Q2 2023 Valens Semiconductor Ltd Earnings Call
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Speaker 2: Ladies and gentlemen, thank you for standing by. The call will begin shortly.
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Good morning, My name is yelling and I will be your conference operator today.
Speaker 2: Good morning. My name is Yoning and I will be your conference operator today. At this time, I would like to welcome everyone to Valenz, Semiconductor's second quarter, 2023, Earnings Conference Call and Webcast. All participant lines have been placed in the Listen Only mode. Opening remarks by Valenz, Semiconductor, Management will be followed by a question and answer session.
This time I would like to welcome everyone to Valens semiconductors second quarter 2023 earnings conference call and webcast. All participant lines have been placed in a listen only mode opening remarks by violence semiconductor management will be followed by a question and answer session.
Speaker 2: I will now turn the call over to Daphne Golden, vice president of investor relations for Valenz semiconductor. Please go ahead.
I will now turn the call over to adopt the Golden Vice President of Investor Relations for model N. Semiconductor. Please go ahead.
Speaker 3: Thank you and welcome everyone to Valencia Me Conductor's second quarter, 223 earnings.
Daphna Golden: Thank you. Welcome everyone to Valens Semiconductor's Q2 2023 earnings call. With me today are Gideon Ben-Zvi, Chief Executive Officer, and Boaz Hazanburg, Chief Financial Officer. Earlier today, we issued a press release that is available on the investor relations section of our website under investors.valens.com. As a reminder, today's earnings call may include forward-looking statements and projections, which do not guarantee future events or performance. These statements are subject to the safe harbor language in today's press release. Please refer to our annual report on Form 20-F filed with the SEC on 1 March 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.
Thank you and welcome everyone to the lunch Semiconductor's second quarter 2023 earnings call with me today are Gideon Bensley, Chief Executive Officer, and Paul has embarked chief financial Officer.
Speaker 3: We meet today, our Gideon rents, the type executive officer, and the role has been brought to finance.
Speaker 3: Earlier today, we should oppressorly set as available on the Investor Relations section of our website under investors.valence.com.
Earlier today, we issued a press release that is available on the Investor Relations section of our website under investors that 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.
Speaker 3: As a reminder, today's earnings call may include forward-looking statements and projections which do not guarantee future events will perform.
Speaker 3: These segments are subject to the safe harbor language in today's press.
These statements are subject to the Safe Harbor language in today's press release.
Speaker 3: Please refer through our annual report on Form 20F, rather than SEC on March 1, 2023, for a discussion of the factors that could cause actual results to differ materially from those expressed or implied.
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.
Speaker 3: We do not undertake any duty to advise or update such statements to select new information for secret events or changes in strategy.
We do not undertake any duty to revise or update such statements to reflect new information subsequent events or changes in strategy.
Speaker 3: 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 define reconciliation of these metrics within our earnings.
Daphna Golden: 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 meetings virtually and in Chicago and Tel Aviv. If you're interested in meeting with us, please email me at investors@valens.com. With that, I will now turn the call over to Gideon.
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.
Speaker 3: In the cutting weeks, we will be conducting investor conferences in meeting virtually and in Chicago and to the
In the coming weeks, we will be conducting investor conferences, and meeting virtually and in Chicago and could it be.
Speaker 3: If you're interested in meeting with us, please email me at investurantadvalence.com. With that, I will now turn the call over to do them. Thanks, stop stop and thank you all for joining our Q22023 poll.
If you're interested in meeting with US please email.
Email me at investments at Valencia Dot Com.
That I will now turn the call over to do dumb things.
Gideon Ben-Zvi: Thanks, Daphna. Thank you all for joining our Q2 2023 call. In Q2 2023, Valens Semiconductor revenues reached a record of $24.2 million. We also achieved better-than-anticipated profitability metrics on our journey towards adjusted EBITDA breakeven by the end of this year. We continue to make progress executing against our long-term growth opportunities as well. As we further push the boundaries of connectivity with our advanced offering and enable our customers to bring to market new disruptive products to existing and untapped markets. We continue to track the current macroeconomic headwinds, the rising inflation, interest rates, and slower than anticipated inventory digestion. While these trends are driving some near-term uncertainty, long-term trends for the semiconductor industry and Valens remain positive. I will start our Q2 business discussion with our audio/video business. The audio/video market is highly correlated to macroeconomic trends.
And thank you all for joining our Q2 2023 quarters.
Speaker 4: In Q2 2023, the Latin Conductor Revenue reached a record of $24.2 million.
In Q2, 'twenty two 'twenty three.
Conductor revenue reached a record $44 $2 million.
Speaker 4: We've also achieved better than anticipated for sustainability metrics on our journey towards adjusted and data driven by the end of this year.
We also want cheap it doesn't like to see.
Okay.
On our journey towards adjusted EBITDA breakeven by the end of this year.
Speaker 4: It continued to make progress, executing again our long-term growth opportunities as well.
We continue to make progress.
Our long term growth opportunities as well.
Speaker 5: As we saw in the poll, the boundaries of connectivity we saw advanced operating in the Navy over customers to bring to market new, destructive products to existing and untapped small.
As we send a push the boundaries of productivity. We saw robust operate and then maybe all of our customers to bring to market new construction.
So it's an untapped market.
Speaker 4: We continue to track the current backward control.
We continue to address the current macroeconomics.
Speaker 4: deriving inflation, interest rates, and it's lower than anticipated even toward the justice.
The rising inflation interest rates and slower than anticipated inventory.
So we think gesture.
Speaker 4: While these trains are driving some near-term uncertainty, long-term trains for the same environment scheme.
While these trends are driving some near term uncertainty long term choice for the semiconductor industry.
We've made.
Speaker 5: I will start our second course of business discussion with our audio video bit.
Always thought our second corporate business discussion, so obviously good business.
Speaker 4: It all the major markets is highly correlated to macroeconomic trends.
And also we can market is highly correlated to macroeconomic right.
Gideon Ben-Zvi: We can now see indication for a recovery of the market, which we believe would start to improve at a relatively slow pace towards the end of 2023 and through H1 2024 and gain momentum into H2 2024. We have identified that one of the main contributors for the expected improvements is the increasing demand for high performance USB peripherals. As such, Valens Semiconductor is driving adoption of the USB 3.2 standards globally across verticals. Valens Semiconductor's long-term vision is to accelerate the transformation of the video conferencing market with an extensive product portfolio. Our latest chipset, the VS6320, is the first single chip in the market for extension of high performance USB. It targets this growing market and can extend USB 3.2 peripherals at up to 100 meters or 328 feet.
Speaker 4: We can now see the occasion for a recovery of the MAPAQ, which we believe would stop through a relatively slow pace toward the end of 2023 and through the first stop of 2024 and gain momentum into the second half of 2024.
We can now see indication for a recovery of the market, which we believe would stop eating food.
No.
We used 23 and through the first half.
T sport in Gainesville make two into the second half of 'twenty 'twenty four.
Speaker 4: We have identified that one of the main contributors for the expected improvements is the increasing demand for hyper-former USB-3 Pro. It's such a lengthening conductor is driving the adoption of the USB 3.2 stand-up, locally across the country.
We are very busy private swap their main contributors.
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Leasing demand for hyper focused UHD peripheral is such a new cervical.
Semiconductor driving adoption.
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Across both groups.
Speaker 4: The Latin conductors' long-term vision is to accelerate the transformation of their digital processing market through some expensive products for all of you.
But listen conduct a long term vision for formation, Okay, you can bring to the market.
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Speaker 5: Our latest chipset, the ZS62320, is the same thing we're shooting the market for extension of high-performance USB. The tablet is growing market and can extend USB 3.2 per repose at up to 100 meters or 320.
Our leases.
Can you just square.
The first thing to keep in the market or extension of high performance.
Yeah.
Market.
You see people you Deepa, we wrote off 200 meters or 320.
Yeah.
Gideon Ben-Zvi: We recently received the first samples of the VS6320 from the successful tape out executed in Q1 2023, and we remain on track to ship the first engineering sample to selected customers by Q4 of this year. We believe that revenues from the new product will start ramping up during H2 2024 as our customers will introduce the new products embedding the new chipset. The VS6320 chipset is ideal for connecting the many remote USB 3.2 peripherals required in video conferencing, industrial, and medical applications. Each of these applications presents a large market. Multi-camera video conferencing is one of the fastest growing areas for audio video equipment in the coming years, as modern video conferencing applications increasingly require a unified meeting room experience with a flexible, efficient, and high performance connectivity solution.
Speaker 4: We recently received the sales fountain of the DSF320 from the successful paper, Executive 2021-2023, and will remain on track to ship the first engineering sample to selected customers that you bought of this year. We believe the revenues from the new product will start dropping us during the second half of 2024 as our customers will introduce the new products and then you will be.
So sponsors.
From the successful people executing 123.
We remain on track.
Can you hear me properly with selected customers for Q4.
We believe this represents one of the new product we stopped dropping.
The second half of FY 'twenty four.
Customers, we introduced a new product.
Yeah.
Speaker 5: The V-axis 320 feature is ideal for connecting the many remote to SB3.2 per repress required in digital conferencing in that state and medical applications. Intervisifications present a large mark.
Yes.
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Thanks for connecting and maybe it was mostly a Q3 two peripheral require E videoconferencing.
Reputation.
The application presented a lot of markets.
Speaker 5: Multi-cover of video quality is one of the fastest growing areas for all your video equipment in the coming years.
Chicago is one of the fastest growing areas for me.
Coming years, it's mobile and video conferencing applications increasingly require unified Goldman area, which are flexible and high performance connectivity solutions.
Speaker 4: As modern video conference in applications is increasingly required, a unified meeting room experience, with flexible institutions and high performance for the public solution.
Speaker 5: Many leading all your video and piece of manufacturing are investing in the development of advanced solutions for small medium and large medium medium.
Gideon Ben-Zvi: Many leading audio/video and PC manufacturers are investing in the development of advanced solutions for small, medium, and large meeting rooms. The video conferencing market is projected to essentially double from about $7 billion in 2022 to more than $14 billion in 2029, or at an 11% to 12% CAGR according to Research Fair Fortune Business Insights. We recently demonstrated how another one of our products, the VA7000 chipset family, that was originally designed for automotive, can be leveraged for multi-camera video conferencing applications. At InfoComm International in June, we announced our collaboration with iCatch Technology, a leading AI image processing fabless semiconductor design company. The two companies are working together to develop a flexible, efficient, and high-performance multi-camera video conferencing solution that leverages our VA7000 chipset family and iCatch Technology's AI imaging system on chip known as SoC.
Maybe I'll just give you a brief.
Ladies picture and are investing in the development.
And also for small medium and large meeting this.
Speaker 4: The video conference in market is projected to essentially double from about $7 billion in 2022 to more than $14 billion in 2029 or 11% to 20% figure according to research there for the business inside.
The video conferencing market is projected to essentially doubled from about.
One place to the more than $14 billion in 2029.
Never perspective.
CAGR According to research the airports and business insights.
Speaker 4: We recently demonstrated how another one of our products, the NEA 7000 chips at the end of the year, it was originally designed for automobiles can be leveraged from multi-camera video conferencing application.
We recently demonstrated how we love the Waterpark.
Thousands cheap systemically.
Really designed for what the market can be leverage almost become a video conferencing applications.
Speaker 5: As in Pokemon International in June , we announced our collaboration with ICH Technology, and it is AI image processing that's farthest than we conduct to the entire company.
Are we going to mention that in June we announced a record operation with ICT.
E E AI image processing Fokker semiconductor design.
Speaker 5: The two companies are working together to develop a flexible, efficient, and high performance multi-camera video conferencing solution that leverages our VA7000 HPSET family and iTouch Technologies AI imaging system on chip known as ESCOS.
The two companies are working together.
Fishing is paper.
Would it be Congress videoconferencing solution.
Richard RMB 87000.
And I teach technology AI imaging Tuesday on cheap node at East Coast.
Gideon Ben-Zvi: Those deploying the solution will benefit from the ability to cover the entire room and enhance the in-room and remote participants' equity. Another benefit of this new solution is the ability to use smaller cameras that consume less power at reduced cost. During the many discussions held with customers about the VS6320 and the VA7000 chipsets, it was clear that with these innovative solutions, Valens Semiconductor is once again at the forefront of the industry. Turning to automotive. First, our symmetric automotive chips family, the VA6000. 2023 is the first year in which our VA6000 chipset is being broadly deployed in Mercedes-Benz S, C, and E-class models, including the electric vehicle EV model, the EQ series. Our annual sales in 2023 are expected to increase as a result of being deployed in more models than prior years. We expect to stay with the same car models going forward.
Those deploy the solution.
Speaker 4: level of disclowing the solution will benefit from their ability to properly entire room and enhance the in-room and remote of independence.
Yeah.
So copper based firewall.
You can go to multiple things.
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Speaker 4: Another benefit of the tools to look at is ability to use more cameras that consume less power, it reduced cost.
Another benefit.
Yes.
Do you want to cover outlets consume less power it reduced school.
Speaker 4: During the many discussions held with customers about the VES, 5320, and the VA7000 chipset, it was clear that was using innovative solutions, but let it be that the conductor is once again at the forefront of the...
There are many discussions with customers about that.
Tracy.
7000 people.
Music using a baking solution, but less semi conductor is once again at the forefront of industry.
So at least towards the market.
Speaker 4: turning to automotive. First, our symmetrical automotive chips family, the V86 valve.
So our domestic automotive chips.
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Speaker 5: 2023 is the first year in which our V86 thousand ships have been broadly deployed in Mercedes Benz at C and E-Class models, including the electric vehicle and the model, the ECU series.
What are you supposed to be.
You're in which over it.
Yes.
Please be broadly deployed in the service business.
The model.
Including electric vehicles, you can model.
Speaker 5: As such, our annual 7th 2023 expected to increase is in that of being deployed in more models in prior year.
As such our annual.
A sudden twenty-twenty suite.
The increase is there.
That will be more.
More and more business.
Yes.
Speaker 4: We expect to stay the same car model as going forward. And such, beyond this year, the expected growth rate for our VH6000 chipsets should be correlated to the second-spot and your call growth rate.
Do you expect to stay the same car models going forward is such deals this year.
Gideon Ben-Zvi: As such, beyond this year, the expected growth rate for our VA6000 chipsets should be correlated to Mercedes-Benz passenger car growth rate. In Q2, we recorded initial sales of the tractor-trailer relative safety solutions we jointly developed with Stoneridge for their fleet operator customers. These customers are in the process of conducting pre-production extensive live on-road evaluations. We expect this will result in ramping sales during H2 2024. Moving to the VA7000, our leading A-PHY asymmetric automotive chipset family for safety applications known as ADAS.
The growth rates for our Dubuque thousands cheesecakes.
Correlated to passenger.
Passenger called brokerage.
Speaker 4: In Q2, we recorded initial sales of the tracks of trailer, relative safety to the truck, we jointly developed with storage for the fleet operator customers. These customers are in the process of conducting free production expensive live-on-run evaluation. We expect this will result in ramping sales during their second half of 2024.
In Q2, we recorded initial standard truck turns out Rugby's basically said, okay. We jointly developed with strong week for us.
Fleet operator customers. These customers are in the process of conducting pre production expenses life on relative valuation. We expect this will result in revenue.
And the second half of 'twenty 'twenty four.
Maybe you could get 7000 or eight.
Finally, most of Mexico for multi family for safety applications known as Adas.
Gideon Ben-Zvi: There is a growing demand from automotive OEMs for ADAS, including vision-based systems, which are key enablers for ADAS and 360-degree perception sensors for applications such as surround view, parking assist, and reverse assist. The VA7000 perfectly fits for vision-based systems, and over the past quarter, we grew the big pipeline with automotive OEMs considering the deployment of the VA7000 in mass production. The ongoing discussion with the OEMs looking at potentially selecting the VA7000 give us confidence that we remain on track to announce our first design wins this year. As a reminder, it typically takes fewer years following automotive design wins before generating initial revenue. To close out my opening remarks, I want to spend a moment discussing the plan we announced in June to improve the efficiency of our operations.
There is a growing demand from automotive Oems for Asia, including vision based systems, which are key enablers for Asia.
Excuse me brief perspective, so for applications, such as the wrong view popping diffused and reserve.
Yes.
Perfect for.
And over the past quarter, we grew.
The market is considerably larger.
<unk> thousand in mass production.
The ongoing discussion with the Oems looking at potentially selecting debuted 7000.
Just a coincidence.
Right on track for our Frac design wins this year.
As a reminder.
Thanks.
Here is what do we got the marquee design win or getting everything ready.
To close out my opening remarks, I want to spend a moment discussing the plan we announced in June we prove that he should be our operations.
Gideon Ben-Zvi: In line with our focus on reaching profitability while maintaining our ability to reach our technological and business goals, we arranged our R&D and development infrastructure in a more efficient manner and streamlined our development platform. This enables us to operate a stronger and leaner organization for the benefit of Valens Semiconductor's stakeholders. Dror will provide more details in his prepared remarks. I'll now turn it over to Dror Hildenberg, our CFO, to review our Q2 2023 financial results and provide our financial outlook.
In light of her focus on reaching profitability, while maintaining our ability to reach all lucky cooking business goes we have raised over RMB and development infrastructure, even more efficient manner and streamlined our development platform.
Recently says that to operate a stronger and leaner organization.
Many people believe that those stakeholders.
Bill will provide more detail.
Prepared remarks.
Now turning to Augusta, Georgia.
Yeah.
To review, our Q2, FY 'twenty financial results and provide our financial outlook.
Thank you Peter.
Boaz Hazanburg: Thank you, Gideon. I'll start with our Q2 results and then provide our outlook for Q3 and the full year 2023. Starting with our Q2 2023 results, we achieved record quarterly revenue of $24.2 million, an increase of $1.7 million or 7.5% from Q2 2022, and an increase of 1.2% from Q1 2023. Q2 2023 gross profit was $14.9 million, with a gross margin of 61.8%, compared to $15.8 million or 70.2% gross margin in Q2 2022. Non-GAAP gross margin reached 63.1%, compared to 71% in Q2 2022. The change compared to Q2 last year was mainly driven by a substantially higher share from automotive as we doubled the portion of revenue coming from this business, which incurs a lower gross margin than our other bigger business.
Start with the second quarter results and then provide our outlook for the third quarter and the previously mentioned.
Starting with our second quarter results, we achieved record quarterly revenues of $44 2 million, an increase of $1 7 million or <unk>.
Seven 5% from the second quarter of 2022, and an increase of one 2% from Q1.
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 a substantially I was sure to move to as we doubled the portion of its revenue coming from this business, which incurs more gross margin than our ODP business Bill.
Boaz Hazanburg: Before referring to OpEx, as Gideon stated, during Q2, we have implemented our plan to improve efficiency. The annual saving of this plan is expected to be $9 million, as previously announced. The additional charge incurred in Q2 specifically was $250,000, coming mainly from R&D. Operating expenses in Q2 2023 totaled $20.1 million, down from $23.7 million in Q2 2022. Research and development accounted for approximately 60% of Q2 2023 OpEx, coming in at $12.2 million, lower than $14.9 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 versus the Israeli shekel. SG&A expenses were $8 million, down from $8.8 million in Q2 2022, mainly due to $0.6 million reduction in D&O insurance premium, as well as positive forex-related impact. Turning to net loss and adjusted EBITDA.
Before turning to Opex as Deno stated during the second quarter, we have internally all the time.
To improve efficiency.
Annual savings of this plan is expected to be $90 million as previously announced.
The additional charge into Q2, specifically was $250000 coming mainly from R&D.
Operating expenses in Q2, two and 'twenty three totaled $20 1 billion below down from $23 7 million in Q2 2022.
Research and development accounted for approximately 60% of Q2, 2023 opex I mean, it was $2 million NOLA and $49 million in Q2, 2022, mainly due to purchases of IP in the amount of $2 million in Q2, 2022.
We also benefited from the strong he was doing all of this it is really shifting.
SG&A expenses were $8 million down from $88 million in Q2, 'twenty, two mainly due to $6 million reduction in D&O insurance premiums as windows attitudes Forex related books.
Turning to net loss and adjusted EBITDA.
Boaz Hazanburg: Q2 2023 GAAP net loss was $4.6 million, substantially better than the $10 million net loss we recorded in Q2 2022. Adjusted EBITDA in Q2 2023 was a loss of $0.8 million, also significantly better than the $4.5 million loss in Q2 2022. The better-than-guided adjusted EBITDA loss in Q2 2023 was mainly due to two factors: rescheduling of certain IP purchases for a new product we are developing, which is now planned for Q3 2023, and the strength of the US dollar in Q2 2023 compared with the company's estimates. This has positive impact on expenses paid in Israeli shekels, mainly for compensation to employees based in Israel. GAAP loss per share for Q2 2023 was $0.05, compared to $0.10 in Q2 2022. Non-GAAP earnings per share reached breakeven in Q2 2023, compared with a loss per share of $0.08 in Q2 last year.
Q2, 'twenty plenty sweet GAAP net loss was $4 6 million.
Substantially better than the $10 million net loss recorded in Q2 42, and adjusted EBITDA in Q2 complete suite was a loss of $8 million also significantly better than the $4 5 million to a loss in Q2 2022.
That's what they've guided adjusted EBITDA loss in Q2, 'twenty suite was mainly due to two factors.
Rescheduling of certain IP purchases for our new products, we are developing which is no plans for Cuba with one thing to sweep.
The strength was borne out in Q2 and 23 compares with the company's estimates these as positive impact on expenses paid in Israeli shekels made meaningful compensation to employees based in Israel.
GAAP loss per share for Q2, 2003, five cents compared to <unk> 10 in Q2 2022.
non-GAAP earnings per share reached breakeven in Q2, 2023, compared with a loss per share of <unk> <unk> in Q2 last year.
Boaz Hazanburg: Excluding the stock-based compensation of $4 million was the main reason for the delta between GAAP loss per share and the non-GAAP earnings per share breakeven in Q2 2023. Turning to our balance sheet. We ended Q2 2023 with a strong balance sheet, which is a clear indication for the current and future strength of the company as we expect to reach adjusted EBITDA breakeven towards the end of 2023. Our sound cash position provides us with operational flexibility to grow our business. Cash, cash equivalents, and short-term deposits total $138 million, and we had no debt. This compares to $139.7 million at the end of Q1 2023. In Q2 2023, we generated $0.4 million from operating activities compared to $4.3 million cash used in Q2 2022. Q2 2023 was the first quarter in which the company's cash from operating activities was positive.
Excluding the stock based compensation of $4 million with the main reason for the delta between GAAP loss per share.
non-GAAP earnings per share breakeven in Q2 2003.
Turning to our balance sheet.
We ended Q2, 'twenty suite with a strong balance sheet, which is a clear indication for the current and future strength of the company.
We expect to reach adjusted EBITDA breakeven towards the end of <unk>.
<unk> cash position provides us with operational flexibility to grow our business cash cash equivalents and short term deposits totaled 138 million and we had notebook.
This compares to $139 7 million.
The end of Q1 'twenty three.
Q2, we generated $4 million from operating activities compared to $4 $3 million cash use in Q2 2022.
Q2, 'twenty thing it was the first quarter in which the company's cash from operating activities was positive.
Thanks.
Boaz Hazanburg: While in the short term, we might face some quarters with -cash flow from operating activity, all in all, we expect that the improvement in our profitability will support the +trend of cash generation on an annual basis. Our working capital, as we ended the quarter, was $160.8 million, compared to $161.4 million at the end of Q1 2023. This difference is mainly triggered by the purchase of fixed assets during Q2 2023. As expected, our inventory balance as of 30 June 2023, was substantially lower than at the end of March 2023, reaching $90 million, down from $23.6 million. 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 our vendors. Yet, we have not yet seen them formally announce a change in their lead time policies.
While in the short term, we might face some quarters with negative cash flow from operating activities. All in all we expect that the improvements in output at the beauty, which support the positive trend of cash generation on an annual basis.
Our working capital as we ended the quarter was $168 million compared to 161 told me rollout at the end of Q1 continues to meet.
This difference is mainly triggered by the purchase of fixed assets during Q2 basically.
As expected our inventory balance as of June 32000 suite will substantially longer than at the end of smartphones in history, reaching $19 million down from $23 6 million bottles.
This approximately 20% reduction reflects the fact that the company is returning to a more balanced supply demand inventory management.
Out of our inventory planning, we assume shorter lead times from old windows, yet, we have not yet seen them formally announced a change in the lead times policies.
Boaz Hazanburg: While we expect a continuous improvement in our inventory balance, we are still seeing our inventory levels impacted by a few factors that have been evident in the past couple of quarters through today. The macro environment is still negatively impacting our customer demand and sales. This is leading to inventory digestion that is taking longer than many have originally anticipated. We expect the recovery to continue at least through the end of H1 2024, which implies a modest pace of recovery in the short term. Second, higher interest rates are driving the cost of inventories up, which means that customers are more cautious in placing orders and stocking up their warehouses with new inventory. To sum up this point, we expect our inventories to continue to go down in Q3 2023, but in a slower pace. I would like to provide our guidance.
While we expect a continuous improvement in our inventory bounds, we are still seeing our inventory better.
By a few factors that have been evident in the past couple of quarters through today.
The macro environment is still negatively impacting our customer demand and sales mix.
Leading to inventory digestion is taking longer than many of our originally anticipated.
The recovery to continue.
With the N type of flu.
Which implies a modest pace of recovery in the short term settings.
Interest rates are driving the cost of inventories up which means that customers are more cautious in placing orders and stocking up their warehouses.
So some of these points, we expect someone is going to lead to continuing to go down in Q3 with industry.
Our pace.
Now I would like to provide a little guidance.
Boaz Hazanburg: For Q3 2023, we reaffirm our expectation for revenues in the range of $14 to 14.2 million. As we have shared with you previously, we anticipate that Q3 will be the lowest quarter of the year. We expect Q3 gross margins to be in the range of 57.6% to 58%, reflecting on one hand, the projected product mix with a higher portion of audio/video revenues, which entail higher gross margins, and on the other hand, the negative impact of fixed OpEx on the lower Q3 2023 revenues. Adjusted EBITDA loss in Q3 is expected to be in the range of $12.2 to 11.9 million. As of June 30, 2023, shares outstanding totaled 101.8 million, excluding, of course, approximately 1 million shares that are subject to forfeiture.
Third quarter recent history, 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 of the year.
We expect Q3 gross margins to be in the range of 87, 6% to 58%, reflecting on one hand, you projected product mix with a higher portion of your video revenues, which you took higher gross margins and on the auto and the negative impact of fixed operation expenses.
On the lower Q3 <unk> 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 subject to full feature.
Boaz Hazanburg: For the full year 2023, we are reaffirming that revenues are expected to range between $83.8 to 84.2 million. Automotive revenues are expected to approximate 30% of total revenues. Full year 2023 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. It is now expected to be a loss in the range of -$16.2 to -15.6 million. We reiterate our expectation to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2024, we expect to be cash flow positive. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.
So the full year when phase III, we are reaffirming but revenues are expected to range between $83 eight and $84 $2 million with most of revenues are expected to approximate 30%.
Thanks.
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 reiterate our expectation to reach adjusted EBITDA breakeven by the end of 'twenty, three which means that in 2024 do you expect to be.
Cash flow positive.
I'll turn the call back to Jim for his closing remarks before opening the call Q&A.
Gideon Ben-Zvi: Thank you, Dror. In face of the ongoing macroeconomy and semiconductor sector specific headwinds that continue 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 H2 of the year are, first, to secure design wins from automotive OEMs for our VA7000 chipset family. This is a major milestone we all have been marching towards. Second, to further enhance our profitable audio/video business with our new offerings. Our strong balance sheet provides the foundation for us to execute our long-term growth strategy and pursue 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 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.
The main targets in the second half of the year are fast to secure design wins from automotive Oems for our 7000 keeps us firmly.
Is a major milestone we all have been marching towards second to further enhance our profitability.
Business in southern Europe .
Our strong balance sheet provides the foundation for us to execute our long term growth strategy and pursue 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.
Operator 2: 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, kindly lift the handset before pressing the numbers. Please ask your question in a loud and clear voice. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Rick Schafer of Oppenheimer. Please go ahead.
Wish to cancel your request. Please press star two if you are using speaker equipment timing with 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.
Rick Schafer: Oh, thanks. 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 in pro AV. Dror, if I think I heard your comment correctly. How much do you think you're under shipping consumption, and when do you expect this, the channel, to normalize? I think I missed it. I think you mentioned something about it on the call, but I think I missed it.
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 in pro AP drove I think I heard I heard your comment correctly.
How much do you think you're under shipping consumption.
And when do you expect the channel to normal lives.
But I think you did mention something about it on the call, but I think I missed it.
Yeah.
Boaz Hazanburg: Hey, Rick. Good to hear you again, and thank you for the question. Yes, I think that your observation is correct. I think that we see most of the impact of the slower-than-anticipated inventory digestion on the audio video business. In a way, I think that at this point in time, we see, I would call it, 3 phases. The first one is the one that is the quarter that we're now in the middle of. It's the Q3. I believe that audio video business is going to bottom in this quarter. According to the guidance that we just provided, we expect to see all-in-all audio video and automotive revenue in the level of $40 million this quarter. Second, I believe that we're starting to see some improvement in the Q4 as we are starting to see better demand from our customers.
Eric which area again and thanks for the question. So yes, I think that your observation is correct I think that we.
We see most of the impact of the slower than anticipated inventory digestion.
Figure business and in a way I think that the disappointing time, we see I'll call. It three phases.
First one is the one the.
The culture that we're now in the middle of the quarter AR I believe that's all going.
Going to bottom in this quarter.
Oh, you know according to the guidance. We just provided we expect to see on a normal what have you done anything about your revenue was 11 of 14, because all this quarter.
Second.
The lizards, we're starting to see some improvement in the fourth quarter, we are starting to see better demand from our customers we see.
Boaz Hazanburg: We see more inventory digestion from our customers along the channels. Third, I believe that according to what we are hearing from our customers, in all the discussions that we have with them, we expect to see a soft rebound into H1 2024. As we mentioned in our prepared remark, we believe that we are going to see that this momentum will continue, will maybe gain momentum into H2 2024.
More inventory digestion from all our customers along would be 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 saw free bump into the close off hopefully 'twenty School and then as we mentioned in our prepared remarks, we believe that things.
We're going to see that this momentum will continue.
Maybe gain momentum into the second half of a point 24.
Okay. Thanks for that color and maybe just for my second question I'm too.
Rick Schafer: Okay. Thanks for that added color. Maybe just for my second question. I'm curious, I know you mentioned that you're on track to add, I think you said at least to announce at least one new customer in auto. I didn't know if there was any other color you could give around that. As part of your answer, either you're getting or Dror, are customers taking a little longer in auto to launch new products? We've heard that from a couple of your auto peers, your component peers. Are you seeing shifts in order patterns, order velocity, in vehicle, in product launch, any change there, that you've noticed within auto?
You mentioned that you're on track.
Instead of them.
Like you announce at least one new customer in auto.
Oh I'm sorry.
Any other color you can give around that and as part of your answer either get them or dor.
I mean, our customers.
Looking a little longer to Washington products, I mean, we've heard that from a couple of years your auto peers your component peers are.
Have you seen shifts and so on.
Our order patterns order velocity.
In in vehicle.
Any change there E coupons.
No.
Okay. So you know like in the past we cannot be more specific on the and mentioned the names of the opportunities that we have right now we just basically to notice.
Boaz Hazanburg: Okay, like in the past, we cannot be more specific on the and mention the names of the opportunities that we have right now in the space of automotive. I can mention here that we see growing demand for our connectivity with the VA7000-based solution 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 or it takes more time for the automotive players to reach a decision, it's a market with players that take their time. I don't think that it's a surprise. If you remember, we said that we expect to see the initial design win before the end of this year. At this point in time, we are confident that we're going to meet this target.
I can mention here that we see growing demand for our connectivity with the VA 7000 based solutions for various types of strategic based solutions for example, the surround view systems.
With respect to the second part of your question, if we see some slowdown.
Takes more time for you to move too quickly is to reach a decision.
It's a it's a market that I was clear that takes their time I don't think that it's.
It's a surprise if you remember we said that we expect to see the initiatives. He's done before the end of each year at this point in time, we're confident that we're going between the stomach.
Okay. Thanks.
Rick Schafer: Okay, thanks.
Okay.
Operator 2: The next question is from Suji de Silva of Needham. Please go ahead.
The next question is from.
Fuji they feel about us.
Needham. Please go ahead.
Suji Desilva: Hi, Suji de Silva, ROTH MKM. Hi, Gideon, Dror. Maybe to follow up on Rick's question, the pipeline closure for auto, what are the drivers for the other customers for the timeframe of those closures? I guess because you may see one by the end of the year and more in 2024, what's driving their timeframe at this point? Are they sampling the chip and testing it, or what other factors are there, thanks?
Prior to the silver brought them to am I getting for them. So maybe to follow up on Rick's question.
The pipeline closure for auto.
What are the drivers for your other customers in the timeframe of those closures that gets cause.
See one by the end of the year in more than 24, what's what's driving their time frame at this point or are they sampling and testing it or what other factors are there. Thanks.
Gideon Ben-Zvi: Hi, Suji. This is Gideon. Thank you for your question. The process with the automotive player, the OEMs, is actually it's a shift. They're shifting from the old system that they use to new systems, and they have their own learning curve about what is needed to understand the need for newer bandwidths, and for more information in order to predict an accident, in order to predict if something going to happen. This is a process that actually they're doing their own shift of understanding new needs in the market.
Hi, Hi, switching to should be Don and thank you for your question B.
The process with the automotive and player to Oems is actually there there is.
We are shifting from.
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 in your bandwidth spurring a newer and for Merck and for more.
Information in order to predict an accident in order to predict it's something going to happen and this is what they are.
Process, that's actually theyre doing their own shift of understanding you'll need in the market and some of them, it's not predictable for us to.
Gideon Ben-Zvi: Some of them is not predictable for us, to know how long it takes, but we see that actually the learning curve in most of them happens, and we see and hear more and more pipeline of companies that understand that for the next generation of ADAS and the next generation of understanding what happens on the road, they will need to cope with higher resolution, higher bandwidth. The solutions exist today. We have superiority. Yes, it takes the time. Some of the time is their own learning curve of the new demands. We see that actually in most of them, actually not in most of them, all of them, that they understand and that they come to very similar conclusion, and we hope that this will yield to a design win, that we'll be able to have this year.
To know how long it takes but we see that it's actually the learning curve and most of them happens 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 the spending what happens on the road they would need to cope with the higher resolution higher bandwidths and solutions exist today, we have a superiority and yes. It takes the time.
And some of the time they are their own learning curve of the new world or the new demand.
The months, but we see that that should be and most of them that the.
One of them and all of them that they understand and that's D M. They come to vary.
A similar conclusion and we hope that this will lead to a to a design win it.
That's what we'd be able to work to have this year.
Yeah.
Suji Desilva: Okay. Thanks, Gideon. Perhaps to follow up there, as they compare your solution to perhaps competitor offerings like Mobileye and so forth, what are the one or two key factors you think are standing out that would lean a customer toward Valens and the VA solution?
Okay. That's good in and then drops to follow up there I think compare your solution to perhaps can pop up a point or offerings that you've had and so forth. What are the one or two key factors. You think are standing out that we're bringing a customer toward.
Our balanced solutions.
Gideon Ben-Zvi: Well, the explanation is technologically. The higher the bandwidth, the more exposure to electromagnetic influence you have. This is not a linear thing. Like if you have a camera of eight megabit versus four megabit, it's not double the exposure. It's far, far more than that. This is the reason that the need for the EMC becomes such a serious thing. This is the first thing, and the second is the total cost of ownership. In our technology, we allow them to use unshielded cables. The unshielded cable is actually having a total cost of ownership, which the whole system costs less because we enable a user cheaper cable, cheaper connectors, and actually cheaper labor, because with unshielded, a lot of things can be done automatically, and there is also a lot less depreciation over the years of what's called aging cable.
The explanation as to co logically and B B.
There's been two weeks.
More exposure to electromagnetic influence do you have any.
This is not a linear thing like if you were if you havent comer of eight figure of eight megabit. That's just four megabit, it's not dumping exposure, it's far far more than that and this is the reason that they.
They and their need for a for them and the M. C becomes such a serious thing this is the.
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.
He was a cheaper carrier cable and cheaper.
Connectors and cheaper LIBOR because honestly.
The same can be done automatically.
There's also a lot less depreciation overdue over the years.
What's called aging cable. So these the artist skew back towards the EMC electromagnetic the total system cost and and the bandwidth that's the that's the three.
Boaz Hazanburg: These are the key factors, the EMC, electromagnetic, the total system cost, and the bandwidth. That is the three key parameters.
Key parameters.
Operator 2: Okay, great. Thank you, Gideon. The next question is from Vivek Arya of Bank of America. Please go ahead.
Thank you Jamie.
Yeah.
The next question is from the back Yeah of Bank of America. Please go ahead.
Blake Friedman: Hi, this is Blake Friedman, I'm from 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, but just taking the full-year guide kind of implies pretty steep sequential growth in December. I'm just curious what you're seeing maybe from kind of your 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 and consumer and a variety of other markets. Just any clarity there would be helpful.
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, and I know you only guide one quarter out and already discussing our Q4, specifically, but just taking the full year guide kind of implies you know a pretty steep sequential growth in December . So I'm, just curious what you're seeing maybe from 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 and a variety of other markets just any clarity there would be helpful.
Boaz Hazanburg: First of all, good to hear again, Blake. First of all, we are not providing guidance today for Q4. It's only for Q3 in the full year, but given the fact that we've already provided H1 and we gave Q1, it's not that complicated to calculate the Q4. I think that the confidence that we have in the Q4 numbers are based on the fact that we know our customer products and based on what they're telling us. On top of that, it's based on backlog, and we see the level of booking that we already have with them.
So first of all good to hear it again Blake.
The the guidance first of all we are not providing guidance today for Q4 basically only for Q3 to four years, but given the fact that we've already provided the first half and we get that.
Third quarter, it's not that complicated to calculate the Q4.
The confidence that we have in the Q4 numbers are based on the fact that we know our customer product and based on what they're telling us.
I think it's based on the backlog and we see that the level of bookings that are we already have.
With them.
Boaz Hazanburg: I think that given that fact that we know what they're expecting and what they see in front of the end customers, and the fact that we see the backlog, this is the reason why we see this correction in terms of the Q3 versus Q4.
I think that given that fact that we know what they're expecting and what they see in front of the end customers and the fact that we already received a backlog we see the backlog.
Is there a reason why we see this correction in terms of Q3 versus Q2.
Blake Friedman: Got it. Then just to kind of follow up. This is kind of more of just a broader question beyond Q3. If I think about from a gross margin perspective, obviously with audio, video down, the gross margins are kind of coming down into this 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.
Got it and then just to kind of follow up you know this is 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.
Boaz Hazanburg: In a way, Q3, it's a kind of an exception. It's an exception because it's a kind of a perfect storm. We just mentioned that we see that audio video reached the bottom, which means that we do not enjoy the gross margin that we usually see in audio video. The fact that we report this lower revenue at the level of about $14 million, we expect to see $14 million in Q3 also means that the impact of the fixed operating expenses, in this consideration of gross margin is going to be more dominant. Q3 in a way is a kind of an exception. It's not a good reference.
So.
In a way Q3 is kind of an exception, it's an exception because it's a kind of a perfect storm that we see.
You know we might we just mentioned that we see that audio video rich to button up which means that.
We do not enjoy.
The gross margin that we that we usually see in audio video.
In fact that we report the slower revenue with a level of about $40 million, we expect to supporting the underlying in Q3 also means that the impact of the fixed operating expenses or even just the traditional gross margin.
And it can be more dominant.
Our Q3, and a way to kind of an exception it's no pumps.
It's not a typical it's not a good reference going forward.
Boaz Hazanburg: Going forward, when we go back to the right proportion between audio video and automotive, I think that it's fair to say at this point in time that we should continue and expect gross margin that will be north to 60%.
When we go back to the right proportion between what you've been doing it to notice I think that it's fair to say at this point in time that we should continue and expand gross margins that could be north of 60%.
Blake Friedman: Thank you.
Thank you.
Okay.
Operator 2: The next question is from Brian Dobson of Chardan Capital Markets. Please go ahead.
The next question is from Brian Dobson of Sheridan capital markets. Please go ahead.
Yeah.
Hi, Good morning, So 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.
Brian Dobson: Hi, good morning. Just a quick follow-up on your commentary. You did a good job laying out the near-term headwinds for the business or for the sector, rather. As you look at the industries of your various end users, which are impacted the most currently, and which are in the best position to recover in 2024?
And as you look at industries.
And excuse me.
If you look at the industries that you're bearish end users which are.
Okay.
Currently which are in the best position to recover.
Before.
Yes, hi, its keyed on and thank you for the question and nice to hear from you. They are I wouldn't describe it as follows we are a strong player clearing the audio video world the audio video.
Gideon Ben-Zvi: Yes, sir. Hi, it's Gideon, and thank you for the question and nice to hear from you. I would describe it as follows. We are a strong player in the audio video world, and in the audio video, we are traditionally working with, I would say, quite high-end customers. With this new chip, the VS6320, which is a USB 3 extension, we expect to go to a broader market, which I would say is a shift from the very large conference room to medium, small, and even huddle room, which are bigger markets and far bigger markets.
We are traditionally working with I would say quite high end chips, a squire high end customers and we still are neutral the P 63 20.
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 a shift from the very large and as we add them.
Conference room to meet you on smaller even a huddle room.
Each are bigger markets and are far far bigger market.
Gideon Ben-Zvi: Some new players as well. This is actually one of the growing engines of the AV. Another growing engine is we see more and more demanded interest for what's called Industry 4.0, which is an adjacent market to the audio/video. It's an audio/video technology that is used not for conference rooms, it's used for a different application. These are some of the growing edges. I would just mention also the education world. Again, it's an audio/video technology, but not going for a regular audio/video conference room or video distribution. It's targeted more to the education market, hybrid education. These are some of the growing engines from the AV. I guess the automotive does all the same, where we are looking after the ADAS and autonomous cars, and actually another market in the automotive, which more and more we see interest in the surround view.
There's some new players as well. So this is actually why don't B and.
A growing engines over the AZ another growing engine as we see more and more demanding interests with what's called industry 4.0, which is the adjacent market. The audio video and audio video technology its ease of use not for contracts roll in Q4.
Application.
And these are some of the growing just mentioned also the education World games.
Again, if he can audio video technology, but not going for regular audio video conference for more video distribution.
It's a targeted more to the education market hybrid education.
And these are some of the growing angelus for from the a b b.
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 market.
In the automobile we ship more and more we see interest in the surround view.
And so actually these are where we see growing interest in the industry, but from a cash point of view. It is the audio video because you know the automotive are any design. We know the time. It takes till you see it's in cash and revenue that takes some years.
Gideon Ben-Zvi: Actually, these are where we see growing engines in the industry. From cash point of view, it is the audio/video because the automotive, any design we know, the time it takes until you see it in cash and revenues takes some years.
Thanks very much.
Brian Dobson: Thanks very much.
Okay.
Yeah.
Right.
There are no further questions at this time Mr.
Operator 2: There are no further questions at this time. Mr. Ben-Zvi, would you like to make your concluding statement?
Mr. Bernstein would you like to make your concluding statement.
Gideon Ben-Zvi: First, I want to thank everyone. I would like to thank you for joining us today for our Q2 2023 call, and for your continued support and interest in Valens Semiconductor, and all have a great day. Thank you and goodbye.
First 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 interest in Poland semiconductor and all have a great day, Thank you and goodbye.
Thank you. This concludes the Valens semiconductor first quarter 2023 results conference call.
Operator 2: Thank you. This concludes the Valens Semiconductor Q1 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.
Thank you for your participation you May go ahead and disconnect.
Okay.
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