Q3 2022 Valens Semiconductor Ltd Earnings Call

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Good morning, My name is <unk> and I will be conference operator today at this time I would like to welcome everyone to <unk> Semiconductor's third quarter 2022 earnings conference call and webcast.

All participant lines have been placed in a listen only mode.

Opening remarks by by lens semiconductor management will be followed by a question and answer session.

I will now turn the call over to adopt the Golden Vice President of Investor Relations for Valens semiconductor. Please go ahead.

Thank you and welcome everyone to <unk> Semiconductor's third quarter 2022 earnings call with me today are Gideon Bensley, Chief Executive Officer, and dwell has enberg Chief Financial Officer.

Earlier today, we issued a press release that is available on the Investor Relations section of our website under investors that <unk> Dot 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 with the SEC on March <unk> 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 youre interested in meeting with US. Please email me at investors at Villa Dot Com.

With that I will now turn the call over to Gideon.

First off Mark and thank you everyone for joining our call.

Q3 quarterly results.

Okay.

Q3, 2022 revenues were a record $23 one when we get a total of 21% compared with Q3 2021.

We also achieved better than anticipated gross margin and adjusted EBITDA.

We are increasing over full year revenue guidance and improving our adjusted EBITDA guidance for the year.

Our high speed connectivity technology is used in diversified business activities.

Support People's Daily lives industry.

<unk> pigment audio video and automotive, which we continue to diversify and expand our footprint.

Now I will turn to a review of our business.

Starting with audio video.

Demand for our high speed uncompressed multimedia distribution solutions was strong and our audio video business continued.

<unk> is expanding into new applications and vertical from corporate video creation government industrial to maybe cut it anymore.

Starting with the duration.

The tradeoff with UK entities, using hybrid model to enable users and stuff to switch between Osage and remote learning is here to stay and we're seeing more and more class rooms around the world equipped with video collaboration system.

Hybrid learning enables a continuity of teaching and learning it.

It can create adequate stability by giving SKU data access to additional education opportunities that meet their academic needs.

In this way our technology democratizes opportunity in grocery goods to equity.

In the corporate sector, the opportunity across industry and geography is substantial for audio video connectivity technology, such as ours as video conferencing technology is increasingly essential for the office space video meetings and remote work.

In command and control the user for technology is growing.

Many entities across the globe need to visualize their operations in concert with efficiency.

Victor safeguard communities a recent use case in the corporate sector is multinational electric utility company, where security is of Paramount importance the company needed to isolate certain departments operations from the rest of the IP network, while still providing uncompressed locally.

A long distance multimedia expansion, our wired audio video distribution and products allows us to meet this goal.

I'm also proud to share that earlier this year, the Valencia semiconductor chips and benefit from a solid 40, HD suite of weaker product regulatory enhance the experience of accurate and spectators from around the world at the regional GMP confirming peak laser gains the order experience.

<unk> immersive visuals in real time in the 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 continue to serve our automotive would be a 6000 cubic in USB expansion 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.

The latest semiconductor <unk> offers a unique set of in vehicle wired symmetrical nonsymmetric high speed connectivity required by the automotive industry.

Our EMEA $6 chips 70 provides symmetric connectivity and enables data flow for infotainment and telematics.

<unk> started using our chips in the aircraft models in Q4 2020 and today you can find our chips in the S C and D class models, including in the electric vehicle known as EV mortgages.

<unk> hundred 7000 chipset family, our Nonsymmetric product was the first in the industry to comply with the new acreage bundled.

It addresses the growing need for high speed video productivity for automotive applications, such as advanced driver assistance systems is up which is projected to ramp towards an $8 billion to $10 billion market in the coming years.

The deep <unk> startup, 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 the sensors to the compute unique for automotive applications, such as Adas and autonomous driving.

The latest semi conductors Nonsymmetric DSP based productivity technology is the foundation for the April startup, which aims to replace the legacy analog solution existing today in cards.

7000 product family feature outstanding resilience, so electromagnetic interference known as EMI, making it a productivity solution for the high bandwidth high resolution critical that significantly improve object detection and classification.

Our ACI compliant chipset greatly simplifies integration for camaraderie Lidar and radar. It also enables flexible integration of these filters into SSO cluster that is collected over a single link.

This is known as the sensor fusion centrifuges opens the door to more accurate centralized computing.

The key element for Adi's level III.

Speaking on <unk>, specifically it is becoming clear that in addition to cameras sensors radar are essential to meet our automotive Oems and tier one asus requirements.

Our connectivity products are currently being evaluated by a leading radar companies that are considering the use of 7000 with the senators.

In our previous calls we communicated there were expectations regarding the pace of adoption of our <unk> solutions I'm pleased to share with you. We have already received initial RFID from potential customers for our <unk> compliance the 87000 Q2.

We are on track for our first design wins next year with smart production expected to start in 2025.

In line with our strategic plan the growing nearly 800 ecosystem continues to gain recognition and work is well position for large scale implementation by automotive Oems around the world.

An important pillar is solidifying the ecosystem is Intel which shows the <unk> board of directors and determined it meet the ACI is the most cutting edge high speed connectivity technology in the automotive industry in Q3, we announced a collaboration with Intel foundry services to <unk>.

Posted the development of the AI compliance offering for the automotive customers.

We believe our partnership with inter coronary we encourage our automotive chip manufacturers to join the growing <unk> ecosystem as automotive Oems require multiple production sources.

The interoperability between systems from a number of rentals is via requirements for that sector any industry standards.

In the third quarter, we announced the successful completion of the industry's first joint interoperability test between a front end semiconductor <unk> hundred 7000, cheap on the receiver side and solid semiconductor solutions prototypes of integrated sensor and transmitter chips on the other side.

Solar and semiconductor solution has.

Space is the importance of introducing this cutting edge technology into the image sensors.

We also expect that the meet the <unk>, Mr integration will provide significant cost and performance benefits to their global base of automotive customers.

Last month, we conducted a webinar with solid semiconductor solutions, and just Bart and association of Japanese automotive Oems and tier ones, such as Toyota Nissan Honda Mazda Suzuki and vessel on how automotive companies can advanced Adas and autonomous driving which.

<unk> five.

Hundreds of participants from the Japanese automotive industry joined the webinar two year's speakers from you just bought a you'll start next generation high speed Network group, Sony Semiconductor solutions automotive development and Valero semi conductor discuss the progress of maybe a fight and growing importance of electromagnetic.

Stability known as EMC and cars.

This car companies integrate sales of requiring higher bandwidth and EMC into next generation Adas and autonomous system interoperability among multiple vendors components will be crucial.

To address this need.

Equipment rentals are beginning to create auspicious testing solutions.

K site technologies, which deliberate advanced design and validation solutions is addressing the growing market demand for high speed digital interfaces for next generation in vehicle networks.

In September <unk> announced their partnership with several companies, including <unk> semiconductor to develop immediately ACI compliance test solution that ensures data transmission quality and broad scale interoperability.

Before turning to our financials.

This call marks the first anniversary of the latest semiconductor as a public company.

Sales going public we have made significant progress executing against our business plan and growth strategy, which is supported by our solid balance sheets.

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 item that could impact our business. During 2023, such as lead times, all a part of and demand levels across industries.

We are focused on creating long term value to all our stakeholders. We believe that we have sufficient resources and capabilities to continue to invest in and expand our competitive advantage to enhance our product portfolio and market presence. We will continue to focus on our best.

<unk>, which we believe will drive sustainable growth and profitability for the company.

I'll now turn it over to Dror <unk>, our CFO to review, our Q3 2022 financial results and provide our financial outlook.

Thank you again.

With our third quarter 2022 results and then provide our outlook for the fourth quarter and our updated full year 2022 guidance.

Beginning with our third quarter 2022 results, we exceeded the high end our revenue gross margin and adjusted EBITDA guidance, we achieved record quarterly revenues of $23 1 million an increase of 21, 3% from the third quarter of 2021.

Other than anticipated revenues driven primarily by audio video also contributed to a novel rule other than expected gross margin.

Third quarter 2022 gross margin came in at 69, 7% compared to last year 72, 4%, reflecting a portion of revenue coming from our automotive business, which carries lower gross margins in audio video non.

non-GAAP gross margin was 75% compared to 72, 7% in Q3 2021.

Operating expenses were $21 $3 million in Q3, 2020, twos down three 4% from $22 million in Q3.

Research and development expenses grew by $2 $1 million from Q3 of 2021.

This reflects our continued investment in developing product offerings to address the new business opportunities ahead of us in both automotive and audio video, while taking into account, our realigned and optimized for automotive R&D efforts, which matched our prospective customers and partners roadmap is.

G&A expenses were $8 6 million.

Compared to $11 $4 million in Q3 2021 last year's SG&A included one time expenses in the amount of $5 $4 million related to ongoing public in September 2021, Q3, 2022, SG&A was similar to the past three quarters as a public company.

Turning to net loss and adjusted EBITDA.

Q3, GAAP net loss was $5 3 million compared.

Compared to $8 $5 million loss in Q3 of 2021, and we exceeded our guidance for adjusted EBITDA reporting an adjusted EBITDA loss of $1 7 million.

The better than expected adjusted EBITDA reflects a combination of higher than expected revenues and gross profit the rescheduling of certain R&D expenses from Q3. Two later this year and early 2023 and the strength of the U S dollar, which positively impacted expenses paid in Israel.

Scheduled mainly for compensation to employees based in Israel.

GAAP loss per share for Q3 2022 was five <unk>.

Calculated as the net loss divided by $98 1 million shares.

This compares to Q3 2021, GAAP loss per share of 94%, which is calculated as the net loss of $8 5 million.

And accrue dividend related to preferred shares in the amount of $3 $9 million totaling $12 3 million divided by $13 2 million shifts the non-GAAP loss per share for Q3 2022 was <unk> <unk>.

Which is calculated as a non-GAAP net loss of $1 5 million divided by the $98 1 million shares.

This compares to Q3 2021, non-GAAP loss per share of <unk>, <unk>, which is calculated as the net loss of $3 million up.

Divided by the $13 2 million shares.

Turning to our balance sheet. We ended Q3 2022 with a strong balance sheet cash cash equivalents and short term deposits totaled $150 million to $90 million.

And we had no debt this compares to $156 8 million at.

At the end of Q2 2022. Furthermore, looking at working capital we ended the third quarter with a balance of $166 6 million comp.

Compared to $168 3 million and.

At the end of Q2 2022.

This difference of $1 7 billion.

Is mainly due to the loss during Q3 2022 after reconciling the noncash expenses such as equity based compensation depreciation and adjustment of the fair market value of the full featured ships.

Our inventory as of September 32022 was $21 9 million.

An increase of $4 $6 million from the end of Q2 2022.

There are two primary reasons for this increase first.

We live in an inflation environment and the value of new inventory is higher second as we have discussed in previous calls in order to secure production capacity with vendors in crowd constrained supply environment, we placed longer term purchase orders goods from this purchase soldiers.

Continued to arrive in the third quarter.

This level of inventory is needed to meet the demand from customers. We see ahead of us in the next 12 months, especially in automotive, where we intend to double our revenues from 2022 to 2023.

Like to point out that the inventory ordered under the longer term purchase soldiers will enable us to mitigate the impact on our gross margins from the expected other product costs in the first half of 2023, although we continued to face cost increases from some of our supply chain vendor we expect.

<unk> to start easing and lead time to start normalizing in the second half of 2023 now.

Now I would like to provide our guidance for the fourth quarter of 2022, we expect revenues in the range of $23 one to $23 2 million.

We expect gross margins to be in the range of 66, 1% to 66, 5% in the fourth quarter, we are planning tape outs of a reclusive.

<unk> hundred 7000 assembly chipsets to be able to deliver to our potential customers reach a feature set and better performance in line with market expectations. This is another crucial steps towards our customers future mass production at the same time in alignment with our current roadmap were reached.

Scheduling certain R&D activities to early 2023, adjusted EBITDA loss is expected to be in the range of $9 $7 million to $9 million.

As you will recall tape out cost in our income statement as they occur.

As of September 32022 shares outstanding totaled $98 4 million.

We are raising our guidance for the full year 2022, largely due to the fact that we exceeded the on and off our revenue gross margin and adjusted EBITDA guidance for Q3 2022, we now expect revenues to range between 93 and $94 million up.

From $89, one and $89 8 million <unk>.

Provided he noticed given the ongoing expansion of our automotive revenues, we continue to expect to essentially double this part of the business in 2022 compared to 2021.

We anticipate 2022 gross margins will be in the range of 69, 3% to 69, 4%. This new gross margin range is up from the previously guided range of 68% to 68, 5%.

Also substantially improving our projected adjusted EBITDA loss to now be between 20, and $19 3 million for the full year significantly better than the prior range of 25, 7% to $24 3 million.

This improvement in adjusted EBITDA is driven mainly by aligning our product roadmap toward customer's needs also supported by the expected benefits from the strong U S dollar on our Israeli shekel based expenses.

We remain on track to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2020 for rebuilding the company should reach cash flow profitability.

I'll now turn the call back to <unk> for his closing remarks before opening the call for Q&A.

Thank you Joel we are pleased with our results for the third quarter that once again exceeded expectations we.

We made notable progress in many aspects of our business.

Our automotive business continues to evolve and we expect revenues from the first generation product. The 6000 to grow further and it will be used in more car models.

We are receiving positive feedback from prospective customers and partners.

<unk> 7000.

The initial RFID. This we received are an important milestone towards adoption of AI product by automotive Oems.

We continue to see new opportunities in various verticals for our high margin and diversified audio video business incorporate education medical and industrial among others.

Even in today's challenging economy, and a 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.

Well as we constantly strive for excellence and innovate daily to ensure our products and solutions meet the high standards of our customers and provide society the connectivity required.

Ever evolving environment operator.

Now like to open the call for questions.

Thank you.

Ladies and gentlemen at this time, we will begin the question and answer session.

You have a question. Please press star one if you wish to cancel your request. Please press star two if you are using speaker equipment kindly, what's the handset before pressing the numbers. Please ask your question in a loud and clear voice questions will be pulled in the order. They RSC. Please standby, while we poll for you.

Questions.

The first question is from Rick Schafer of Oppenheimer. Please go ahead.

Thanks and congrats.

Okay.

It's tough out there right now.

Order velocities and speaking of that one.

For almost everyone I feel like.

<unk> balance.

Growth.

I was curious if you could talk about any shifts you are seeing.

In your order patterns.

Is it more negative and anything that youre seeing there in terms of.

Any push outs, whether it's in <unk> in auto.

Or any significant change to lead times, just sort of any sense of what youre seeing in terms of your order book. Thanks.

Hi, Ray Paula good talk to you again.

Obviously at this point in time.

We will not.

Providing our guidance for 2023 however.

If we analyze our business and let's start with automotive I think that what we're seeing today, we're starting to see indications that our automotive business is expected to double its revenue in 2023 from <unk> 22. So in that respect we feel that the automotive business is quite resilient.

With respect to the video business.

So I would say that the other bigger business is probably more correlated.

To some of the global macro trends that we see today. So we assume that took place during the first part of 2023 custom.

Customers will mainly consume inventories that they accrued in the challenging supply demand environment, having said that when.

When we analyze the biggest segment in 2023, we still see the following opportunities obviously, we continue to exceed the expansion of the <unk>.

Just to refresh your memory. This is the most recent member of our audio video product family and we see this product in designs of many industry, leading companies and we expect to see more revenue contribution from these chipsets.

Next year in 2023.

In addition, our other solutions.

Now being evaluated as Gideon mentioned in his prepared remarks for new applications, and we assumed that at least some of them will mature into mass production product during 'twenty three.

So I would say maybe to sunrise. So why do you anticipate a more moderate growth rate for this part of the business compared to the projected 2020 to feel the real growth rate. We still believe that we will continue to see an annual growth in audio visual.

With respect to the last part of your question about some cancellations or push outs.

I would say that you know these are tough days for our customers as well.

And obviously their planning is becoming more challenging for them as well I can I can tell you that recently, we got some push outs request at least from certain customers. However, those push outs were offset by pooling request.

By other customers and this resulted in the improved guidance that we shared with you today in this call.

Thank you that's great color and then maybe just a follow up to that.

Gross margin was a lot higher.

You're guiding to higher much higher than I had modeled.

I was just hoping that you could maybe provide a little color on what's driving that.

And where we should expect gross margin to stabilize now and I think you've talked in the past about the sort of a low mid sixty's, but I didn't know if there was any update.

On sort of gross margin. Thank you.

Yeah sure so the better than expected gross margin.

Is mainly driven by the revenue mix between audio video and it's emotive. We just mentioned that the growth in revenue was mainly triggered by the audio video business that comes with higher gross margin. So therefore, the first reason the second reason is that in the third quarter.

We still consume some inventory that was produced in lower <unk> costs.

Obviously as we refresh the inventory it always does in this environment inflationary environment. It comes with a cost so.

Assume that we will 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're going to meet this target.

Great. Thank you guys and congrats again.

Thanks.

The next question is from Fujita Silva of Roth Capital. Please go ahead.

Hi, good in hydro <unk> congratulations on the progress here.

So maybe we can talk about audio video first and just what drove the upside is that potential remain each quarter or is there kind of some secular trend that is helping you guys that that tailwind kind of tough environment.

Okay.

Ice ice Fuji and thanks for the question I think that nothing dramatic to report here I think that one thing that helps us in the audio video is the fact that this part of the business is very diversified.

And.

This is a very strong business strong points for us.

Every quarter, we see this strength in other areas of the business again, we continue to see as I mentioned before to Rick We continue to see the expansion of the <unk> thousand it's a very encouraging.

Sign for us.

With respect to the penetration of this <unk>.

New product, which by the way it comes with.

Asp's.

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.

I would like to add high high skilled on how are you and thank you for the for.

For the question and I would like to add some of the vertical and some of those markets in the audio video.

Our lesson infected by the atmosphere in the world.

Atlanta is not.

Some of the very sensitive market today, and we're exposed more to a market check this hybrid education and hybrid learning and in conference rooms, which are less to even zero infected from the from the wasn't atmosphere of course, not everything is like that but this is one of the reason that we can.

Keep seeing the growth in the company.

The growth in the company and is one of the reasons for the heads up for next year.

Okay. Thanks, Gideon thanks, Ron so switching over to auto perhaps I'm wondering beyond the lead customer when perhaps the stoneridge in the trucking relationship would contribute revenue materially if it if it maybe already is just really curious about the timing when that would help kind of layer in with the lead customer.

So.

I think that as we.

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 2003 in that respect everything is on track Okay. No change to the storage project to the truck project.

Okay. If I can sneak in one last quick one can you just elaborate on the R&D rescheduling what was behind that just to understand the dynamics there. Thanks sure.

So I think that this is something that we've already mentioned last time, we mentioned that.

<unk>, we started to ship the first samples of the 85.

ACI product the 7000 to introduce samples to customers. Obviously, we worked with our prospective customers very closely to better understand their roadmaps and dose schedule.

And based on all these close relationships and joint work with the Oems and some of the tier ones, we realize that we need to realign a big.

And adjust our.

Product roadmap development.

It's mainly related to the next generation that we planned. This was originally planned and now based on the input that we received from customers what is more important today and what is less important.

When they need.

More and new devices, we realized that we need to adjust our roadmap.

I think that the focus today of customers is to make sure that the VA 7000.

Can reach to mass production according to their schedule.

I think that the next generation can wait a bit.

Definitely some other derivatives that we plan I think that the two data customers very focused on the benefits of the BBA 7000 brings just to name a few of them.

Virtually and see it's the bandwidth.

Total system cost.

The.

It's a set of advantages that I think that they recognize obviously the ability to walk with untreated with despair.

It's a set of benefits and we need to make sure that we owed them to get to mass production as soon as they can.

Okay, Great Thanksgiving and thanks, Brian .

Okay.

The next question is from Brian Dobson of Sheridan capital markets. Please go ahead.

Sure.

Alright, thanks, so much for taking my question.

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 July being standard adoption moving forward.

Okay I'll take it. 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 meet the AFI.

<unk> can be embedded as part of the silicon of deep a sensor and this was solid it.

And actually this is I would say it was not the master minds objections meeting a part of the <unk> and the collaboration with Sony in several advanced expression of Sonic is a very very strong almost 50% plus market share in the central and growing market sharing cytosorb for automotive and once they.

Embedded the transmitter as part of their whole sensor they give them advantage both on the price and the quality and the simplicity in the space on the board empower like it's an all win game and this is the kind of collaboration which we are very proud of and very.

Proud to be a partner with respectful company like Exxon semiconductors.

As of in period.

<unk> a M.

FOP is a very important.

Collaboration and they would boost the automotive <unk> implementations by allowing companies actually to compete with us, but we are very happy with it.

What will drive the market and we are happy that a company like Intel recognized and shows.

In theory, it wouldn't be a fight and the technology that they want to encourage a silicon players to integrate and to manufacture in the future. So these are two of the collaborations.

Collaborations of course, there are more I think these are the most interesting to share now.

This time, maybe maybe just to add to what you didn't mention it.

The press release and the collaboration that we have with the key site now it's a good sign for mature markets mature do you know.

We're starting to see companies that develop test equipment.

Really when they realize and they estimate that they are talking about.

A market that is going to growth and most of that is going to be matured very set and the fact that the company and.

An established company like key site understand that they need to develop already developed test equipment that has been obviously to serve not just for length, but other players in this market. It's another indication for the developer ecosystem and the fact that anticipate that they are going to see.

Business significant business.

For companies to develop <unk> solutions.

Yes excellent. Thank you very much.

Okay.

If there are any additional questions. Please press star one if you wish to cancel your request. Please press star two please standby, while we poll for more questions.

Oh.

There are no further questions at this time, Mr. Bernstein would you like to make your concluding statement.

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 Valencia semiconductor.

Have a great rest of the date.

Thank you. This concludes the Valens semiconductor third quarter 2022 results conference call. Thank you for your participation you May go ahead and disconnect.