Q2 2023 Valens Semiconductor Ltd Earnings Call
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[noise], ladies and gentlemen, thank you for standing by the call will begin shortly.
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You may begin.
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Good morning, My name is Jody and I will be your conference operator today at this time I would like to welcome everyone to Valens semiconductor second quarter 2023 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 adopt the Golden Vice President of Investor Relations for violence semiconductor.
Please go ahead.
Thank you and welcome everyone to Valens semiconductors second quarter 2023 earnings call with me today are Gideon Bensley, Chief Executive Officer, and Paul has been bugging Chief Financial Officer.
Earlier today, we issued a press release that is available on the Investor Relations section of our website under investors thought Valletta 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 1st 2023 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 conducting investor conferences and meeting virtually and then Chicago antenna.
If you're interested in meeting with US Please email me at Investor <unk> Com.
That I will now turn the call over to keep them safe.
And thank you all for joining our Q2 2023 quarters.
If you could 2023.
Conductor revenue reached a record $24 $2 million.
We also want you to fill them up.
Perfect.
On our journey towards adjusted EBITDA breakeven by the end of this year.
We continued to make progress.
Our long term growth opportunities as well.
And we found that push the boundaries of productivity, we saw robust offering in the Navy.
Customers to bring to market, new disruptive products for existing and untapped market.
We continue to address the current macroeconomics.
The rising inflation interest rates and slower than anticipated inventory digestion.
These trends are driving some near term uncertainty long term trends for the semiconductor industry.
Maine.
I always thought that was second quarter discussion. So I'll give you a good business.
Well it didn't meet your market is highly correlated to macroeconomic pressure.
We can now see indication for a recovery of the market, which we believe would stop equal to a relatively slow pace.
23, and through the first half of 'twenty 'twenty four and gateway.
Into the second half of 2024.
Yeah.
I just wanted a major corporate users.
The program is increasing demand for high performance THB three groups.
The latest semiconductor driving adoption of USB C E O.
Luckily of course.
But let's think about the long.
Long term vision.
This transformation.
You can bring to the market with some expenses.
Yes.
Our latest ship if you just.
Where.
The first thing to keep in the market for extension of high performance DSP.
This is a growing market. So you can expect USB three <unk> rose up to 100 meters or 320.
We recently received the first adopters.
E Com has successfully executed 123, and we remain on track to ship.
Did you give any buffers.
Thank you for.
We believe this revenues from the new products, we've stopped dropping off during the second half of 'twenty 'twenty four is over across the months, we introduced a new product.
Yes.
The V 22.
A useful colectomy and maybe we won't USD 3.2 peripheral required.
Yeah, that's right.
Each of these applications or is there a lot of markets.
Wanted to cover with you just for currency is one of the fastest growing areas for old Navy just weakness in the coming years as mobile and video conferencing applications increasingly require unified.
We are flexible and hyper OLED.
Great.
Maybe you can obviously go to D. C. When you picture and are investing in development.
For small medium and large.
Video conferencing market is projected to essentially doubled from about seven wells in 2022 for more than $40 billion in 2029.
11% to 12% CAGR, According to research airports and business insights.
We recently demonstrated how novel peripheral disease different thousands of chips it favorably.
Designed for what the market can be leverage will become or video conferencing applications.
If you've already mentioned that in June we announced a record operational.
G E AI image processing focus for me going back to the cycle.
These two countries are working great linkage.
Our species as paper.
Would it be Congo, Egypt and solution.
Solution with leather ridges RMB 87000.
And I teach technology AI.
On cheap no.
Pete.
The only deploy the solution we benefit from that.
You've covered the entire room and then you can go more often.
Another benefit.
And also there is the ability to use more of Colorado, which consume less power at reduced cost.
You already been many discussions with customers about that.
And the 80.
7000 cheap since it was clear that this was.
<unk> solutions the latest semi conductor is once again.
Now, let me talk to market share.
Our significant growth in mortgages.
So what are you supposed to be.
And which one might be.
Chipsets.
It's broadly deployed in the service there.
If you could model it.
<unk> elected to be H E B model.
As such our youth.
Certain twenty-twenty suites are expected to increase.
More and more business in prior years.
We expect to stay in the safeguard model going forward is such beyond this year.
Growth rates for our 6000 chips it can be called.
Related to this.
Passenger called grocery.
In Q2, we recorded initial sale of the truck.
Trucking trades off road safety, so that we.
We jointly developed with storage for the fleet operator customers. These customers are in the process of conducting pre production expenses life on relative valuation. We expect this will result in ramping surgery.
<unk> thousand 34.
Moving to the V. Eight 7000 hour 85, nonsignificant, but won't give keeps a penny for safety applications known as Adas.
There is a growing demand from automotive Oems.
Including vision based systems, which are key enablers for Asia and Australia.
The Green section so for applications, such as surround view and reserve.
7000 person speeds for vision based system and over the past quarter, we grew.
Part of the market.
Considering the deployment of the <unk>.
In mass production.
The ongoing discussion with the Oems looking at potentially selecting the 7000 give us confidence as we remain on track for our first design wins this year.
As a reminder.
It takes fewer youre supposedly supposed a marquee design win or generally.
To close out my opening remarks, I want to spend a moment discussing the plan we announced in June we prove it.
Perfect visibility, while maintaining our ability to reach Olympics Lucky person business goes we arranged over RMB and development infrastructure in a more efficient manner and streamlined our development platform.
These releases us to operate a stronger and leaner organization for the semiconductors stakeholders.
Bill will provide more detail.
Our prepared remarks.
Now I'll turn it over to the door has been break our CFO to review, our Q2, FY 'twenty financial results and provide our financial outlook.
Thank you Peter.
I'll start with the second quarter results and then provide our outlook for the third quarter and the food industry.
So second quarter three results, we achieved record quarterly revenues of $24 2 million, an increase of $1 7 million or seven 5% from the second quarter of 2022, and an increase of one 2% from Q1 once we get to me.
Second quarter 2023, gross profit was $14 9 million with a gross margin of 61, 8% compared to $15 8 million or 72% gross margin in Q2 2022.
non-GAAP gross margin reached 63, 1% compared to 71% in Q2.
The change compared to Q2 last year was mainly driven by substantially I assure you.
As we double the portion of revenue coming from this business, which incurs lower gross margin than our <unk> business before.
Before turning to Opex as Deno stated during the second quarter, we implemented a plan to improve efficiency.
Annual savings of this plan is expected to be $9 million as previously announced.
The additional charge into Q2, specifically was $250000 coming mainly from R&D.
Operating expenses in Q2, 2023 totaled $20 1 billion down from $43 7 million in Q2 2020.
As such in development accounted for approximately 60% of Q2 points when it's real opex coming in at $12 2 million, let us know the $49 million in Q2 2022, mainly due to purchasing of IP in the amount of $2 million in Q2 2022.
We also benefited from the strong us dollar.
These really shifting.
SG&A expenses were $8 million down from $8 8 million in Q2, 2022, mainly due to $6 million reduction in D&O insurance premiums as well as other team sports related books. So.
Turning to net loss and adjusted EBITDA.
Q2, 2023 GAAP net loss was $4 6 million subsidy.
Substantially better than the $10 million net loss recorded in Q2, 42, and adjusted EBITDA in Q2 2000.
<unk> was a loss of $8 million also significantly better than the $4 5 million loss in Q2 2022.
That's what they've guided adjusted EBITDA loss in Q2, 2000 suite was mainly due to two factors.
Rescheduling of certain IP purchases for a new product we are developing which is now planned for Q3, it's one thing to suite.
The strength of the U S. Dollar in Q2 2003, compared with the company's estimates these as positive impact on expenses, taking Israeli shekel, mainly for compensation to employees based in Israel.
GAAP loss per share for Q2, <unk> compared to 10 cents in Q2 2022.
non-GAAP earnings per share reached breakeven in Q2, 2023, compared with a loss per share of eight cents in Q2 last year.
Excluding the stock based compensation of $4 million was the main reason for the delta between GAAP loss per share and.
non-GAAP earnings per share breakeven in Q2 2003.
Turning to our balance sheet.
We ended Q2 with Sweden, the strong balance sheet, which is a clear indication to be current and future strength of the company.
As we expect to reach adjusted EBITDA breakeven towards the end of <unk>.
Some cash position provides us with operational flexibility to grow other businesses cash cash equivalents and short term deposits.
$138 million and we admit that.
This compares to $139 7 million at the end of Q1 'twenty three in <unk>.
Q2, we generated $4 million from operating activities compared to $4 $3 million cash use in Q2 2022.
Q2, 2003 was the first quarter in which the company's cash from operating activities was positive.
Thanks.
While in the short term, we might face some quarters with negative cash flow from operating activities. All in all we expect that the improvement in profitability, which support the positive trend of cash generation on an annual basis.
Our working capital as we ended the quarter was $168 million.
It was $161 $4 million at the end of Q1 when things like.
This difference is mainly triggered by the purchase of fixed assets during Q2 phase three.
As expected our inventory balance as of June 32000, suites will substantially longer than at the end of small delinquency, reaching 19 million below down from $23 6 million barrels.
This approximately 20% reduction reflects the fact that the company is returning to a more balanced supply demand inventory management as part of our inventory planning, we assume shorter lead times from old Bengals, yet, we have not yet seen them of poorly and announced a change in there.
Lead times policies.
While we expect a continuous improvement in our inventory balance we are still seeing our inventory levels.
By a few factors that have been evident in the past couple of quarters Sweepstake.
The macro environment is still negatively impacting our customer demand and sales mix.
As leading to inventory digestion is taking longer than many of our originally anticipated.
Thank you recovery to continue.
And it says that the flu.
Implies a modest pace of recovery in the short term second.
Interest rates are driving the cost of inventory, which means that customers are more cautious in placing orders and stocking up their warehouses.
Hum.
Some of these points, we expect inventories to continue to go down in Q3, 'twenty industry has seen a solid pace.
Now I would like to provide a little guidance.
So the sales quarter with industry, we reaffirm our expectation for revenues in the range of 14% to $14 2 million bottles. As we have shared with you previously we anticipate that the third quarter will be the lowest quarter appear.
Q3 gross margins to be in the range of 57, 6% to 58%, reflecting on one hand, you projected product mix.
Other portions of your video revenues, reaching to higher gross margins and on the auto and the negative impact of fixed operation expenses on the lower Q3 2023 revenues.
Adjusted EBITDA loss in the third quarter is expected to be in the range of plus two to $11 9 million.
As of June 32003 shares outstanding totaled $101 8 million excluding of course, approximately 1 million shares that are subject to full feature.
So the full year 2033, we are reaffirming that revenues are expected to range between $83 eight and $84 2 million consumers.
Revenues are expected to approximate 30% of total revenues.
Full year gross margins are now expected to be in the range of 62, 2% to 62, 5%.
We are improving our adjusted EBITDA guidance for the full year and it is now expected to be a loss in the range of $62 million to $66 million.
We iterate our expectation to reach adjusted EBITDA breakeven by the end of 'twenty, three which means that in 'twenty 'twenty four we expect to be cash flow positive.
Now I'll turn the call back to Gil for his closing remarks before opening the Cogs Q&A.
Thank you Dror in face of the ongoing macro economy and semiconductor sector specific headwinds continued to impact most of our end markets. We remain focused on elements in our control and our progress towards profitability.
Our main targets in the second half of the year are fast to secure design wins from automotive Oems are our 7000th keeps a penalty.
Is a major milestone we all have been marching towards second to further enhance our profitable business with our new offerings and our strong balance sheet provides the foundation for us to execute our long term growth strategy.
Q, the promising opportunities that will deliver value for all our stakeholders.
I would like to close by thanking our employees for their commitment and ongoing dedication to the company's success and for the support of all our stakeholders operator, I would now like to open the call for questions.
Thank you ladies and gentlemen at this time, we will begin the question and answer session. If 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 kind of lift the handset before pressing the numbers. Please ask your question in a loud and clear voice.
No questions will be pulled in the order. They are a seat please standby while we poll for your questions.
The first question is from Rick Schafer of Oppenheimer. Please go ahead.
Okay.
And good morning, good afternoon.
Nice job managing through a pretty tough macro.
I had two questions if I could the first is just a little more color on channel inventory, particularly it sounds like it's all pretty much and probably be George I think I heard I heard your comment correctly.
How much do you think you're under shipping consumption.
And would you expect the channel to normalize I think I Miss.
But I think you mentioned something about it on the call, but I think I missed it.
Eric a rich area again and thank you for the question. So yes, I think that your observation is correct I think that so we've seen most of the impacts of these lower than anticipated inventory digestion on the project.
And in a way I think that at this point in time.
We see them.
Call it three phases.
First one is the one the.
So with that we're now in.
The military.
Third quarter I believe that's all.
It isn't going to bottom in this quarter.
Oh, you know according to the guidance that we just provided we expect to see ought to know what are we doing it.
You ended up at 14, because all this quarter.
Second.
We're starting to see some improvement in the fourth quarter.
We are starting to see better demand from our customers we see.
More inventory digestion from our customers along with the the channels.
And so I believe that we are according to what we are hearing from our customers are in all the discussions that we have with them that we expect to see soft rebound into the first off the 20 School and then as we mentioned in our prepared remarks, we believe that we're going to see that this momentum will continue.
Maybe gained momentum into the second half of FY 'twenty four.
Yeah.
Okay. Thanks for that added color.
Just for my second question I'm curious I know you mentioned that you're on track to add I think you said it.
I can announce at least one new customer in auto.
I'm sorry.
Any other color you can give around that and as part of your answer either getting her door.
Our customers.
A little longer to Washington products, I mean, we've heard that from a couple of years here your auto peers your component peers.
Do you see any shifts in short order patterns order velocity.
In in vehicle and perfect walkie and any change there.
Okay.
And auto.
Okay. So you know like in the past we cannot be more specific on the and I've mentioned the names of the opportunities that we have right now we can displace up at the motive.
All I can mention here that we see growing demand for our connectivity with the VA 7000 based solutions for various types of vision based solutions for example, the surround view systems.
With respect to the second part of your question, if we see some slowdown.
It takes more time for you to know to clear through which a decision you know it's it's a it's a market that are with players that takes their time I don't think that.
It's a surprise if you remember we said that we expect to see the the initiatives. He's done before the end of this year at this point in time, we're confident that we're going to be the stomach.
Yeah.
Okay. Thanks.
Right.
The next question is from Fuji to feel about of Needham. Please go ahead.
Prior to the silver brought them Cam I actually enjoy them. So maybe to follow up on Rick's question.
The pipeline closure for auto.
What are the drivers for your auto customers in a timeframe of those closures that gets goods.
See one by the end of year and more than 24, what's what's driving their time frame on them at this point or the sampling and the type of testing it or what other factors are the things.
Hi, hi, switching to sort of be Don and thank you for your question the.
The process with the automotive a player to Oems is actually there there is.
They are shifting from the.
The old system that they used to new systems and they have their own learning curve and Baltimore is needed to understand the need for and you're been doing screening in newer and for more for more.
Information in order to predict an accident in order to predict it's something going to happen and this is.
A process that actually they're doing their own shift of understanding you don't need in the market and some of them, it's not predictable for us.
To know how long it takes but we see that actually the learning curve and most of them.
And we see and hear more and more a pipeline of companies that understand that for the next generation of Adas and the next generation of.
And what happens in the road, there will need to cope with the higher resolution higher bandwidths and solutions exist today.
Superiority and yes, it takes the time and so over time here.
Their own learning curve of the new World.
Months, but we see that it's actually in most of them.
At the nothing most of them all of them.
I understand and that's B M. They come to very similar.
Similar conclusion, and we hope that this would lead to a to a design win.
We'd be able to work to have this year.
Okay.
To get in and then perhaps to follow up there I think compare your solution to perhaps partner offerings like Ethernet and so forth what are the one or two key factors. You think are standing out that we're bringing a customer toward the van.
Alan Smith EHR solution.
They'd be explanation as to co logically and B, the higher bandwidths get more exposure to electromagnetic influence you'll have and this is not a linear thing like if you. If you havent comer of age of eight megabit versus four megabit, it's not dumping exposure as far as.
Far more than that and this is the reason that they and their need for four a M and the EMC becomes such a serious thing.
The first thing and the second is a total cost of ownership in our AR technology.
Technology, we allow them to use.
I'm sure that the cables and the I'm sure. The cable is the is actually having a total cost of ownership, which.
The whole system costs less because we enable.
Use of cheaper carrier cable and cheaper.
Connect sort of amateur cheaper LIBOR because honestly.
A lot of things can be done automatically.
There's also a lot less depreciation overdue over the years.
What's called aging cable. So these artists get back to the EMC electromagnetic the total system cost and and the bandwidth that's the that's the three.
Key parameters.
Thank you Gary.
Yeah.
The next question is from the back <unk> of Bank of America. Please go ahead.
Hi, This is Blake Friedman on for Vivek. Thanks for taking my question.
Just wanted to focus on kind of the full year guide specifically Q4, I know you only guide one quarter out and don't really discussing our Q4, specifically, but just taking the full year guide kind of implies a pretty steep sequential growth in December . So I'm, just curious what youre seeing maybe from kind of.
A customer perspective, that's giving you confidence in that strong ramp up just because we've heard across the ecosystem. Maybe some continued digestion for a couple of quarters, whether it be across industrial or consumer.
Consumer and a variety of other markets just any clarity there would be helpful.
The the guidance first of all we are not providing guidance today for Q4, basically only for Q3 and that for you, but given the fact that we've already provided the first half and we gave the third quarter, it's not that complicated to coffee into Q4, I think that the confidence that we have in the Q4 numbers are based on.
That we know our customer product and based on what they are telling us.
It's based on backlog and we see the level of bookings that are we already have.
With them.
I think that given the fact that we know what they are expecting and what they see in front of the end customers and the fact that we already received a backlog we see the backlog. This is the reason why we see this correction in terms of the Q3 versus Q2.
Yeah.
Got it and then just to kind of follow up you know this was kind of more of just a broader question beyond Q3, but if I think about from a gross margin perspective, obviously with audio video down you know the gross margins are kind of coming down and into this you know below 60% level just as we move forward. If you can kind of give a high level overview of how we should think about.
The gross margin recovery in the business that'd be great. Okay. So.
In a way Q3, it's a kind of an exception with an exception because it's kind of a perfect storm that we see.
You know we met with just mentioned, we definitely see that audio video rich Barton, our which means that we do not enjoy.
The gross margin that we that we usually see in the budget.
Fact that we report this lower revenue at the level of about 40 million. So what I'll do you expect to supporting the underlying Q3 also means that the impact of the fixed operating expenses are even if you skip traditional gross margin is going to be more dominant so Q3, and a way to kind of an exception. It's no pumps things that it's not a typical.
It's not a good reference going forward.
We'd go back to the right proportion between ought to be done at the motive.
I think that it's fair to say at this point in time that we should continue and expect gross margins that could be north of 60%.
Thank you.
Okay.
The next question is from Brian Dobson of Sheridan capital markets. Please go ahead.
Yeah.
Hi, good morning, so just.
Just a quick follow up on your in your commentary you know you did a good job laying out the near term headwinds for the business for this sector.
And as you look at industries.
Of your head.
Excuse me if you look at the industries marriage end users which are.
So it's currently which are at the back.
Position to recover.
Before.
Yeah sure Hi, its keyed on and thank you for the question and nice to hear from you there are and I wouldn't describe it as follows we are a strong player in the audio video world. The audio video and we are traditionally working with the I would say quite high.
And to chips base acquiring a high end customers.
And we used to a new chip the P 63, 'twenty and we expect which is it used to be extension used to be three extension, we expect to go to broader market.
Which I would say is the shift from D M very large and eh.
Our conference room to meet you on smaller even a huddle room, and which are bigger market and Oh.
Far bigger markets and some new players as well. So this is actually why don't B E.
Growing engines over the AZ another growing engine as we see more and more demanded interests with what's called industry four zero.
The adjacent markets with the audio video Eaton at all given the technology that is used not for conference really choose for a different application.
And these are and how they're growing.
Just to mention also the education World.
Again, it's an audio video technology, but not going for Eric regular audio video conference room, where video distribution.
Patients and these are some of the growing engine from the AZ B, Yeah, I guess, the automotive and those are all.
At the same where we are looking after the Adas and autonomous cars and this is where we're where our industry another marketing and those are in.
In the automotive we ship more and more we see interest in the surround view.
And so actually these are where we see growing engine in the industry, but from a cash point of view.
It is the audio video because you know the automotive.
Any designer we know the time it takes until you see it.
Cash and revenue that takes some years.
Thanks Rich.
Yes.
There are no further questions at this time.
Mr. Bernstein would you like to make your concluding statement.
I want to thank everyone I would like to wear thank you for joining us today for our Q2 2023 call and for your continued support.
And the interesting for lattice semiconductor and all have a great day, Thank you and goodbye.
Thank you. This concludes the Valens semiconductor first quarter 2023 results conference call. Thank.
Thank you for your participation you May go ahead and disconnect.
Okay.
Yes.
Okay.
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