Earnings Call Transcript - VLN Q3 2022

Operator, Operator

Good morning. My name is Yoni, and I will be your conference operator today. I would like to welcome everyone to Valens Semiconductor's Third Quarter 2022 Earnings Conference Call and Webcast. I will now turn the call over to Daphna Golden, Vice President of Investor Relations for Valens Semiconductor. Please go ahead.

Daphna Golden, Vice President of Investor Relations

Thank you, and welcome everyone to Valens Semiconductor's Third 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 filed 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 will be in New York, Scottsdale, Arizona, and London for investor conferences and meetings. If you are interested in meeting with us, please e-mail me at investors@valens.com. With that, I will now turn the call over to Gideon.

Gideon Ben-Zvi, CEO

Thanks, Daphna, and thank you, everyone, for joining our call. Q3 quarterly results exceeded our guidance. Q3 2022 revenues were a record of $23.1 million, up 21% compared with Q3 2021. We also achieved better-than-anticipated gross margin and adjusted EBITDA. We are increasing our full-year revenue guidance and improving our adjusted EBITDA guidance for the year. Our high-speed connectivity technology is used in diversified business activities that support people's daily lives and industries in two business segments – audio-video and automotive – in which we continue to diversify and expand our footprint. Our audio-video business continued expanding into new applications and verticals from corporate, education, government, industrial, to medical and more. The trend of educational entities using hybrid models to enable students and staff to switch between on-site and remote learning is here to stay, and we are seeing more and more classrooms around the world equipped with video collaboration systems. Hybrid learning enables the continuity of teaching and learning. It increases equitability by giving students access to additional education opportunities that meet their academic needs. In this way, our technology democratizes opportunity and contributes to equity. In the corporate sector, the opportunity across industries and geographies is substantial for audio-video connectivity technology, such as ours, and video conferencing technology is increasingly essential for office spaces, video meetings, and remote work. The use of our technology is growing in command and control as entities worldwide need to visualize their operations, enhance their efficiency, and better safeguard communities. A recent use case in the corporate sector is a multinational electric utility company where security is of paramount importance. The company needed to isolate a specific department’s operations from the rest of the IP network, while still providing uncompressed long-distance multimedia extension. Our wired audiovisual distribution products allowed them to meet this goal. I'm also proud to share that earlier this year, Valens Semiconductor chipsets, embedded in Panasonic’s 4K HD Suite for video products, were used to enhance the experience of athletes and spectators from around the world at the Beijing Olympic and Paralympic Winter Games. They all experienced breathtaking immersive visuals in real time across different sporting events. All in all, our audio-video business grew on the top line and generated strong margins with a healthy mix of customers, industries, and geographies. In Q3, we also continued to sell our automotive VA6000 chipsets in USB extension applications for audio-video use. I believe that going forward, we will see additional revenue contribution in the audio-video business by repurposing our automotive products. This leads me to our automotive business. Valens Semiconductor offers a unique set of in-vehicle wired symmetric and non-symmetric high-speed connectivity required by the automotive industry. Our VA6000 chipset family provides symmetric connectivity and enables data flow for infotainment and telematics. Mercedes-Benz started using our chips in the S-Class model in Q4 2020. And today, you can find our chips in the S, C, and E-Class models, including in the electric vehicle known as EV models. The VA7000 chipset family, our non-symmetric products, was the first in the industry to comply with the MIPI A-PHY standard. It addresses the growing need for high-speed video productivity for automotive applications, such as Advanced Driver Assistance Systems, known as ADAS, which is projected to ramp towards an $8 billion to $10 billion market in the coming years. The MIPI A-PHY standard, which was released in Q4 2020, is the industry standard for in-vehicle-long-reach video productivity. It will be required initially for high-speed connectivity between sensors to the compute unit for automotive applications such as ADAS and autonomous driving. Valens Semiconductor's nonsymmetric DSP-based connectivity technology is the foundation for the MIPI A-PHY standard, which aims to replace the legacy analog solutions existing today in cars. Valens' VA7000 product family features outstanding resilience to electromagnetic interference, known as EMI, making it an ideal connectivity solution for high bandwidth, high-resolution sensors that significantly improve object detection and classification. Our A-PHY compliance chipset greatly simplifies integration of cameras, LiDAR, and RADAR. It also enables flexible integration of these sensors into a sensor cluster that is connected over a single link. This is known as sensor fusion. Sensor fusion opens the door to more accurate centralized computing and is a key element for ADAS Level 3. Speaking of radars specifically, it is becoming clear that in addition to camera sensors, radars are essential to meet our automotive OEM and Tier 1 ADAS requirements. Our connectivity products are currently being evaluated by leading radar companies that are considering the use of VA7000 with their sensors. I am pleased to share with you that we have already received initial RFIs from potential customers for our MIPI A-PHY-compliant VA7000 chipsets. We are on track for first design wins next year with mass production expected to start in 2025. In line with our strategic plan, the growing MIPI A-PHY ecosystem continues to gain recognition and is well-positioned for large-scale implementation by automotive OEMs around the world. An important pillar solidifying the ecosystem is Intel, which chairs the MIPI Alliance Board of Directors and determined that MIPI A-PHY is the most cutting-edge high-speed connectivity technology in the automotive industry. In Q3, we announced a collaboration with Intel Foundry Services to support the development of a MIPI A-PHY compliant offering for their automotive customers. We believe our top partnership with Intel Foundry will encourage other automotive chip manufacturers to join the growing MIPI A-PHY ecosystem as automotive OEMs require multiple production sources. The interoperability between systems from a number of vendors is a requirement for the acceptance of any industry standard. In the third quarter, we announced the successful completion of the industry's first joint interoperability test between a Valens Semiconductor VA7000 chip on the receiver side and Sony Semiconductor Solutions' prototype of an integrated sensor and transmitter chipset on the other side. Sony Semiconductor Solutions has stated the importance of introducing this cutting-edge technology into their image sensors. We also expect that the MIPI A-PHY transmitter integration will provide significant cost and performance benefits to the global base of automotive customers. Last month, we conducted a webinar with Sony Semiconductor Solutions and JASPAR in association with Japanese automotive OEMs and Tier 1s such as Toyota, Nissan, Honda, Mazda, Suzuki, and Denso on how automotive companies can advance ADAS in autonomous driving with MIPI A-PHY. Hundreds of participants from the Japanese automotive industry joined the webinar to hear speakers from JASPAR, Toyota's next-generation high-speed network group, Sony Semiconductor Solutions' automotive development, and Valens Semiconductor discuss the progress of MIPI A-PHY and the growing importance of electromagnetic compatibility, known as EMC, in cars. As car companies integrate sensors requiring higher bandwidth and EMC into next-generation ADAS and autonomous systems, interoperability among multiple vendors' components will be crucial. To address this need, test equipment vendors are beginning to create off-the-shelf testing solutions. Keysight Technologies, which delivers advanced design and validation solutions, is addressing the growing market demand for high-speed digital interfaces for next-generation in-vehicle networks. In September, they announced their partnership with several companies, including Valens Semiconductor, to develop a MIPI A-PHY-compliance test solution that ensures data transmission quality and broad scale interoperability. Before turning to our financials; this call marks the first anniversary of Valens Semiconductor as a public company. Since going public, we have made significant progress executing against our business plan and growth strategy, which is supported by our solid balance sheet. So far, during 2022, we have successfully operated in a turbulent geopolitical and economic environment. In the near term, we will continue to monitor the macro environment and, in particular, items that could impact our business during 2023 such as lead times, order patterns, and demand levels across industries. We are focused on creating long-term value for all our stakeholders. We believe that we have sufficient resources and capabilities to continue to invest in and expand our competitive advantages, enhance our product portfolio, and market presence. We will continue to focus on the best opportunities, which we believe will drive sustainable growth and profitability for the company. I'll now turn it over to Dror Heldenberg, our CFO, to review our Q3 2022 financial results and provide our financial outlook.

Dror Heldenberg, CFO

Thank you, Gideon. I'll begin with our results for the third quarter of 2022 and then share our outlook for the fourth quarter along with our updated full-year guidance. In the third quarter, we surpassed our expectations for revenue, gross margin, and adjusted EBITDA. We generated record quarterly revenues of $23.1 million, which is a 21.3% increase from the same quarter in 2021. The increase in revenue, primarily fueled by audio-video, also led to a better-than-expected gross margin. The gross margin for the third quarter was 69.7%, down from 72.4% last year, due to a larger portion of revenue coming from our automotive business that has lower gross margins compared to audio-video. Our non-GAAP gross margin was 70.5%, compared to 72.7% in the third quarter of 2021. Operating expenses for the quarter were $21.3 million, a decrease of 3.4% from $22 million in the same period last year. Research and development expenses increased by $2.1 million compared to Q3 of 2021, reflecting our ongoing investments in product development for new business opportunities in both automotive and audio-video. We have realigned our automotive R&D to better match the needs of our customers and partners. Selling, General and Administrative (SG&A) expenses were $8.6 million, down from $11.4 million in Q3 2021, which included one-time expenses of $5.4 million related to our public listing in September 2021. The SG&A expenses for Q3 2022 were consistent with the past three quarters since going public. Regarding net loss and adjusted EBITDA, our GAAP net loss for Q3 was $5.3 million, compared to an $8.5 million loss in the same quarter last year. We also exceeded our guidance for adjusted EBITDA, reporting a loss of $1.7 million. This better-than-expected adjusted EBITDA was a result of higher revenues and gross profit, rescheduling some R&D expenses from Q3 to later this year and early 2023, as well as the strong U.S. dollar positively affecting expenses paid in shekels for our employees in Israel. Our GAAP loss per share for Q3 2022 was $0.05, calculated using 98.1 million shares, compared to a loss per share of $0.94 in Q3 2021, which included a net loss of $8.5 million plus an accrued dividend related to preferred shares. The non-GAAP loss per share for Q3 2022 was $0.02, derived from a non-GAAP net loss of $1.5 million, divided by the 98.1 million shares. This contrasts with a non-GAAP loss per share of $0.23 in Q3 2021, based on a net loss of $3 million. Turning to our balance sheet, we ended Q3 2022 with a robust position, having cash, cash equivalents, and short-term deposits totaling $152.9 million, with no debt, compared to $156.8 million at the end of Q2 2022. Our working capital at the end of the third quarter was $166.6 million, down from $168.3 million at the end of Q2 2022, mainly due to the loss recorded in Q3 after accounting for non-cash expenses. Our inventory as of September 30, 2022, was $21.9 million, an increase of $4.6 million from the end of Q2 2022, driven by inflation and our strategy to secure production capacity by placing long-term orders amid supply constraints. This level of inventory is necessary to meet anticipated customer demand over the next 12 months, particularly in automotive, where we plan to double our revenues from 2022 to 2023. The long-term purchase orders should help us manage expected increases in product costs in the first half of 2023. While we continue to face rising costs from some suppliers, we believe supply constraints will start to ease, and lead times will normalize in the second half of 2023. Looking ahead, we project fourth-quarter revenues between $23.1 million and $23.2 million, with gross margins expected to range from 66.1% to 66.5%. We plan to initiate tape-outs of our automotive VA7000 family chipsets in the fourth quarter to deliver enhanced features and performance to our potential customers, which is a vital step for future mass production. Additionally, we're rescheduling certain R&D activities to early 2023 in line with our roadmap. We anticipate an adjusted EBITDA loss between $9.7 million and $9.0 million as we recognize tape-out costs as they accrue. As of September 30, 2022, we had 98.4 million shares outstanding. We are raising our guidance for the full year 2022, having exceeded our revenue, gross margin, and adjusted EBITDA expectations for Q3. We now project revenues between $90.3 million and $90.4 million, up from the previous guidance of $89.1 million to $89.8 million. We expect to nearly double our automotive revenues in 2022 compared to 2021. Our gross margins for 2022 are now projected to be between 69.3% and 69.4%, an improvement over the earlier range of 68.0% to 68.5%. We are also significantly lowering our adjusted EBITDA loss guidance to between $20 million and $19.3 million for the full year, much better than the prior forecast of $25.7 million to $24.3 million. This improvement is mainly due to aligning our product roadmap with customer needs, along with benefits from the strong U.S. dollar on expenses in shekels. We remain on track to achieve adjusted EBITDA break-even by the end of 2023, which we believe will lead to cash flow profitability in 2024. I will now hand the call back to Gideon for his closing remarks, and then we will open the call for questions.

Gideon Ben-Zvi, CEO

Thank you, Dror. We are pleased with our results for the third quarter which once again exceeded expectations. We made notable progress in many aspects of our business. First, our automotive business continues to evolve, and we expect revenues from the first-generation products, the VA6000 to grow further, as it will be used in more car models. Second, we are receiving positive feedback from prospective customers and partners that are evaluating the VA7000. The initial RFIs that we received are an important milestone towards the adoption of A-PHY products by automotive OEMs. Third, we continue to see new opportunities in various verticals for our high-margin and diversified audio-video business in corporate, education, medical, and industrial among others. Fourth, even in today's challenging economics and the constrained supply environment, we successfully managed to meet all our customers' demand in a timely manner. I want to thank our employees once again for their commitment and ongoing dedication to the company's success. Finally, during the past quarter, we released our first sustainability report, less than a year after being listed as a public company. At Valens, we constantly strive for excellence and innovative ways to ensure our products and solutions meet the highest standard of our customers and provide society the connectivity required in an ever-evolving environment. Operator, I would now like to open the call for questions.

Operator, Operator

The first question is from Rick Schafer of Oppenheimer.

Rick Schafer, Analyst

Congrats, I know it's tough out there right now. Order velocity for almost everyone seems balanced growth. So I was curious if you could talk about any shifts that you are seeing in your order patterns, positive or negative, just anything that you're seeing there in terms of any push outs, whether it's in pro AV or in auto or any significant change to lead times? Just sort of any sense of what you're sort of seeing in terms of your order book?

Gideon Ben-Zvi, CEO

It is good to talk to you again. Obviously, at this point in time, we will not be providing our guidance for 2023. However, if we analyze our business, let's start with the automotive. I think that what we're seeing today are indications that our automotive business is expected to double its revenue in 2023 from 2022. So in that respect, we feel that the automotive business is quite resilient. With respect to the audio-video business, I would say that the audio-video business is probably more correlated to some of the global macro trends that we see today. So we assume that at least during the first part of '23, customers will mainly consume inventories that they accrued in the challenging supply-demand environment. Having said that, when we analyze the audio-video segment in 2023, we still see the following opportunities. We continue to see the expansion of the VA3000. This is the most recent member of our audio-video product family. We see this product in designs of many industry-leading companies, and we expect to see more revenue contribution from these chipsets in 2023. In addition, our other solutions are now being evaluated for new applications, and we assume that at least some of them will mature into mass-production products during '23. So I would say maybe to summarize, while we anticipate a more moderate growth rate for this part of the business compared to the projected 2022 year-over-year growth rate, we still believe that we will continue to see annual growth in audio-video. With respect to the last part of your question about some cancellations or push outs, I would say that these are tough days for our customers as well. Obviously, their planning is becoming more challenging for them. I can tell you that recently, we got some push out requests at least from certain customers. However, those push outs were offset by pull-in requests by other customers, and this resulted in the improved guidance that we shared with you today in this call.

Rick Schafer, Analyst

That's great color. And then maybe as a follow-up to that. Gross margin was a lot higher than you guided, much higher than I had modeled. So I was just hoping that you could provide a little color on what's driving that and where we should expect gross margin to stabilize now? I think you've talked in the past about sort of the low mid-60s, but I didn't know if there was any update on gross margin, I guess.

Gideon Ben-Zvi, CEO

Yes. Sure. The better-than-expected gross margin is mainly driven by the revenue mix between audio-video and automotive. We just mentioned that the growth in revenue was mainly triggered by the audio-video business that comes with higher gross margins. So that was the first reason. The second reason is that in the third quarter, we still consumed some inventory that was produced at lower costs. Obviously, as we refresh the inventory in this inflation environment, it comes with higher costs, so I assume that we'll see the implication going forward. In terms of our gross margin going forward, again, today, we provide you the gross margin we anticipate for Q4 and the full year. I think that we are going to meet this target.

Operator, Operator

The next question is from Suji Desilva of ROTH Capital.

Suji Desilva, Analyst

Congratulations on the progress here. So maybe we can talk about audio-video first and just what drove the upside? Does that potential remain each quarter? Is there kind of some secular trend that is helping you guys? A tailwind in a tough environment?

Gideon Ben-Zvi, CEO

Suji, thanks for the question. I think that nothing dramatic to report here. I think that one thing that helped us in audio-video is the fact that this part of the business is very diversified, and this is a very strong business. It's a strong point for us. Every quarter, we see the strength in other areas of the business. Again, we continue to see the expansion of the VA3000. It's a very encouraging sign for us with respect to the penetration of this new product, which, by the way, comes with higher ASP to customers. It's a good sign. And again, nothing special, it's just the nature of the business and the growth that we expect from this business.

Dror Heldenberg, CFO

And I would like to add that some of the verticals in some of those markets in the audio-video are less affected by the atmosphere in the world. Valens is not exposed to some of the very sensitive markets today, and we're exposed more to markets such as hybrid education and hybrid learning and conference rooms, which are less impacted from the atmosphere. This is one of the reasons that we keep seeing the growth in the company, and this is one of the reasons for the heads up for next year.

Suji Desilva, Analyst

Okay, switching over to auto perhaps, I'm wondering beyond the lead customer when perhaps Stoneridge and the trucking relationship would contribute to revenue materially if it maybe already is? Just really curious about the timing when that would help layer in with the lead customer?

Dror Heldenberg, CFO

As we indicated in the past, the project with Stoneridge continues to progress, and we are not changing our previous guidance that we anticipate mass production and ramp up of this business next year in 2023. In that respect, everything is on track, okay? No change to the Stoneridge project, to the truck project.

Suji Desilva, Analyst

If I can sneak in one last quick one, Dror, can you just elaborate on the R&D rescheduling? What was behind that? Just to understand the dynamics there.

Dror Heldenberg, CFO

Sure, Suji. This is something that we've already mentioned last time. We mentioned that after we started to ship the first samples of the A-PHY product, the VA7000 engineering samples to customers, obviously, we worked with our prospective customers very closely to better understand their roadmap and their schedule. Based on all these close relationships and joint work with the OEMs and some of the Tier 1s, we realize that we need to realign a bit and adjust our product roadmap development. It's mainly related to the next generation that we originally planned. Now based on the input that we receive from customers, we realized that we need to adjust our roadmap. I think that the focus today of customers is to make sure that the VA7000 can reach mass production according to their schedule. I think that the next generation can wait a bit. Definitely, some other derivatives that we plan can wait, as today, the customers are very focused on the benefits that the VA7000 brings. Just to name a few, it's the better EMC, the higher bandwidth, and the total system cost – it's a set of advantages that I think they recognize. Obviously, the ability to work with unshielded twisted pair is also a significant advantage, and we need to make sure that we help them get to mass production as soon as they can.

Operator, Operator

The next question is from Brian Dobson of Chardan Capital Markets.

Brian Dobson, Analyst

I guess shifting gears a little bit. Could you speak to some of your key partnerships and collaborations, perhaps specifically with leading players within the space? And how you see those driving standard adoption moving forward?

Gideon Ben-Zvi, CEO

Okay. Thank you very much for the question, and nice to hear from you. I will start with the collaboration with Sony. One of the strengths of the MIPI A-PHY is that the transmitter can be embedded as part of the silicon of the AA sensor. And this is what Sony did. This is, I would say, almost the mastermind of the transmitting part of the MIPI A-PHY, and the collaboration with Sony gives several advantages. First of all, Sony has a very strong, almost 50% market share in sensors and is growing its market share in automotive. Once they embedded the transmitter as part of their whole sensor, they gain advantages in price, quality, simplicity, space on the board, and power – it’s an all-win situation. This is a kind of collaboration we are very proud of and honored to partner with respected companies like Sony Semiconductors. The Intel Foundry is a very important collaboration, and it will boost the automotive MIPI A-PHY implementations by allowing companies to compete with us, but we are very happy with this because this is what drives the market. We are pleased that a company like Intel recognized and chose MIPI A-PHY as the technology that they want to encourage silicon players to integrate and manufacture in the future. These are two of the collaborations, and of course, there are more, but I think these are the most interesting to share at this time.

Dror Heldenberg, CFO

To add to what Gideon mentioned, the press release and the collaboration that we have with Keysight is a good sign for market maturity. We are starting to see companies that develop test equipment only when they realize and estimate that they are talking about a market that is going to grow, a market that is going to mature very fast. The fact that an established company like Keysight understands that they need to develop test equipment already indicates that they anticipate significant business for companies developing hybrid solutions.

Operator, Operator

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

Gideon Ben-Zvi, CEO

Yes. Thank you. I would like to thank you all for joining us today for our Q3 2022 call and for your continued support and interest in Valens Semiconductor. Have a great rest of the day.

Operator, Operator

This concludes the Valens Semiconductor Third Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.