Valens Semiconductor Ltd. Q2 FY2022 Earnings Call

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 Second 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 Investor Relations for Valens Semiconductor.

Thank you, and welcome everyone to Valens Semiconductor's second 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 and you can find reconciliations of these metrics within our earnings release. In the coming weeks, we’ll be in Chicago, Las Vegas and New York for investor conferences and meetings. If you're interested in meeting with us, please email me at investors@valens.com. With that, I will now turn the call over to Gideon.

Thanks, Daphna. And thank you everyone for joining our call. Earlier today, we reported quarterly results that exceeded our guidance. Our Q2 revenues reached a record high as we continued to meet the growing demand from our customers for audio-video automotive solutions. Q2 2022 quarterly revenues were a record of $22.5 million, up 28% compared with Q2 2021. We also achieved better than anticipated gross margin and adjusted EBITDA. Taking into account our better than anticipated first half of the year and visibility into the second half of 2022, we are increasing our full year revenue guidance and substantially improving our adjusted EBITDA guidance for the year. I'm also pleased to share with you that we are now expecting to reach adjusted EBITDA breakeven towards the end of next year 2023. We will discuss this in more detail throughout the call. Now, I will turn to a review of our two business segments. Starting with audio-video, as organizations continue to invest in enhancing and optimizing content distribution, the main trends we are seeing are the transition to high resolution and growing demand for high bandwidth video connectivity and camera imaging extensions. Corporations worldwide are focused on improving flexible hybrid workspaces as part of the next normal trend. Education systems aim to enhance participation and provide the same experience for in-classroom and remote students; in both the corporate world and in education, devices enabled by our technology foster equity by allowing all participants in a hybrid environment to participate and collaborate with others from wherever they are. In healthcare, there is an increased focus on safe, uncompressed zero latency high bandwidth video connectivity and camera imaging extensions. This enables healthcare staff to properly diagnose and ensure patients and healthcare professionals' safety. Lastly, command-and-control centers require real-time, uncompressed content delivery to increase public safety and to enhance passenger experience. Valens Semiconductor benefits from these trends as there is growing demand for our solutions. Our HDBaseT connectivity technology enables better performance through seamless and effective distribution of multiple streams of data and video over a single low-cost category cable, simplifying and lowering installation and maintenance costs. Many leading manufacturers in the audio-video industry, such as Crestron, EPSON, Extron, LG Electronics, Logitech, NEC, Panasonic, Samsung, Siemens, Sony and others use our technology in millions of devices today. Based on our conversations with customers and prospects, it's clear that our audio-video distribution technology will continue to play an important role in sectors such as corporate, education, medical, and government. Overall, in Q2, we saw substantial demands from Tier 1 customers across many geographies for the VS3000, the newest member of our audio-video product family. Revenues from these products more than doubled from Q1 2022. This is one of the main reasons our revenue figure exceeded our original expectations. In Q2, we announced the latest development in our longstanding collaboration with Crestron, the global leader in workspace and smart home technology. Crestron has based this suite of more than 24 next generation professional audio-video products on the VS3000. These new products bring to the industry a truly uncompressed HDMI 2.0 extending 4K resolution, 60 frames per second video, 1 gigabit ethernet, USB, and other data formats all over a single, simple off-the-shelf category cable. We also continue our work in the Logitech Collaboration Program to develop a solution, embedding our technology in Logitech’s video conferencing product suite, primarily for use in educational and corporate environments. A cutting-edge example of how our technology is being used in education is Panasonic’s deployment at Southwestern Oklahoma State Esports Arena. Colleges, universities, and others have started providing dedicated Esports programs to develop skilled professionals. Valens products were selected to elevate the visual experience, which is also livestreamed so students can participate regardless of their location. As we have mentioned previously, we continue to see more and more opportunities in the medical space for data extension capabilities. For example, we recently announced a new joint solution with Würth Elektronik, a leading German manufacturer of electronic and electromechanical components. This solution will deliver the highest level of safety with zero latency high bandwidth uncompressed video connectivity required by medical imaging devices, such as MRIs, CTs, X-rays, robotic surgery, and endoscopy solutions. Another example of the demand for our technology in medical is LG’s first business innovation center, focused on medical. The center demonstrates Valens solution for training and educational purposes in medical environments. Moving on to command-and-control centers, federal and state governments and municipalities worldwide are upgrading their command-and-control rooms to provide accurate and continuous visuals to monitor crisis situations and to manage critical ongoing activities such as air traffic control. Valens Semiconductor’s audio-video connectivity technology is perfectly suited for video walls in such control centers. An example is the recently renovated terminal in the Orlando International Airport where over 1,200 4K resolution digital signage displays have been deployed so far, informing tens of millions of passengers 24/7/365 reliant on Valens Semiconductor Solutions. We are proud of the role our products play in keeping citizens safe and ensuring travel flows smoothly around the world. Finally, our VA7000, originally developed as a high-speed camera connectivity solution for automotive, is also gaining traction in non-automotive applications. In addition to the opportunities for the VA7000 in the medical industry I discussed last quarter, we are starting to see interest in the VA7000 for multi-camera video conferencing in corporations and industrial applications like machine vision for automated inspection and robotic operations. Turning now to automotive, our technology delivers today's infotainment and telematics connectivity in cars in mass production. It will also enable tomorrow's advanced driving assistance systems (ADAS) and autonomous medical applications that our technology can be used to meet the growing demand for ADAS features such as parking assistance, collision avoidance systems, lane departure warning, traction control, electronic stability control, and telematics, which is constantly growing. Looking at the total addressable market for ADAS video connectivity, as S&P stated in a report from April 2022, approximately 100 million cars are expected to be manufactured in 2025. At that point in time, each car is expected to have 8 to 15 video productivity sensors for ADAS and surround view applications. For simplicity’s sake, let's assume an average of ten sensors per car. With two connectivity chips per sensor to communicate between the transmitter and receiver, we predict a total of two billion chips. With each chip expected to cost between $4 and $5, this translates into an $8 billion to $10 billion addressable market for ADAS connectivity. The Safety segment is projected to be the fastest growing segment in the global automotive semiconductor industry and Valens is well positioned to capitalize on this trend. ADAS and autonomous driving will require inputs from various high-resolution sensor types. Cameras, radars, and LiDAR sensors are what we call sensor fusion. Sensor fusion requires high bandwidth connectivity solutions and a centralized compute unit to aggregate the raw data for real-time processing and decision making. Our technology enables sensor fusion and centralized processing with high bandwidth and almost no latency. It provides the electromagnetic interference (EMI) and the electromagnetic compatibility (EMC) protection necessary for optimizing vehicle video and data transmission to ensure near-zero error rates. It also provides car makers with greater flexibility, enabling them to implement advanced electronic architecture without limiting themselves due to link length or EMI issues. Today, more than 30 automotive OEMs, Tier 1s, and Tier 2s are evaluating our VA7000 chipsets, and many are investing engineering resources in the assessment process. I would like to reiterate that we believe we are on track to receive RFIs and RFQs from potential customers towards the beginning of next year. This should lead to design wins by mid-year 2023 and mass production starting in 2025. Through conversations with potential customers and partners, we have learned more about their current and next-generation product roadmaps. To match their roadmaps, we will focus over the next two years on developing products supporting sensor to ECU connectivity. With respect to our engagement with Mercedes-Benz, I’m pleased to report that in the second quarter we reached a milestone of selling more than 2 million VA6000 chips to date. We are also advancing with our joint rearview camera project with Stoneridge, which is incorporating our VA6000 chips into a safety connectivity solution that will remove truckers’ blind spots. We remain on track to ramp revenues from this collaboration in 2023 and beyond. The trucking industry, which produces more than 2 million new trucks every year, invests in upgrading and retrofitting throughout a truck’s approximate 10-year life cycle. Given the long life cycle of trucks, our joint solution also targets the aftermarket, presenting improved safety opportunities for millions of drivers and pedestrians and a robust business opportunity for Valens Semiconductor. I’ll now turn it over to Dror Heldenberg, our CFO, to review our Q2 2022 financial results and provide our financial outlook.

Thank you, Gideon. I'll start with our second quarter 2022 results and then provide our outlook for the third quarter. Our updated full year 2022 guidance and our plan to reach adjusted EBITDA breakeven towards the end of next year. Beginning with our second quarter 2022 results. We came in above the top end of our revenue guidance, achieving record revenues of $22.5 million, an increase of 28.4% from the second quarter of 2021. The higher than anticipated revenues driven primarily by audio-video also contributed to an overall higher than expected gross margin. Second quarter 2022 gross margin was 70.2% compared to last year's 71.2%. Non-GAAP gross margin was 71%, similar to 71.1% in Q2 2021. Operating expenses were $23.7 million in Q2 2022, compared to $16.5 million in Q2 last year. Research and development expenses grew by $3.9 million, representing 55% of the $7.2 million year-over-year increase in operating expenses. This reflects our investment in expanded product offerings to address the new business opportunities ahead of us in both automotive and audio-video. SG&A expenses were up by $3.2 million due to continued investment in product promotion as well as expenses related to being a public company. Turning to adjusted EBITDA, we exceeded our guidance, reporting a second quarter 2022 adjusted EBITDA loss of $4.5 million, compared to the midpoint of our guidance range, which was $9.3 million. These better than expected results reflect a combination of higher than expected revenues and gross profit, the rescheduling of certain automotive R&D expenses from Q2 to later this year, and the strength of the U.S. dollar, which positively impacted expenses paid in Israeli shekels, mainly for compensation to employees based in Israel. Q2 GAAP net loss was $10 million and included $3.6 million of financial expenses, mainly related to the valuation of Israeli shekel-based cash and short-term deposits compared to the U.S. dollar, offset by $1.5 million of income related to the valuation of deferred value of the full-feature shares included in our balance sheet. GAAP loss per share for Q2 2022 was $0.10, calculated as the net loss divided by 97.4 million shares. This compares to Q2 2021 GAAP loss per share of $0.68, which is calculated as a net loss of $3.7 million divided by 11 million shares. The greater number of shares outstanding in Q2 2022 is the result of the conversion of our preferred shares into ordinary shares, the shares issued as part of the transactions related to our listing, and options exercised into shares during this period. The non-GAAP loss per share for Q2 2022 was $0.08, which is calculated as a non-GAAP net loss of $8.1 million divided by the 97.4 million shares. We arrived at the $8.1 million by excluding from the GAAP net loss $3.5 million related to stock-based compensation and depreciation expenses offset by the $1.5 million from the change in fair value of the full-feature shares. Turning to our balance sheet, we ended Q2 2022 with a strong balance sheet showing working capital of $168.3 million compared to $176.5 million at the end of Q1 2022. This difference of $8.1 million is comprised of the adjusted EBITDA loss of $4.5 million and net financial expenses of $3.6 million, primarily from the devaluation of the Israeli shekel-related cash balance. Our cash, cash equivalents and short-term deposits totaled $156.8 million, and we had no debt. This compares to $165.5 million at the end of Q1 2022. The change in our total cash balance is a result of the loss in the second quarter that also included the currency exchange rate impact and the increase of our inventory balance. We ended Q2 2022 with an inventory balance of $17.3 million, an increase of $4.9 million from the end of Q1 2022. There were three reasons for this change: first, the increase in the number of chipsets we intend to sell over the next 12 months; second, as you know, the cost of chipsets has increased; and third, to secure production capacity given the continued supply constraint environment, we placed longer-term purchase orders for goods. We intend to ship these goods in the next 12 months, meeting our customers’ needs on a timely basis. Now, I would like to provide our guidance. For the third quarter of 2022, we expect revenues in the range of $22.5 million to $22.8 million. We expect gross margins to be in the range of 65.4% to 66.1%, and adjusted EBITDA loss to be in the range of $6.2 million to $5.6 million. As of June 30, 2022, shares outstanding totaled 97.7 million. As Gideon said earlier, based on the better-than-expected results for the first half of the year and the higher than anticipated demand for our audio-video solutions we are expecting in the second half, we are raising our guidance for the full year 2022. We now expect revenues to range between $89.1 million and $89.8 million, up from $86.5 million and $88 million provided in May. Given the ongoing expansion of our automotive revenues, we continue to expect to essentially double this part of the business from 2021. We anticipate 2022 gross margins will be in a range of 68% to 68.5%. This new gross margin range is up from the previously guided range of 66% to 67.3%. We are also improving our projected adjusted EBITDA loss to be between $25.7 million and $24.3 million, significantly better than the prior range of $37.2 million to $35.5 million. Multiple reasons are driving the 2022 improved adjusted EBITDA guidance: first, the increase in revenues; second, the improved gross margin; third, the assumption that the foreign exchange impact of the strong U.S. dollar on our Israeli shekel-based expenses continues; and fourth, as Gideon mentioned earlier, our decision to focus our automotive R&D for the next two years on products supporting sensor to ECU connectivity will allow us to slow the pace of new employee hiring and reduce our investment in R&D compared with our original plan for 2022 without impacting revenue opportunities or changing our longer-term technology roadmap. I also would like to note that we believe our current headcount supports our 2022 and 2023 business plan and product development roadmap. We do anticipate a modest increase in 2023 R&D expenses from the lower 2022 level, which in combination with the anticipated year-over-year revenue growth we believe will allow us to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2024, we believe the company should reach cash flow profitability.

Thank you, Dror. We are proud of our results for the second quarter and the significant progress we have made in executing against our business plans and strategy since going public almost one year ago. We are well-positioned for sustained growth and success and to create value for our stakeholders. We serve two large, fast growing markets: audio-video and automotive. We have the first mover advantage for wired, high speed connectivity solutions, a compelling business model, and a clear path to cash flow breakeven. I would like to take this opportunity to mention that, on September 7, we will be hosting a webinar with OMNIVISION to demonstrate our MIPI A-PHY-Compliant Camera Solution for ADAS. The demonstration will highlight the joint solutions, smaller camera design, reduced power consumption, lower camera cost, and interoperability with the wider A-PHY ecosystem. As the A-PHY ecosystem continues to evolve, Valens Semiconductor stands to benefit from the growing awareness of the innovative MIPI A-PHY productivity solution, which mainly is one of the key technologies to enable ADAS and autonomous driving vehicles. I would like to thank our team around the world for their ongoing commitment and execution. I'm confident that they will continue to drive Valens Semiconductor’s continued success.

Operator, I would now like to open the call for questions.

Congratulations on the progress here. A nice update. So I hope you can elaborate on the OPEX. You're pushing out to improve the adjusted EBITDA forecast. What the product kind of strategy shift is if you could elaborate there would be helpful? Why you're emphasizing sensor to ECU connections versus what was pushed out? Thanks.

Okay. Thank you very much for your question, and thank you for the compliment to start with. We're definitely very happy as well. So our current R&D budget for 2022 is lower than the original plan, primarily driven by actually two reasons. First, a portion related to the rescheduling of certain investment from 2022 to 2023. For example, even a two-week push out of a tapeout can translate into millions of dollars moving from one year to the next. And the second is our refined focus on sensor to ECU connectivity solutions that match our prospective customers and partners' roadmaps. We hear it from them as well. As we discussed in our prepared remarks, this is actually the focus and being more accurate on the market. And this allows us to reduce our originally planned investments in R&D and slow the pace of hiring. I hope this answers your question.

Yes. I think so. And then maybe looking ahead a bit to calendar year ‘24, where you'll have positive EBITDA. Do you have any rough assumption of what the mix of auto versus AV would be, and at that point, would auto gross margins still have upside, would they, or would it be fully scaled at that point?

You referred to 2024?

So, Suji, first good to talk again. It's too early to talk about 2024 at this point in time. I can just tell you that in light of the desire, our indication that we're going to be reach adjusted EBITDA breakeven, exiting 2023, we are going to be cash flow profitable during 2024. At this point, I think that it's too early to say what will be the mix between audio-video and automotive, but definitely as we scale up, as we ramp the volume of automotive, we're going to improve the gross margins of this segment of the business.

Okay. That's helpful Dror. And then maybe lastly, you provide some end market data for auto for ‘25, ‘26. Does that need L4 to begin or is that L2 plus L3 automotive? That color would be helpful as well.

So Suji, I think that – and we discussed it in the past. I think that right now, all our projections and all our market analysis is based on the fact that in the coming years, we're going to see mainly L2 and L3, or L2 plus cars. I think that it will take some time for L4 and L5 cars to be on the road, therefore, all the analysis and the projections that we're making is based on the lower level of the autonomous cars, the L2 and L3 cars.

This is Blake Friedman on for Vivek. I was curious if you guys could comment on your visibility into 2023. I know you kind of mentioned you have strong visibility into the back half of the year, but any comments about next year would be very useful. And if you could break that out by the different end markets you serve, that would be great.

So I would say that, as you know, we serve two large and fast growing markets. We play in the audio-video and we play in automotive. If we break it, we are in close contact with our current audio-video customers. And we see strong demand from them, especially given the fact that we are expanding into new verticals that we mentioned, education and industrial and medical, et cetera. In addition, we continue to see the expansion of the VS3000 and we expect more contribution from this device. On the automotive side, obviously, we're going to see more Mercedes-Benz models on the road that where we will find our chips inside, deployed in this car. And in addition, as you remember, we expect to see some revenues coming from the project that we have with the truck company, Stoneridge. So, despite the fact that we're not going to provide any guidance at this point for 2023, I can tell you that we expect the growth trend of our revenues to continue in 2023 as well.

And then secondly, just across the tech supply chain, there have been concerns regarding inventory buildup. So if you can provide any commentary on maybe what you're seeing at your customers regarding that issue, that would be great.

First, if you review the press release we issued this morning, you will see that our inventory balance has increased by approximately $5 million compared to the end of Q1 2022. We provided a few reasons for this increase. The first is that we need to build up inventory as we expect to sell more units in the upcoming 12 months. The second reason is that refreshing our inventory has become more expensive due to price increases in the industry. Additionally, as I mentioned before, to secure production capacity, we had to commit to longer-term purchase orders with all our supply chain vendors, and we are now observing the effects of that in our inventory levels. We are not worried about this increase in inventory because we believe we will use it within the next 12 months. We regularly monitor inventory levels with our customers, and in most cases, we see no significant changes in their normal inventory balances. However, some customers are experiencing shortages of certain components from other suppliers, which means they may delay purchasing certain products until they sell their existing inventory. Regarding the audio-video segment, in the automotive sector, purchasing patterns remain stable as Tier 1 suppliers continue to buy according to their rolling 12-month forecasts.

Operator Instructions. There are no further questions at this time. Mr. Ben-Zvi, would you like to make your concluding statement?

Yes, thank you very much for everyone. And I want to thank you all for joining us today. Have a great rest of the day, and we’ll meet you again in the next quarter. Thank you.

Thank you. This concludes the Valens Semiconductor second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.