Good morning. My name is Yoni, and I will be your conference operator today. At this time, I would like to welcome everyone to Valens Semiconductor's First Quarter 2022 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode. Opening remarks by Valens Semiconductor management will be followed by a question-and-answer session. I will now turn the call over to Daphna Golden, Vice President of Industrial Relations for Valens Semiconductor. Please go ahead.

Thank you, and welcome everyone to Valens Semiconductor's first quarter 2022 earnings call. With me today are Gideon Ben-Zvi, Chief Executive Officer; and Dror Heldenberg, Chief Financial Officer. Earlier today we issued a press release that is available on the Investor Relations section of our website under investors.valens.com. As a reminder, today's earnings call may include forward-looking statements and projections, which do not guarantee future events or performance. These statements are subject to the Safe Harbor language in today's press release. Please refer to our annual report on Form 20-F filed today with the SEC on March 2, 2022, for a discussion of the factors that could cause actual results to differ materially from those expressed or implied. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events, or changes in strategy. We will be discussing certain non-GAAP measures on this call, which we believe are relevant in assessing the financial performance of the business. You can find reconciliations of these metrics within our earnings release. We will be in Boston, New York, Tel Aviv, San Francisco, and London later this month and in June for investor conferences and meetings. If you're interested in meeting with us, please email me at [email protected]. With that, I will now turn the call over to Gideon.

Thanks, Daphna, and thank you everyone for joining our call today. Q1 was a record quarter for Valens Semiconductor and a very strong start to 2022. Revenue and profitability exceeded our guidance with sales driven by continued solid demand for our core Audio-Video solutions, as well as exceptionally strong demand for our emerging automotive products. We reported the company's highest ever quarterly revenues of $21.6 million, 62% higher than Q1 2021. I am proud to say we continue to successfully meet customer demand even in today's challenging supply chain environment, and we will continue to do so by taking proactive measures and working closely with our customers and suppliers. As a result of the better-than-anticipated start to the year and our outlook for the rest of 2022, we are raising our full-year guidance. Most of this revenue increase is attributed to Audio-Video, while we are also essentially doubling the automotive revenue from the full year 2021. Dror will elaborate on our guidance in his remarks. Valens is well positioned to benefit from significant growth trends in both the automotive and Audio-Video markets. Starting with Audio-Video, the demand for our solutions continues to build across all geographic regions and is expanding into new applications within multiple verticals: corporate, education, government, industrial, and medical. Companies recognize the potential of our cost-effective, high-performance, and easy-to-install Audio-Video solutions that can be used in conference rooms, boardrooms, and training facilities in both hybrid and remote settings. We see a growing number of customers rolling out their next-generation products that embed our newest Audio-Video products, the VS3000. As a reminder, the VS3000 transfers uncompressed signals to deliver the clearest picture possible in HDMI. It is versatile, supports full 4K HDMI video, and can transfer Audio-Video, one gigabyte Ethernet, and USB formats all over a simple off-the-shelf, single cable. Last quarter, I discussed the role we believe Valens technology will play in what's called the Next Normal for hybrid environments such as work, education, and medical. In education, we're seeing more schools and universities upgrading their classroom infrastructure to enable more advanced in-classroom and remote learning. This trend is supported by the fact that the U.S. federal government recognizes the important role that technology will play in keeping schools operating most effectively and enabling students to continue their studies, even under scenarios that would have previously halted schooling. The U.S. Congress has allocated to date a budget of approximately $190 billion in elementary and secondary school emergency relief as funding for kindergarten through 12th grade schools, which includes parts for educational technology, including hardware, software, and connectivity that enables remote and hybrid learning. We believe the use of advanced technology will expand to education systems worldwide, which presents an opportunity for Valens to further enhance its business in the large education segment. By implementing our solution, we enable schools to stay open even in extreme scenarios such as severe weather and pandemic outbreaks. To that point, last month we announced that we joined the Logitech Collaboration Program to develop a solution using our technology and products in Logitech's USB peripherals suite for hybrid setups. Another interesting use case in education is a university in Japan that was looking to build a modern classroom where students could easily see professors on video screens from anywhere in the large classroom. The university also required true 4K video quality as well as remote control of the in-class camera. Our Audio-Video solution met all those requirements while extending HDMI, USB control, and power between PC and camera sources, projectors, and displays over a single off-the-shelf, low-cost category cable. We also continue to see demand for our Audio-Video connectivity solutions from leading equipment vendors in the industrial and medical equipment markets. The medical equipment space is undergoing significant transformation due to remote and hybrid healthcare, robotic surgery, and deep artificial intelligence diagnostics. These applications require uncompressed high-resolution video connectivity that is medical-grade and patient-isolated to ensure patient safety. For example, a U.S.-based center for special surgery required real-time uncompressed audio-video connectivity in surgery rooms. They recently completed updating the center's video signal transport infrastructure using Valens' audio-video solution. Using the VS3000, simple cabling was all that was needed to enable control and signal distribution, allowing easy installation and increased flexibility. Now this medical center can retrieve videos from any of the surgical rooms in real-time as well as imaging such as X-rays on multiple displays. I'm also encouraged to see that our VA7000, which was originally developed as a high-speed camera connectivity solution for automotive, is also gaining traction in the medical industry. It perfectly fits medical equipment targeted for use in critical procedures that require long-reach, reliable, uncompressed high-resolution video. Recently, several prospective customers in medical imaging have begun evaluating the VA7000. While the sales cycle in medical is typically long, we are off to a very encouraging start and expect the medical market to become a meaningful business for Valens. We are proud of the role our technology will play in improving patient care. Turning to automotive, in the first quarter of 2022, we increased the number of OEMs, Tier 1s, and Tier 2s looking to integrate our newest VA7000 chipset into their platforms from 25, reported previously, to more than 30 to-date. In fact, since December 2021, we have doubled the number of OEMs evaluating our meeting ADAS-compliant VA7000 chips. Today, we have eight OEMs evaluating this solution. Furthermore, we have also been receiving positive feedback on our engineering samples from prospective customers and partners who have already started to evaluate the VA7000 samples. This is a clear testament to the positive momentum and traction we see for the adoption of the A-PHY standard in the markets. We expect that the next step will be OEMs requiring MIPI A-PHY standard compliant high-speed connectivity technology as part of the RFIs and RFQs. We believe we will begin to see this request towards the beginning of 2023, resulting in new design wins by mid-year 2023, which will translate into mass production starting in 2025. In parallel to the larger A-PHY ecosystem, we continue to grow. Earlier this week, we announced an important partnership with OMNIVISION, a leading Tier 2 supplier for in-vehicle camera sensors, on MIPI A-PHY compliant sensor solutions for Advanced Driver-Assistance Systems (ADAS) applications. OMNIVISION will deliver VA7000 A-PHY compliant chipsets in their automotive reference design system camera modules. As we speak, we are demonstrating this A-PHY reference design at OMNIVISION's booth at the AutoSens Detroit exhibition. Also at AutoSens, we are leading a session on turning sensor fusion into reality for ADAS. It is clear that the fusion of data from various sensor parts, including radars, Lidars, and cameras, and the integration of this data in the compute unit will play an essential role in reliable ADAS systems and autonomous driving. These concepts of sensor fusion will require a reliable high bandwidth video connectivity solution that can aggregate data from the Valens sensor to the compute unit. We believe our A-PHY compliant solutions will play a vital role in the realization of these important trends. We're also advancing with our joint project with Stoneridge and continue to expect ramping revenues from this project in 2023 and beyond. As a reminder, Stoneridge is incorporating our VA6000 chipsets into a connectivity solution to enhance vision and safety systems in tractor trailers to address critical safety issues in the trucking industry. The trucking industry standards are quite extensive, with more than 2 million new heavy trucks sold each year globally, in addition to a significant aftermarket opportunity. With our automotive product portfolio currently comprised of the non-symmetric VA7000 chipset and the symmetric VA6000 chipset families, Valens is a one-stop-shop for the in-vehicle world high-speed connectivity required by OEMs. Why is this important? For today's infotainment and telematics data flows in cars, mostly over symmetric links in parallel, to enable tomorrow's automotive applications such as ADAS and autonomous vehicles, manufacturers require video connectivity over non-symmetric links. The automotive market is looking to deploy standard-based products for high-speed video connectivity for ADAS in autonomous vehicle applications, rather than today's legacy solutions, which are proprietary and require dependency on specific vendors. All told, our end-to-end symmetric and non-symmetric offerings, primarily the MIPI A-PHY standard compliant chipset, the VA7000 provides a huge advantage to automotive OEMs looking for a comprehensive set of solutions addressing their high bandwidth connectivity needs.

Thank you, Gideon. I'll start with our first quarter 2022 results and then provide our outlook for the second quarter and updated full year 2022 guidance. Beginning with our first quarter 2022 results, we topped our revenue guidance, achieving record total revenues of $21.6 million, an increase of 61.8% from the first quarter of 2021. Q1 2022 gross profit grew to a record of $15.4 million from $9.5 million in Q1 2021, an increase of 62%. First quarter 2022 gross margin was 71.4%, similar to last year at 71.3%. Non-GAAP gross margin increased to 72.1%, up from 71.8% in Q1 2021. The better than anticipated gross margins were driven by a favorable product mix in audio-video, as well as the increase in automotive gross margins from prior quarters as this business begins to scale. In addition, in Q1, we enjoyed the benefits from sales based on today’s higher average selling prices, while a portion of the cost of goods was still based on previous lower pricing. Operating expenses in Q1 2022 were $22.6 million, up from $15.7 million in Q1 last year. The $6.9 million increase was mainly due to an additional $3.7 million in research and development expenses, representing 54% of the total year-over-year increase in operating expenses. This demonstrates our continued investment in expanding our product offerings to address the business opportunities ahead of us. Sales and marketing expenses increased by $1.1 million due to higher levels of promotion of our new audio-video and automotive products, and G&A expenses were up by $2.1 million, primarily due to public company expenses such as costs related to D&O insurance and professional services. We also exceeded our adjusted EBITDA guidance, with our first quarter 2022 adjusted EBITDA loss coming in at $4.1 million, compared to the loss of $4.3 million in the first quarter of 2021. Our Q1 2022 adjusted EBITDA was $6.1 million better than the midpoint of our guidance of a $10.2 million loss due to our higher than expected revenues and gross margins, as well as the fact that most of the better than internally projected operating expenses were related to certain R&D expenses that were deferred from Q1 into subsequent quarters in 2022. Loss per share for Q1 2022 was $0.05, 91.6% lower than Q1 2021, which was $0.93 per share. Q1 2022 is calculated as a net loss of $5.1 million, which includes an income of $2.6 million related to the fair value of our forfeiture shares, divided by 97.2 million shares. Q1 2021 is calculated as a loss of $10.1 million divided by 10.8 million shares. The non-GAAP loss per share for Q1 2022 was $0.02 based on the net loss excluding $3.1 million of stock-based compensation and depreciation expenses divided by the 97.2 million shares. The higher number of shares outstanding is the result of the conversion of our preferred shares into ordinary shares, and shares issued as part of the transactions related to our listing and options exercise during the period. Turning to the balance sheet, we ended Q1 2022 with a strong balance sheet with cash, cash equivalents, and short-term deposits of $166 million and no debt. As we stated in the past, we intend to use our strong balance sheet to fund the development and commercialization of Valens' next-generation products. As a reminder for new products, the time from design initiation and manufacturing until we generate revenue can be lengthy, typically within three years in the audio-video market and up to five years in the automotive space. Inventory increased by $3 million from the end of 2021, driven by two main factors. First, the anticipated increase in the number of chipsets we intend to sell this year, and second, the constrained supply chain environment resulted in higher costs for raw materials and services from our supply chain, as well as the need to place longer-term purchase orders and accrue more inventory to meet our customers' needs on a timely basis. Considering our strong backlog, we believe that $12.5 million in inventory will be consumed during 2022. Now I would like to provide our guidance. For the second quarter of 2022, we expect revenues in the range of $21.6 million to $22 million. We expect gross margins to be in the range of 66.3% to 67.3% and adjusted EBITDA to be a loss in the range of $9.8 million to $8.8 million. For modeling purposes, please note that as of today we have 97.2 million outstanding shares. As Gideon said earlier, we are raising our guidance for the full year 2022. We now expect revenues to range between $86.5 million and $88 million, up from $83 million to $85 million provided in March. Further increases in demand in audio-video and the continued expansion of our automotive revenues, which we expect to essentially double from 2021, drove our higher 2022 projections. We expect gross margins to be in the range of 66% to 67.3%. This new gross margin range is up from the previously guided range of 65.5% to 67.2%. We are also improving our projected adjusted EBITDA loss to be between $37.2 million and $35.5 million, up from a range of $38.4 million to $37.8 million. We will continue to invest in enhancing our current product offering and developing and commercializing Valens' next-generation products. In summary, Q1 was a strong start to the year, positioning us for a better than anticipated 2022. As we look further out, we are observing growing demand and adoption of our next-generation connectivity solutions in multiple industries. Together with our robust balance sheet, this should sustain our business through breakeven and beyond. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.

Thank you, Dror. Our ongoing success reinforces our belief that Valens is well situated to deliver value for our stakeholders. We operate in two significant and rapidly expanding markets, automotive and audio-video. Additionally, Valens has a first-mover advantage with our wired high-speed connectivity solutions, establishing industry standards over simpler and cheaper alternatives. We initially secured our leadership in the audio-video sector and are now replicating that achievement in the automotive field. Furthermore, our business model provides strong financial metrics since we began as a semiconductor company, fostering environmentally responsible growth. I also want to express my gratitude to our amazing and skilled team worldwide for their outstanding education and execution. They have paved the way for a remarkable start to 2022, and I am confident they will continue to propel Valens' success. Operator, I would now like to open the call for questions.

Hi, thank you for taking my questions and good job in raising the full year guidance. I have two questions for Dror. Dror, regarding that $2 million to $3 million increase incrementally for the annual guidance. Can you break that out between audio-video and automotive? Great. And then you commented that the gross margins on the automotive side are benefiting from higher average selling prices, and I want to understand what assumption you're making on the pricing for the full year as you continue to hear foundries raising pricing even into next year. So, what is the assumption you're making in the full-year guidance?

Okay, so it's a question that involves both the price adjustments or the price increases that we see from our supply chain vendors and the price adjustments that we made shortly after to our customers. So, you know, let's start with the price adjustment from our supply chain. I would say that unlike what we saw last year in 2021, and primarily in Q-to-Q in the third quarter of 2021, today we see more of an end to price increases from our supply chain vendors. It's not in the same order of magnitude that we've seen last year. If you remember, starting from this year, January 1st, we implemented price adjustments to our customers to compensate for what we've seen with respect to our supply chain. Part of this price increase also applies to the automotive customers. I must admit that in the current circumstances, we don't believe the price will go down in the foreseeable future. It doesn't seem likely. So, I believe we have reached some kind of status quo that should last at least through the end of 2022.

Yes, and one last one for Gideon. Gideon, some of your auto peers have talked about an inflection in the second half for ADAS. Understand you guys have an incubation time for your chip. How are you looking at the auto market? Do you also see some type of inflection happening in the second half into next year?

Actually, yes. Let me clarify the question, I think it's very important to elaborate here. We see that the deep lens solution for this market is something that doesn't matter whether it's in video or others; they will need to transfer data from sensors to the ECU. So, whatever ecosystem you mentioned will be the one who wins; we believe that most of them would need us to complete the solution. Now, in our market, as you know, the timelines are not fast—automotive is slower than audio-video. The time it takes between design wins to when you see the ramp-up is longer. So, if you're looking at whether in the second half of 2023 we will see a ramp-up from those numbers, then the answer is no. If you're looking for whether we are going to continue with the growth of existing customer demand, we think the answer is yes. I hope I answered you.

Maybe just to add to what Gideon said: if we take 2022 as the reference year, I just mentioned that we do believe we will double the revenues from automotive in 2022 compared to 2021. In this year, by the way, 2022, still most or I would say all of the revenues that we anticipate will come mainly from the business that we have with a major OEM. We continue to see the deployment of our chipsets in more and more models within this OEM. As we mentioned in the past, we also have the project that will run together with Stoneridge. We anticipate production ramp-up at the beginning of next year. So, I can say that everything is progressing according to plan, it seems on track with respect to the production ramp.

Thank you; and congratulations on the OMNIVISION partnership you highlighted on the call. I believe you only began sampling their last quarter in 1Q, but I could be wrong. Is this a longer-standing relationship or is this an indication of how fast future A-PHY design wins could happen?

Well, I think the answer is both. We have known those partners for a while, but the time it takes once they see the chip, and once they see that it's working, has been really quick. I would say the convincing stage looks shorter and shorter. When customers see the efficacy of how these chips solve real problems, the convincing time seems to be shrinking from customer to customer. As you know, that's not the first one committed to us on MIPI A-PHY, and OMNIVISION's commitment was very encouraging.

I believe you came into this year with $78 million or so in backlog. I'm curious if you could kind of update us on where backlog is now, maybe give a sense of how that splits between AV and Auto, and how much of that is shippable this year? I would say that we continue to see strong bookings and backlogs that are better than our internal projections. Our backlog remains robust, contributing to our increased forecast for 2022. This is part of the reason that we raised the guidance today. We see progress in the booking and backlog in both audio-video and automotive. It's a very encouraging and positive trend, and we're already seeing backlog scheduled for shipping in 2023, which further increases our confidence in our revenue growth trends. I'd like to revisit the gross margin question, particularly as it pertains specifically to automotive. I know you talked about improving scale and mentioned prices are stable or firm. So, does this change your long-term target for automotive gross margin over time? In a way, it has changed a bit the revenue projections that we see; part of it is reflected in the guidance provided. We are now trying to analyze the long-term impact of this price increase. With respect to gross margins, we observe improvement in automotive gross margins as we witness the ramp-up in volume. The increasing volume is one of the outcomes that drives improvement in gross margins within the semiconductor business. If you remember the fundamentals of our business, you'll know that we're dealing with both audio-video and automotive, both growing rapidly. We anticipate that automotive business will grow faster than audio-video. Given that our gross margins in audio-video are higher than automotive, I would say the weighted average gross margin we anticipate going forward is expected to decline slightly as automotive contributes more to our top line. However, I believe the steady-state gross margin of the company will still be above the figure we've typically conveyed, which is north of 60%.

Hi, Gideon. Hi, Dror. Congratulations on the progress here. I have a revenue question regarding any impact from the supply chain in terms of under-shipping the demand in the first quarter or the second quarter guidance, or is that not an issue?

Thanks for the question. I would say that, despite a very challenging supply chain environment, we still managed to fulfill all our customer demand on a timely basis, and we're very proud of it. We have not seen any negative impact from the current circumstances in the semiconductor business on our business. We do not, by the way, see any negative impacts on our second-quarter outlook, and we believe we will be able to fulfill the revenue guidance that we provided today. I think we navigated successfully with our vendors; we've managed our inventory levels correctly. However, we face some challenges as we've mentioned before. Today, we see longer or extended lead times from our supply chain vendors. We are obviously adding to extend our lead time to customers, and right now we don't see any improvements in this area.

This also created an opportunity, because in order to be timely and ensure that our customers aren't affected by global events, we had to strengthen our relationships with suppliers, focusing on disciplined forecasting and order commitments. This has actually led to some benefits in terms of increased intimacy between the supplier and us as a customer.

On the AV business, I can discuss the content opportunities for you in a system pre and post-COVID. The hybrid systems coming out post-COVID likely have many more peripherals connected. The COVID experience has led to a new phenomenon; some of these will not disappear after the pandemic. For instance, working from home will likely continue. The hybrid education trend is expanding beyond the pandemic, and we are seeing opportunities for advanced solutions. All these trends require our extensions and enhancements. Moreover, we're witnessing increased demand for automotive solutions in the Audio-Video realm, indicating that many of the solutions in automotive are well-suited for the Audio-Video world.