Valens Semiconductor Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Yoni, and I will be your conference operator today. At 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 Valence Semiconductor Management will be followed by a question and answer session.

Operator

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

Speaker 1

Thank you, and welcome everyone to Valens Semiconductor's Q2 2023 earnings call. With me today are Gideon Bensley, Chief Executive Officer and Boel Hasenberg, 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.

Speaker 1

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 1, 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 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 to the V.

Speaker 1

If you're interested in meeting with us, please email me at investorvalens.com. With that, I will now turn the call over to Gidon.

Speaker 2

Thanks, Daphna, and thank you all for joining our Q2 2023 call. In Q2 2023, Valens Semiconductor revenues reached a record of $24,200,000 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.

Speaker 2

The rise in 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 audiovideo business. The audiovideo market is highly correlated to macroeconomic trend. We can now see indication for a recovery of the market, which we believe will start to improve at a relatively slow pace towards the end of 2023 and through the first half of twenty twenty four and gain momentum into the second half of twenty twenty four.

Speaker 2

We have identified that one of the main contributors for the expected improvement is the increasing demand for high performance USB peripherals. As such, Valens Semiconductor is driving adoption of the USB 3.2 stand out 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 VS-six thousand three hundred and twenty is the 1st English 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 ORS 328 feet.

Speaker 2

We recently received the first samples of the BS6320 from the successful takeout executed in Q1 2023 and we remain on track to ship the 1st engineering sample to selected customers by Q4 of this year. We believe that revenues from the new product will start ramping up during the second half of twenty twenty four as our customers will introduce their new products embedding with new chipsets. The VS-six thousand three hundred and twenty chipset is ideal for connecting the many remote USB3.2 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.

Speaker 2

As modern video conferencing applications increasingly require a unified meeting room experience with a flexible, efficient and High Performance Connectivity Solution. 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 $7,000,000,000 in 2022 to more than $14,000,000,000 in 2029 or 11% to 12% CAGR According to Research, Fairport and Business Insights, we recently demonstrated how another one of our products, the VH7000 Chipset family, It was originally designed for automotive can be leveraged for multicamera video conferencing applications. At Infocom International in June, we announced our collaboration with iTouch Technology, a leading AI image processing fastest semiconductor design company. The 2 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 Technologies AI imaging system on chip known as SoC.

Speaker 2

Valens deploying the solution will benefit from the ability to cover the entire room and enhance the in room and remote of its defense 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 VS-six thousand three hundred and twenty and the VA-seven thousand Chipset, It was clear that with these innovative solutions, Valens Semiconductor is once again at the forefront of the industry. Turning to automotive. 1st, our symmetric automotive chips, I believe the VA6000.

Speaker 2

2023 It's the 1st 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 E2 series. As such, Our annual sales in 2023 are expected to increase as a result of being deployed in more models and prior years. We expect to stay in the same car models going forward. 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 revenue safety solution we jointly developed with StormReach for the fleet operator customers.

Speaker 2

These customers are in the process of conducting preproduction extensive live on road evaluations. We expect this will result in ramping sales during the second half of twenty twenty four. Moving to the VA-seven thousand, our midi A5 non symmetric automotive chipset family for safety applications known as ADAS. 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, popping assist and reverse assist. The VA-seven thousand perfectly fits for vision based systems and over the past quarter, we grew a big pipeline with automotive OEMs considering the deployment of the VA7000 in mass production.

Speaker 2

The ongoing discussion with the OEMs looking at potentially selecting the VA7000 give us confidence as we remain on track to announce our first design wins this year. As a reminder, it typically takes fewer years following automotive design wins for generating initial revenues. 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 in line of our focus on reaching profitability, While maintaining our ability to reach our technological and business goals, we arranged our R and D and development infrastructure in a more efficient manner and streamline our development platform. This enables us to operate a stronger and linear organization for the benefit of Valens Semiconductor's stakeholders. Dror will provide more details in his prepared remarks.

Speaker 2

I'll now turn it over to Dror Hildenberg, our CFO, to review our Q2 2022 financial results and provide our financial outlook.

Speaker 3

Thank you, Gideon. I'll start with our Q2 results and then provide our outlook for the Q3 and the full year 2023. Starting with our Q2 2023 results, we achieved record quarterly revenues of $24,200,000 an increase of $1,700,000 or 7.5 percent from the Q2 of 2022 and an increase of 1.2% from Q1 2023. 2nd quarter of 2023 gross profit was $14,900,000 with a gross margin of 61.8 percent compared to $15,800,000 or 70.2 percent gross margin in Q2 2022. Non GAAP gross margin reached 63.1% compared to 71% in Q2 2022.

Speaker 3

The change compared to Q2 last year was mainly driven by substantially higher share from automotive as we doubled the portion of revenue coming from this business, which incurs a lower gross margin than our audiovideo business. Before referring to OpEx, as Gideon stated, during the Q2, we have implemented our plan to improve efficiency. The annual saving of this plan is expected to be $9,000,000 as previously announced. The additional charge incurred in Q2 specifically was $250,000 coming mainly from R and D. Operating expenses in Q2 2023 totaled $20,100,000 down from $23,700,000 in Q2 2022.

Speaker 3

Research and development accounted for approximately 60% of Q2 to 2023 OpEx coming in at $12,200,000 lower than $14,900,000 in Q2 2022, mainly due to purchasing of IP in the amount of $2,000,000 in Q2 2022. We also benefited from the strong U. S. Dollar versus the Israeli shekel. SG and A expenses were $8,000,000 down from $80,800,000 in Q2 2022, mainly due to $600,000 reduction in D and O insurance premiums as well as positive ForEx related impact.

Speaker 3

Turning to net loss and adjusted EBITDA. Q2 2023 GAAP net loss was $4,600,000 substantially better than the $10,000,000 net loss recorded in Q2 2022 And adjusted EBITDA in Q2 2023 was a loss of $800,000 also significantly better than the $4,500,000 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 U. S. Dollar in Q2, 2023 compared with the company's estimates.

Speaker 3

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 EUR0.10 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. Excluding the stock based compensation of $4,000,000 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.

Speaker 3

We ended Q2 2023 with a strong balance sheet, which is a clear indication for the 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 totaled $138,000,000 and we had no debt. This compares to $139,700,000 at the end of Q1 2023. In Q2, 2023, we generated $400,000 from operating activities compared to $4,300,000 cash used in Q2 2022.

Speaker 3

Q2 2023 was the Q1 in which the company's cash from operating activities was positive. 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 our profitability will support the positive trend of cash generation on an annual basis. Our working capital as we ended the quarter was $160,800,000 compared to $161,400,000 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 June 30, 2023 was substantially lower than at the end of March 2023, reaching $90,000,000 down from $23,600,000 This approximately 20% reduction reflects the fact that the company is returning to a more balanced supplydemand inventory management.

Speaker 3

As part of our inventory planning, We assume shorter lead times from our vendors, yet we have not yet seen them formally announced a change in their lead times policies. 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 that many have originally anticipated. We expect the recovery to continue at least through the end of the first half of twenty twenty four, which implies a modest pace of recovery in the short term.

Speaker 3

2nd, 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 and go down in Q3 2023, but in a slower pace. Now I would like to provide our guidance. For the Q3 of 2023, we reaffirm our expectation for revenues in the range of $14,000,000 to $14,200,000 As we have shared with you previously, we anticipate that the 3rd quarter 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 the higher portion of audiovideo revenues, which incur higher gross margins and on the other end, the negative impact of fixed operation expenses on the lower Q3 2023 revenues.

Speaker 3

Adjusted EBITDA loss in the 3rd quarter is expected to be in the range of $12,200,000 to $11,900,000 As of June 30, 2023, shares outstanding totaled 101,800,000 excluding, of course, approximately 1,000,000 shares that are subject to full feature. For the full year 2023, we are reaffirming that revenues are expected to range between $8,000,000 $84,200,000 Ultomotive 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 and it is now expected to be a loss in the range of $16,200,000 to 15.6 $1,000,000 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 Guillaume for his closing remarks before opening the call for Q and A.

Speaker 2

Thank you, Dror. In face of the ongoing macroeconomy and semiconductor sector specific headwinds. This 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 second half of the year are: 1st, to secure design wins from automotive OEMs for our VA7000 chipset family.

Speaker 2

This is a major milestone we all have been marching towards. 2nd, to further enhance our profitable audiovideo 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.

Operator

Thank you. Ladies and gentlemen, At this time, we will begin the question and answer session. Your questions will be pulled in the order they are received. Please stand by while we poll for your questions. The first question is from Rick Schaeffer of Oppenheimer.

Operator

Please go ahead.

Speaker 4

Thanks 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 in pro AV. Dror, if I think I heard your comment correctly.

Speaker 4

How much do you think you're undershipping consumption. And when do you expect this channel to normalize? I think I missed it. I You mentioned something about it on the call, but I think

Speaker 3

I missed it. Thank you for your question. Eric, good to hear you again, and thank you for the question. So yes, I think that your observation It's correct. I think that we see most of the impact of the slower than anticipated inventory digestion on the audio video business.

Speaker 3

And 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 This is a quarter that we are now in the middle of it, it's the 3rd quarter. I believe that audio video business is going to baton in this quarter. According to the guidance that we've just provided, we expect to see all in all audio video and automotive revenue in the level of $40,000,000 this quarter. 2nd, I believe that we're starting to see some improvement in the Q4.

Speaker 3

We are starting to see better demand from our customers. We see more inventory digestion from our customers along the channels. And third, I believe that we according to what we are hearing from our customers in all the discussions that we have with them that we expect to see soft rebound into the first half of twenty twenty four. And then as we mentioned in our prepared remarks, we believe that this we're going to see that this momentum will continue We'll mainly gain momentum into the second half of 0.24.

Speaker 4

Okay. Thanks for that added color. And maybe just for my second I'm curious, I know you mentioned that you're on track to add, I think you said at least like to announce at least one new customer in In auto, so I don't know if there was any other color you could give around that. And as part of your answer, either you're getting or Are customers taking a little longer in auto to launch new products? I mean, we've heard that from a couple of Your auto peers, your component peers, are you seeing shifts in sort of order patterns, order velocity In vehicle, in product launch, any change there that you've noticed within auto?

Speaker 3

Okay. So 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 based automotive. I can mention here that we see growing demand for our connectivity with the VA-seven thousand 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 Slow down or it takes more time for the automotive players to reach a decision. It's a market that So with players that take their time, I don't think that it's a surprise.

Speaker 3

If you remember, we said that we expect to see The initial design is before the end of this year. At this point in time, we are confident that we are going to meet this target.

Speaker 4

Okay. Thanks.

Operator

The next question is from Suji Desilva of Needham. Please go ahead.

Speaker 4

Hi, it's Sidi Sasolov of Roth, MKM. Hi, Gideon. So maybe to follow-up on Rick's question, The pipeline closure for auto, what are the drivers for the auto customers and the timeframe of those closures? And I guess because You may see 1 by the end of the year and more in 2024. What's driving their timeframe at this point?

Speaker 4

Are they sampling the ship and testing it? Or what other factors are they? Thanks.

Speaker 5

Hi, Suji. This is Guido. Thank you for your question. The process with the automotive player, the OEMs is actually there is 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 For newer bandwidth, for newer and for more information in order to predict an accident, in order to predict It's something going to happen.

Speaker 5

And this is a process that actually they're doing their own shift of understanding new needs in the market. And 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 and the solutions exist today, we have superiority. And yes, it takes the time. And some of the time is their own learning curve of the new world of the new demands. But we see that actually in most of them that the actually not in most of them, all of them that they And that's the 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.

Speaker 4

Okay. Thanks, Gideon. And then perhaps As they compare your solution to perhaps competitor offerings like Ethernet and so forth, what are the 1 or 2 key factors you think are standing out that You're being a customer toward Valens with the API solution.

Speaker 5

Well, the explanation is technologically. And the higher the bandwidth, the more exposure to electromagnetic influence you have. And this is not a linear thing. Like if you had a camera of 8 megabit versus 4 megabit, it's not double the exposure. Far more than that.

Speaker 5

And 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. And the unshielded cable It's actually having a total cost of ownership, which the whole system cost less because we enable user cheaper cables and 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 cables.

Speaker 5

So these are the key So the EMC, electromagnetic, the total system cost and the bandwidth. That's the 3 Key parameters.

Speaker 4

Okay, great. Thank you, Gideon.

Operator

The next question is from Vivek Arya of Bank of America. Please go ahead.

Speaker 6

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 1 quarter out, in early discussing of Q4 specifically. But just taking the full year guide, Kind of implies pretty steep sequential growth in December.

Speaker 6

So 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 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.

Speaker 3

So first of all, good to hear you again, Blake. The guidance first of all, we are not providing guidance today for Q4 basically. It's only for Q3 and the full year. But given the fact that we already Provided the first half and we gave the Q1, it's not that complicated to calculate the Q4. I think that the confidence

Speaker 5

that we are looking at

Speaker 3

the Q4 numbers are based on the fact that we know our customer product and based on what they are telling us. But on top of that, it's based on backlog and we see the level of booking that we already have with them. I think that given that fact that we know what they're expecting and what they see at in front of the end customers. And the fact that we already received the backlog, we see the backlog, this is the reason why we see this correction in terms of the Q3 versus Q4.

Speaker 6

Got it. And then just to kind of follow-up, 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 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 The gross margin recovery in the business, that would be great.

Speaker 3

Okay. So in a way, Q3 is a kind of an exception. It's an exception because it's a kind of a perfect Tom, we see we just mentioned that we see that audio video reached a button, 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 $40,000,000 We expect to see $40,000,000 in Q3 also means that the impact of the fixed operating expenses in this calculation of gross margin is going to be more dominant. So Q3 in a way is It's not something it's not typical it's not a good reference.

Speaker 3

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

Operator

The next question is from Brian Dobson of Sheridan Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. So 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 industries of your end user excuse me, 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.

Speaker 5

Yes, hi. It's Guido and thank you for the question and nice to hear from you. There are I will describe it as follows. We are a strong player in the audiovideo world. And in the audiovideo, we are traditionally working with, I would say, Quite high end chips, quite high end customers.

Speaker 5

And with this new chip the BS6320, We expect which is a USB extension 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 a huddle room, which are bigger markets and far bigger markets and some new players as well. So this is actually one of the a growing engines of the AV. Another growing engine as we see more and more demanded interest for what's called Industry 4.0, which is adjacent market with the audiovideo. It's an audiovideo technology that is used not for conference room, it's used for a different application. And these are sound growing.

Speaker 5

I would just mention also the education world. Again, it's an audiovideo technology, but not going for a regular audio video conference room or video distribution. It's targeted more to the education market, Education and these are some of the growing engines from the AV. I guess the automotive The same where we are looking after the ADAS and autonomous cars and this is where our and actually in the automotive, which more and more we see interest in the surround view. And so actually these are where we see growing engines in the industry.

Speaker 5

But from cash point of view, it is the audio video The automotive, any design we now, the time it takes until you see it's in cash and revenue, it takes some years.

Speaker 4

Thanks very much.

Operator

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

Speaker 5

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 the interest in Valens Semiconductor and all have a great day. Thank you and goodbye.

Operator

Thank you. This concludes the Valens Semiconductor First Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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Key Takeaways

  • Valens reported a record Q2 revenue of $24.2 million, reduced its adjusted EBITDA loss from $4.5 million to $0.8 million year-over-year, and remains on track to reach break-even by the end of 2023.
  • The audio-video segment is expected to recover late 2023 into 2024, with the new VS6320 USB 3.2 extension chipset samples received and engineering samples set to ship in Q4, targeting a revenue ramp in H2 2024.
  • At InfoComm, Valens showcased how its VA7000 automotive chipset can power multi-camera video conferencing alongside iCatch’s AI imaging SoC, enabling smaller, lower-cost cameras and enhanced room coverage.
  • In automotive, the VA6000 chipset is now broadly deployed in Mercedes-Benz S, C and E-Class models (including the EV), driving 2023 sales, while the VA7000 ADAS chipset has a growing OEM pipeline with first design wins expected this year.
  • With a strong balance sheet of $138 million cash and no debt, Valens has implemented a $9 million annual savings plan and reaffirmed Q3 revenue guidance of $14–14.2 million and full-year EBITDA break-even ambitions.
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Earnings Conference Call
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