Conference Transcript - VLN 2025-11-12

Operator

Good morning. My name is Karen and I will be your conference operator today. At this time, I would like to welcome everyone to Valens Semiconductor's Third Quarter 2025 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 michael benari investor relations for valence

Michal Ben Ari, Head of Investor Relations

semiconductor please go ahead thank you and welcome everyone to valence semiconductors third quarter 2025 earnings call with me today are gideon bensvi chief executive officer and guy natanzon chief financial officer earlier today we issued a press release that is available on the investor relations section of our website under investors.valance.com as a reminder today's earning 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 20f filed with the sec on february 26 2025 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. With that, I will now turn the call over to Gideon.

Gideon Ben-Zvi, CEO

Thank you, Michal. Hello, everyone, and thank you for joining us. Before we begin with the rundown of our Q3 highlights, I would like to take a moment to acknowledge our leadership transition. As you know, this will be my last earning call. As of tomorrow, Yoram Salinger will assume the role of Chief Executive Officer of Valen Semiconductor. Euron brings over 25 years of leadership experience in global high-tech companies and a track record of driving growth, innovation, and successful exits. As I step down from the CEO position, I will continue to be a board member of the company. And now, let's discuss the business highlights. We are pleased to report a strong third quarter well above our initial expectations. We delivered revenues of $17.3 million significantly above our guidance range of $15.1 to $15.6 million as customer demand exceeded expectations in the Pro-AV market, marking the sixth consecutive quarter of growth for our company. Looking ahead to Q4 2025, we expect revenue to be in the range of $18.2 to $18.9 million, dollars, setting us up for a seventh straight quarter of growth. For the full year of 2025, we expect revenues to be in the range of 69.4 to 70.1 million dollars. Gap gross margin for Q3 2025 came in at 63 percent, better than the guidance, and adjusted EBITDA loss was 4.3 million above the guidance range. I'll begin our quarterly discussion with a review of our cross-industry business unit, which covers industrial machine vision, medical, and the traditional professional audio video where our customers have reported better than expected demands. In ProAV, we are succeeding with our strategy of first targeting high-end products and allowing the rest of the market to follow. Adoption of the VS3000 chipset continues to grow underscoring the demand for long-range distribution of uncompressed 4K video. The VF3000 remains the only solution available that delivers HDMI 2.0, high-fidelity audio, Ethernet, USB 2.0, control signals, and power over single-category cable at distances up to 100 meters. One notable trend in Q3 was the growing adoption of matrix solutions. These are increasingly being used to deliver high-resolution video in command and control centers, museums, and live events. Several market leaders have launched state-of-the-art matrix products powered by the VS3000, including Extron's DTP3, Crosspoint, Kramer's MTX3, and Alclona's 4K HDR switcher. We also had exciting news from the field regarding our USB 3.0 extension solution, the VS6320. A major player that had previously been designing with a competing technology has now engaged us in four new designs based on the VS6320. We expect continued strong interest in this product moving forward. Staying with the cross-industry business unit, let's turn to industrial machine vision. In July, we announced that our VA7000 chipset, the series originally developed for automotive, is powering the market's first end-to-end camera-to-processor, MIPI A5 platform, from D3 Embedded. This solution provides the industry's first product ready pass to implementing the standard in AI-based embedded vision systems. We are observing strong momentum for MIPI AFI from within the ecosystem where companies are impressed by AFI's superior performance. Next quarter, we're excited to showcase the AFI offering alongside customers and partners at ITE in Yokohama, Japan, an important region for industrial vision systems. We continue to expect industrial machine vision to become an increasingly meaningful part of our revenue mix in the coming quarter. with initial revenue anticipated by the end of 2026 and strong growth potential in the years that follow. I would like to conclude this discussion of our cross-industry business unit with an update on the notable progress we are making in medical endoscopies. You have heard us speaking about disposable endoscopies several times. It is time to be explicit. Recently, we announced some exciting news. three OEMs, we launched the first VA7000-based endoscopies on the market, including the first disposable colonoscopy with 4K video resolution. As a reminder, the VA7000 chipset is the first on the market with built-in electrosurgical noise cancellation. To explain how important this innovation is, I would like to cite the international standard governing safety and performance requirements for medical endoscopies. Quote, the short interruption of illumination or image display shall not be considered unacceptable degradation for endoscopies equipment. That is to say, the official standard governing safety in endoscopies procedures allows for video loss. And the reason is simple. Until now, there have not been endoscopies that could flawlessly handle electromagnetic interference while supporting the highest resolution sensors. Valence technology offers a solution for endoscopies vendors that provides seamless video experience, and that's the main reason why we're seeing such strong market fit, both for single use and reusable medical endoscopies. In the medical world, there are two major trends, reducing the use of invasive surgeries and shifting toward single-use medical devices. ValenSolution addresses both of these emerging needs by enabling high-resolution video transmission and allowing for surgical procedures to be performed without electromagnetic interference. We will be showcasing the medical offering next week at the Medica trade show taking place in Dieselsdorf, Germany, and we anticipate considerable interest driven by the growing momentum this solution is generating across the markets. Our goal over the next year is to secure additional design ways and continue supporting existing ones, always the aim of ramping into mass production starting in 2027 to 2028. This market is representing a long-term growth opportunity. It's known for its high barrier to entry, but stickiness tends to be strong once you're in. Now, I would like to turn to the automotive industry. As a reminder, our opportunity in automotive is dominated by the VA7000, which offers high bandwidth and best-in-class EMI immunity. It is the first chipset on the market to comply with the MIPI A5 standard for high-speed sensor connectivity. Late last year, we announced three design wins with leading European OEMs for the solution, gaining a strong foothold for AFI within the global OEM community. To drive AFI forward and ensure it is the key connectivity standard in the automotive industry, we collaborate with multiple silicon vendors validating interoperability as their AFI solution come to market. The impact was clear in Q3 as another AFI provider announced the standard for design win. This makes AFI the first automotive standard to secure design wins across more than one silicon vendor. Another important milestone from MIPI AFI came from Sony Semiconductor Solutions, which announced the upcoming release of the IMX828, the automotive industry's first image sensor with a built-in MIPI AFI interface. According to Sony, the camera brings a number of benefits to OEMs and Tier 1s, including reduced cost, compact ball size, suppressed heat generation, reduced camera module power consumption, and improved resistance to error due to external noise. Having an integrated product is a pivotal milestone for any standard, and this is why Valens partnered with Sony from the early stages of this product's development, ensuring that the camera met the A5 specification and was interoperable with our VA7000 chipset. When Sony markets this chip to its customers and partners, it is highly likely that the Valens VA7000 will be involved on the received side. AFI also receives another major endorsement by the leading player in the automotive industry, Samsung Electronics. We were proud to announce last quarter that Samsung is supporting the MIPI AFI standard reflecting strong market interest from global OEMs. In addition, we will fabricate our new generation of AFI solution at Samsung Foundry. Here is what Samsung Corporate VP Foundry Technology Planning stated about AFI. OEMs are demanding a next-generation connectivity solution that can ferry them to higher level of ADAS and autonomous driving. And AFI offers the key technical breakthroughs necessary to achieve this. It's clear that the momentum around AFI is building all around the world. We continue to be engaged in several evaluation processes with multiple OEMs, each at different stages of development. This sustained activity highlights the growing strengths of the MIPI-AFI ecosystem and its acceptance as an emerging industry standard. We remain confident in our leadership position in AFI, supported by three design wins with leading European OEMs and a strong partnership with Mobili. With that, Guy, please go ahead and discuss our financial performance in more detail.

Guy Nathanzon, CFO

Thank you, Giden. I'll start with our third quarter results and then provide our outlook for the fourth quarter and full year of 2025. We generated quarterly revenue of $17.3 million, which exceeded our guidance range of $15.1 to $15.6 million. This compares to revenues of $17.1 million in Q2 2025 and $16 million in Q3 2024. The cross-industry business, or CIB, accounted for $13.2 million, or approximately 75% of total revenues, while Automotive contributed $4.1 million, or approximately 25% of total revenues this quarter. This compares the Q2 2025 revenues of $12.8 million from CIB and $4.3 million from Automotive, which represented 75% and 25% of total revenues, respectively. In Q3, 2024, revenues from CIB were $9.4 million and $6.6 million were from automotive, or approximately 60% and 40% of total revenues, respectively. Q3 2025 gross profit was $10.9 million compared to $10.8 million in the second quarter of 2025 and compared to $9 million in the third quarter of 2024. Q3 2025 gross margin was 63% compared to our guidance range of 58% to 60%. This compares to a Q2 2025 gross margin of 63.5% and 56.4% in Q3 2024. On a segment basis, Q3 2025 gross margin for the CAB was 69.1% and gross margin from automotive was 43.2%. This compares to Q2 2025 gross margin of 67.8% and 50.5% respectively, and for Q3 2024 gross margin of 70.3% and 36.8% respectively. The increase in gross margin of the CIB compared to Q2 2025 was due to change in product mix. The decrease in Q3 2025 in automotive gross margin compared to Q2 2025 was due to product versions mix and certain operational expenses related to manufacturing line transition. Non-gap gross margin in Q3 was strong at 66.7%, which compares to 67.2% in Q2 2025 and 60.7% in Q3 2024. Operating expenses in Q3 2025 totaled $19 million compared to $18.2 million in Q2 2025 and $21.3 million in Q3 2024. Research and development expenses in Q3 totaled $10.8 million, compared to $10.2 million in Q2 2025, and $10.3 million in Q3 2024. SGN expenses in Q3 were $7.4 million, compared to $8.9 million in Q2 2025, and $10.7 million in Q3 2024. The decrease, compared to Q2 2025, is mainly due to income from a certain batch production incident in an amount of $1.5 million recognized for insurance claim payments. Change in annual liability in Q3 was an expense of $0.7 million compared to an income of $0.8 million in Q2 2025 and an expense of $0.3 million in Q3 2024. The change, compared to Q2 2025, is mainly due to reassessment of the earned amount to be paid to the acronym shareholders. Gap net loss in Q3 2025 was $7.3 million, compared to a net loss of $7.2 million in Q2 2025 and a net loss of $10.4 million in Q3 2024. Adjusted EBITDA in Q3 2025 was a loss of $4.3 million, better than the guidance range of a loss between $7.4 million to $6.8 million. This compares to an adjusted EBITDA loss of $4 million in Q2 2025 and an adjusted EBITDA loss of $5.1 million in Q3 2024. Gap loss per share for Q3 was $0.07, compared to a gap loss per share of $0.07 for Q2 2025 and a gap loss per share of $0.10 for Q3 2024. Non-gap loss per share in Q3 2025 was $0.04, compared to a loss per share of $0.04 in Q2 2025 and a loss per share of $0.03 in Q3 2024. The difference between gap and non-gap loss per share was mainly due to a stock-based compensation, change in earner reliability, depreciation and amortization expenses, and certain batch production incident income. Turning to the balance sheet, we ended Q3 2025 with cash, cash equivalent, and Schroden deposits totaling $93.5 billion and no debt. This compares to $102.7 million at the end of Q2 2025 and $131 million at the end of 2024. During Q3 2025, the company allocated $3.6 million for shares repurchase program and total of $23.4 million between Jan 1, 2025 and September 30, 2025. Currently, there is no active share repurchase program. Our working capital at the end of Q3 2025 was $98.9 million, compared to $106 million at the end of Q2 2025 and $133.6 million at the end of 2024. Our inventory as of September 30, 2025 was $11 million, a slight decrease from $11.5 million on June 30, 2025, and down from $11.2 million on December 31, 2024. Now, I would like to provide our guidance for the fourth quarter and full year of 2025. We expect Q4 2025 revenues to be in the range of $18.2 to $18.9 million, dollars meaning seventh consecutive quarters of growth in revenues we expect gross margins for q4 2025 to be in the range of 58 percent and 60 percent and we expect adjusted ebitda loss in q4 2025 to be in the range of 4.6 to 4.2 million dollars loss for the full year 2025 we expect revenues to be in the range of $69.4 to $70.1 million. The midpoint reflects growth of approximately 20% compared to the annual revenue of 2024. I'll now turn the call back to Giddon for his closing remarks before opening the call for Q&A. Thank you, Guy. Across each of our target

Gideon Ben-Zvi, CEO

markets, Valens Semiconductor is well positioned for growth supported by our cutting-edge technology and robust balance sheets. We remain focused on executing our long-term strategy and advancing on our path towards profitability. On a personal note, I would like to say that it has been a privilege to lead the Valens team over the last five and a half years. I'm confident that in his position as the next CEO of Valence, Yoram will accelerate Valence growth and strengthen its position as a leader in high-performance connectivity across industries. With that, I will now open the call to answer to your questions. Operator.

Operator

Thank you, ladies and gentlemen. At this time, we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2 if you are using speaker equipment kindly lift the handset before pressing the numbers please ask your question in a loud and clear voice your questions will be pulled in the order they are received

Operator

please stand by while we pull for your questions question is Queen button go

Neil Young, Analyst — Needham & Company

Hey, it's Neil Young. I'm for Quinn Bolton. Thanks for letting me ask a question. So I wanted to ask about the gross margin across the two businesses, specifically within automotive, which dropped sequentially. So last quarter you talked about the optimization of product costs within automotive. This quarter it looks like the sequential drop was due to product versions mix and certain operational expenses related to manufacturing line transitions. I was wondering if you could give a little more detail on what that is. You know, is this a one-time event? Should we expect this to carry over into future quarters? And then, you know, maybe for 4Q, just kind of walk us through the puts and takes and gross margin for the guide. You know, it seems like it came in a little bit softer than I would have thought.

Guy Nathanzon, CFO

Hi, Quinn. So we truly believe that this was like a kind of a one-time event related to the mix of different versions of the product during the quarter and related to one-time expenses related to a transition of certain manufacturing line. And we believe that in the next quarter that should be improved again.

Neil Young, Analyst — Needham & Company

Okay, so it should maybe return to what it was in 2Q with an auto or a smaller step up?

Guy Nathanzon, CFO

I'll be a little bit cautious here, and I will try to avoid from providing an exact answer, but again, it should be improved. It's still early to say what would be the pace of the improvement.

Neil Young, Analyst — Needham & Company

Okay, thanks. That's really helpful. And then the cross-industry business revenue came in definitely above what I would have expected. So I know earlier in the year or last quarter when you guys were talking about your guide, there were some concerns around the impact of tariffs. You know, was that not as bad as previously feared? Sort of what's driving the strength in CIB or more specifically in pro-AV? And, you know, should we expect it to grow at a higher rate sequentially than auto in 4Q?

Gideon Ben-Zvi, CEO

Hi. Thank you, Quentin. Thank you for the question. We see that the tariff influences becomes milder, and this is the reason that companies are less reluctant from making new orders, and they know that they can ship what they buy. It's not yet the situation that the market is clear and the atmosphere is clear. It's improving, and as we all read the same press, it's changing daily. but the whole atmosphere around is far more relaxed not relaxed to the level before it all started

Michal Ben Ari, Head of Investor Relations

Great, thank you

Operator

The next question is from Suji De Silva from Roth Capital

Suji DeSilva, Analyst — ROTH Capital

Hi Gideon Gideon, best of luck in the transition and you're in best of luck in the new role So team, the pro AV upside in the quarter, can you give some color on where that was coming from and how sustainable that is?

Gideon Ben-Zvi, CEO

Pro-EV is a very big part of the CIB. And Pro-EV is mainly, you know, matrices and conference rooms and projectors. It's all one mix. And it comes from all of them. It doesn't come particularly from one. I might say that one niche which is starting and become bigger is the conference room camera. If there is a sub-segment that might have an entry, it's this one. But other than that, it's the stuff we know for years, and the market is getting back to what it used to, and this is the pro-AV recovery. I don't think I have a lot more color to put other than that, but I believe that this covers where the pro-AV is back to.

Suji DeSilva, Analyst — ROTH Capital

All right. Thanks, Gideon. And then my other question is maybe a bigger picture question. Can you talk about the factors that are pacing or gating MIPI AFI, broader MIPI AFI adoption, you know, maybe across non-auto and auto, just to understand, you know, what you think is kind of left in 25 and 26 to help kind of accelerate that adoption?

Gideon Ben-Zvi, CEO

You know, MIPI AFI, as I repetitively say, a company like Valens cannot win in points. We can win in knockout. MIPI AFI, where it gives the advantages, the advantages are very blunt. This is correct for automotive and for medical and for industrial and where people have serious influence of electromagnetic. And when electromagnetic is strong and changes the whole ecosystem, this is where we are. And this is part of what the new world, the new world has more cameras, it has more resolution, more bits per pixel, and they require more bandwidth. And this bandwidth makes the whole system to be more fragile. And when it's more fragile, MIPA is the solution. and that's exactly where we are and this is the reason for those with I am not sure I did answer exactly your question so if it's not please don't hesitate to elaborate

Suji DeSilva, Analyst — ROTH Capital

no Gideon that was the color I was looking for I mean there is it sounds like bandwidth and higher resolution video is one of the catalysts that's happening secularly in the market just to understand great alright thanks guys thank you

Operator

the next question is from Dave Storms of

Dave Storms, Analyst — Stonegate

please go ahead good morning and thank you for taking my questions um just want to start with the gross profit margin guide in q4 year-to-date gross profit margin is tracking around 63 percent and you're obviously guiding between 58 to 60 is this an expectation that the mix is going to change is this typical seasonalities uh is this you know being judicious in the face of the macro

Guy Nathanzon, CFO

environment any color here would be great sure so in the beginning of the quarter we're trying to estimate the next quarter results based on product mix and the combination of the revenue drivers. And the result is what we've provided as the guidance.

Dave Storms, Analyst — Stonegate

Appreciate that. And I just wanted to turn to the medical segment. Great to see they had the three product launches. Curious as to what the pacing may be around for further product launches and what the logistics look like for expansion there.

Gideon Ben-Zvi, CEO

Okay. I believe that both of us are not medical doctors, but I try to get us both to the same point of view of a medical doctor. There are stages when the doctor penetrates with the camera in order to see what is in, and then he starts to solder or to burn or to do anything. At this time, all the frames are lost, and he's blind, and he uses the memory he had before to see that he does correctly. And the reason for that is because there is no any resistance of electromagnetic. There is no EMC. The EMI is celebrating the influence is very high. What we do enable that the continuity of the surgery without loose frames. And this is one of the reasons that it is adopted in the industry. And the other reason is the pressure to move to a single-use endoscopy. This reason is originated by the tendency that minimal invasive surgery is responsible for maybe more than 50% of the infections in hospitals. And both try to move from single-use endoscopy on one hand and to have a more resilient system on the other hand. And there is a third reason, which I'll mention in a second, drive to look for solution that have immunity against electromagnetic, so the doctor would not have lost frames, and the cost will be cheaper and enable single-use endoscopy. The third is a little bit more abstract. I'll try to explain it over the phone. The third is the distance between the lens and the sensor. When they are remote, the surgery sees what's inside our body, lights through a stroke. When they are connected, it opens up so we can see a larger picture. And this is a third motivation for why to move from traditional endoscopy to this new endoscopy that enables both bigger picture. The doctor can do whatever he wants without losing frames.

Dave Storms, Analyst — Stonegate

That's a great caller there. Thank you.

Operator

I repeat, if you have a question, please press star 1. There are no further questions at this time. Mr. Bentzvi, 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 third quarter of 2025 Earning Call and for your continued support and interest in Valente Semiconductor. We hope to meet you again in our next Earning Call.

Operator

Thank you. This concludes the Valente Semiconductor Penalz Conference Call. Thank you for your participation. You may go ahead and disconnect.