales is likely to remain lumpy and hard to predict in the short term. In the conference call, management reiterated that it aims for an annual turnover exceeding USD10m in just a few years.

License sales came in at USD1.37m, compared to our estimates of USD1.10m. Better component supply for customers and a solid demand explain the strong figure. We anticipate this to be a reasonable quarterly level also for 2023.

Within license sales, Neonode almost only talks about the automotive industry rather than including military and avionics. Our previous hopes of a large military customer almost being a closed deal have now practically diminished.

Within automotive, however, the management of Neonode appeared very confident. The company states that it expects a good chance of overtaking a contract in driver monitoring systems (DMS) from a competitor.

Neonode also appeared eager to talk about its progress in discussions with tier 1s and OEMs about its head-up display (HUD) solution. This solution implies creating a holographic display instead of cars' traditional physical instrument panel.

The average selling price (ASP) per car for DMS and HUD is likely around USD3 per car. This estimate is partly from Neonode saying that ASP for HUD is “a few dollars.” Regarding ASP for DMS, we know that the market leaders in DMS have ASPs around USD6, and we estimate Neonode is pricing itself considerably lower.

Regarding TAM for HUD, this appears to be an offering for the premium segment. Annual production of cars is just more than 80m (excl. light and heavy trucks), and we think the premium segment makes up 15-20% of this. This would imply a TAM of cUSD45m per year for the HUD offering. The procurements appear to be ongoing and in the final phases for premium actors. This typically implies European premium OEMs like Audi, Mercedes, BMW, etc.

Regarding DMS, 40% of all new vehicles sold (incl. light and heavy trucks) are expected to include DMS in 2026 (from c1% in 2022). This makes the TAM much bigger, but we think market leaders Smart Eye and Seeing Machines will grab at least 80% of this.

OPEX came in at USD2.5m, vs Redeye’s estimates of USD2.3m. Looking ahead, Neonode is expanding its sales and marketing team. Hence, we expect OPEX to increase somewhat going forward.

Per the end of the quarter, Neonode’s cash level stood at USD14.8m, up from USD11.3m in last quarter. Between October and January, the company used its ATM to sell c1.8m shares, increasing share count by c13%, at an average share price of cUSD7.2. This brought in a total of USD12.5m after costs (USD7.9m added in January). We estimate the resulting cash balance (incl. net accounts receivables/payables) per the end of January to be cUSD22m - making Neonode optimistic about reaching breakeven without needing more cash. However, some optimistic scenarios can also imply investments that would imply more money needed.

Since our last update, nothing in particular has happened – as expected. The big question at the moment is whether judge Albright will order the lawsuit to “stay” (i.e., be put on hold) or not before a) appeal against the decision to approve patent 879 becomes decided, and b) the reconsideration process for patent 993 after the appeal was approved. Should judge Albright order not to stay, the time to the actual trial will be shorter, and it would also be a positive sign for Neonode’s chances of monetizing its patents.

Regarding our estimates, we choose to reduce our estimated value per produced unit, while we increase the probability of a successful outcome in the lawsuit. The net effect reduces our Base Case and Bull Case.

Considering that the license agreement with Samsung concerned two patents and not one, we estimate that half of the value was attributable to the other patent. This makes us halve our estimated value per unit.

We have previously used the sum per unit from the license agreement as a proxy for the value attributable to patent 879. However, considering that the license agreement covered both the “zForce” patent and the “Neon” patent (patent 879), it is more reasonable to split the value 50/50 between these two. Effectively, we change our estimated royalty per unit (incl. treble damage) to USD3.2 for Samsung and USD2.1 for Apple.

Having listened to experts in the field, we grasp that surviving IPR based on facts (what Neonode has done) implies a very high probability of reaching a settlement (as high as 70%, we understand). While we do not want to be as optimistic as that, we choose to increase our estimated probability of a successful outcome from 30% to 50%, out of which 40 percentage points represent settlement, and the remaining 10 percentage points trial win.

We raise our Bear Case (due to raised cash at a higher share price) while reducing our Base Case and Bull Cases from lower potential in the lawsuit and the dilution of 13%.

Bear Case is USD1.5 (0.8), Base Case is USD22.7 (28), and Bull Case is USD72 (149).

However, we think the above picture points out a way too narrow picture of the valuation. Thus, to clarify the different outcomes in Base, Bear and Bull case for both operations and the lawsuit, we use the following matrix: This should highlight that even if the lawsuit is lost, Base and Bull cases can still happen for operations.