Valens Semiconductor Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 5 speakers on the call.

Operator

Good morning. My name is Maya, and I will be your conference operator today.

Operator

At this time, I would like to welcome everyone to Valens Semiconductor's Q2 2024 Earnings Conference Call and Webcast. All participant lines have been placed in a listen only mode. Opening remarks by Valens Semiconductor Management will be followed by a question and answer session. I will now turn the call over to Lisa Fortuna, Investor Relations for Valens Semiconductor. Please go ahead.

Speaker 1

Thank you, and welcome, everyone, to Valens Semiconductor's Q2 2024 Earnings Call. With me today are Gideon Binzi, Chief Executive Officer and Guy Methanzen, 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 February 28, 2024, for a discussion of the factors that could cause actual results to differ materially from those expressed or implied. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events or changes in strategy. We will be discussing certain non GAAP measures on this call, which we believe are relevant in assessing the financial performance of the business, and you can find reconciliations of these metrics within our earnings release. With that, I will now turn the call over to Gideon.

Speaker 2

Hello, everyone, and thank you for joining Velez Semiconductor's Q2 2024 Earnings Call. This quarter, our team made solid progress executing against our long term strategy and capitalizing on growing market demand for our high performance connectivity solutions. This resulted in revenue exceeding our guidance, increasing our confidence in the positive trends we are seeing across the diverse verticals we sell. In the audio video market, we continue to see growing interest in adopting of our latest USB3 extension technology, the DS-six thousand three hundred and twenty Chipsets. Reflecting this momentum, we entered exciting new partnerships and collaborations in recent months, strengthening our go to market strategy.

Speaker 2

We believe we are poised to capitalize on the $1,000,000,000 annual total addressable market in audio video connectivity for videoconferencing, machine vision, industrial, medical and other verticals. In addition, our recent acquisitions of Accronain, the 1st M and A transaction of Valens Semiconductor elevates our presence in these verticals. All of these developments occurred despite continuous challenges, including slow inventory digestion in the Audio Video segment. Despite these short term challenges, our mid- and long term opportunities remain promising. Moving on to a quick overview to our Q2 financial performance, we are pleased to report that organic revenues exceeded the top end of our guidance at $13,200,000 Acronym contributed an additional $400,000 which increased total revenues to 13 point $1,000,000 As Acronym was consolidated from May 31, its contribution this quarter represents just 1 month of revenue.

Speaker 2

GAAP gross margin of the 2nd quarter came in at 61.4 percent and adjusted EBITDA loss was $5,200,000 both beating our guided ranges. We have a very strong balance sheet with $130,600,000 of cash and cash equivalents that allows us to continue investing in innovations and pursuing long term growth opportunities. Moving to acronym acquisition. I would like to give you more detail about why we are excited about the recent acquisitions of Acroname, which we closed on May 31, 2024. Based in Boulder, Colorado, Accroname has around 20 employees, most of whom are talented engineers.

Speaker 2

Accroname is pioneering advanced automation and control technologies for applications in industrial robotic control systems and audio video conference rooms. Aperon's products and solutions will enable us to expand our position in the industrial and audio video market as they are a leading supplier of high programmable USB hubs, switches and test automation systems for industrial applications. This M and A transaction, although modest in size, marks a significant milestone in our strategy to support non organic growth through synergetic acquisitions that will enhance value for our customers and shareholders. Importantly, strong balance sheet provides us with the flexibility to move quickly when opportunities arise. Going forward, we expect this highly selective acquisition strategy to complement our organic growth initiatives.

Speaker 2

Now let me turn our performance and the trends we are seeing in the markets we serve. Starting with professional audio video, which includes applications such as entertainment, video conferencing, education and digital signage. Since its introduction late last year, we are proud to have over 50 customers developing product based on the VS-sixty three twenty with a wide variety of products already launched. The public excitement for the chipset validate that the VS-six thousand three hundred and twenty's groundbreaking technology demonstrates the high demand for reliable, streamlined and affordable connectivity. The industry's eagerness for this chipset was most apparent at the Infocom International, the largest professional audiovideo trade show in North America, which took place in mid June.

Speaker 2

At the show, many leading manufacturers announced launching products while other demonstrates the VS60 320 embedded into their products, which include USB extenders, PTZ cameras, video bars, wall plates, docking stations, room appliance controllers and USB hub switches. All across the show floor, people were praising the new capabilities of the VS-six thousand three hundred and twenty chipset. We are pleased to report that we reached mass production of the VS-six thousand three hundred and twenty chipset in July and expect to start generating revenues in the second half of twenty twenty four before ramping up further in 2025. There is growing adoption of video conferencing systems driven by hybrid work and educational environments as well as necessary improvements to the user experience despite current market conditions. These positive trends are expected to support mid- and long term demand for our chipsets.

Speaker 2

In addition, during the Q2, we continued to expand our partnerships with leading providers to accelerate new product introductions. One example is the partnership with Taiwan based Goodway Technology, one of the world leading PC peripheral design and manufacturing companies. Google Technology has leveraged our VS60 320 in combination with Synaptics DisplayLink technology to offer the video conferencing market a simplified, flexible and cost effective solution, opening the door for the integration of docking station into reasonably priced meeting rooms. As you can see, video conferencing continues to be a major focus for us and we expect it will be driving factor in the recovery of the entire AB market. We are encouraged by investments that leading tech companies like Microsoft and Zoom are making.

Speaker 2

These innovative solutions will improve the user experience through certification processes for video conferencing systems and for the seamless and unified experience in hybrid meetings. We expect that these certifications will drive adoption of better technologies, which is where we have a significant advantage. Moving on to the Machine Vision and Industrial Verticals. To date, Valens has engaged the industrial market and application connecting industrial PCs and remote touch displays, extending the HDMI and USB enabled remote operation of industrial machines. With the launch of our VS60 320 and the VA-seven thousand Chipset, we are now entering a much larger market, machine vision.

Speaker 2

These new chipsets are targeting 2 main segments in the machine vision world, the IPC based and the embedded vision segments respectively. The IPC based segment is dominated by 2 standard technologies, Geek E Vision and USB 3 Vision. Until recently, USB 3 Vision offers significantly higher bandwidth, but had limited cable length. Now with the Valens USB 3 extension solution, USB3 Vision can support the same 100 meter distance as GigE alongside the much needed higher bandwidth. Our new solution enables high resolution machine vision system such as vision inspection and automated warehouse operations.

Speaker 2

The Embedded Vision segment typically leverages proprietary camera extension technologies. Valens VA 7000 CSI2 extension solution brings significant benefit. It is based on an EP aligned standard. It enables higher bandwidth extension over long and simpler cables. And most importantly, it is 20 times more robust to electromagnetic interference than competing technologies.

Speaker 2

Valens is increasing its investment in the industrial machine vision vertical, expanding our partnerships across the ecosystem to enable faster introduction to our technology. We believe that the fruits of this effort will be on display during the Vision Show of Stuttgart, Germany on October 8. Before we discuss automotive, I would like to briefly address the current challenges in the audiovideo markets. We are still experiencing a significant reduction in our audiovideo revenue compared to last year. We believe this is related to general weakness in the macro economy and to customers continuing to hold high levels of inventory, which dumpled new order replacement and upgrade activity.

Speaker 2

We remain bullish on the audio video market in the medium and longer term. We believe we're in a cycle and that our legacy products will get back to the levels of revenue we used to see in the past. In addition, the VS-six thousand three hundred and twenty based products are set to become significant new revenue growth drivers as well as in the new industry machine vision vertical. Moving to automotive. Overall, our automotive business is stable.

Speaker 2

As a reminder, our 1st generation VA6000 chipsets are used in Mercedes Benz infotainment and telematics systems. A big part of our focus remains on our 2nd generation chipsets, the VA 7000, which complies with the MiP EFI standard. We are progressing in several evaluation processes with global automotive OEMs on this chipset and customer feedback has been encouraging. And of course, we continue to work with companies across the ecosystem to design and develop products based around this technology. One example of the growth in the EFI ecosystem came last month when Continental, one of the largest Tier 1 automotive suppliers in the world, introduced the EIFI standard into their ADAS camera build.

Speaker 2

They announced that they have upgraded their SS6300 camera, which now feature a link speed of up to 8 gigabits enabling resolution beyond 8 megapixels. They said, and I quote, the MiP EFI standard ensures the lowest error rate and enhanced EMC robustness, making our cameras resistant to external interference and reliable in various conditions. Continental is the latest in a long list of companies joining the EFI ecosystem and recognizing the many technological benefits this startup offers the automotive industry. We are confident that our innovative technology will position us to take advantage of an enormous opportunity in this automotive segment, which we estimate will have a total addressable market of $0,500,000 per annum by 20 briefly discuss a trend that crosses traditional boundaries in the region as it is the growth of AI. Much of the AI system architecture we know and use today is cloud based including popular large language models like Cheggpt.

Speaker 2

However, there is another kind of AI system architecture called Edge AI, and it's finding new avenues for deployment and applications that require real time operations where the AI processor is separated from the data sensor input. The AI processor must leverage a high performance connectivity solution, specifically one that is uncompressed and error free in order to make accurate decisions. Valens' cost effective and high performance distribution technology is playing an instrumental role in enabling this breakthrough technology in the automotive, machine vision and video conferencing industries. With that, I will turn the call to Guy to discuss our financial performance in more detail.

Speaker 3

Thank you, Gideon. I'll start with our Q2 2024 results and then provide our outlook for the Q3. We achieved quarterly revenues of $13,600,000 exceeding our guidance of between $12,500,000 to $13,000,000 our revenue excluding Equanim was $13,200,000 above the high range of the guidance. This compares to revenues of $24,200,000 in the Q2 of 2023. The reduction is related to the inventory digestion cycle of our customers as explained by Gideon earlier.

Speaker 3

AudioVideo contributed $8,100,000 or approximately 60% of total revenues and automotive contributed $5,500,000 or approximately 40% of total revenues this quarter. This compares to audiovideo revenues of $15,500,000 and automotive revenues of $8,700,000 representing 64% and 36% of total revenues respectively in the Q2 of 2023. Q2 2024 gross profit was $8,300,000 compared to $14,900,000 in the Q2 of 2023. 2nd quarter 2024 gross margin was 61.4% compared to 61.8% in the Q2 of 2023. On a segment basis, our audiovideo gross margin was 75.4% and the automotive gross margin was 40.9% compared to 75.3%

Speaker 2

and 37.8%

Speaker 3

respectively in the Q2 of 2023. The increase in automotive gross margin was related to chip cost improvements. Non GAAP gross margin was 64.5% compared to 63.1% in the Q2 of 2020 3. Operating expenses in the Q2 of 2024 totaled $17,800,000 compared to $20,100,000 in the Q2 of 2023, mainly due to a reduced headcount as part of the efficiency plan that was implemented in the second half of twenty twenty three. Research and development expenses accounted for approximately 56% of the Q2 of 2024 operating expenses coming in at $10,000,000 compared to approximately 61 percent of the Q2 of 2023 operating expenses or $12,200,000 in the Q2 of 2023.

Speaker 3

SG and A expenses were $7,800,000 compared to $8,000,000 in the Q2 of 2023. The Q2 of 2024 GAAP net loss was $8,900,000 versus a net loss of $4,600,000 recorded in the Q2 of 2023 and adjusted EBITDA in the Q2 of 2024 was a loss of $5,200,000 compared to a loss of $800,000 in the Q2 of 2023. GAAP loss per share for the Q2 of 2024 was 0 point 0 $8 compared to GAAP loss per share of 0 point 0 $5 for the Q2 of 2023. Non GAAP loss per share in the Q2 of 2024 was 0 point 0 $4 compared to $0.00 in the Q2 of 2023. Demand difference between GAAP and non GAAP loss per share was due to a stock based compensation, depreciation and amortization.

Speaker 3

We ended the Q2 of 2024 with a strong balance sheet with cash, cash equivalents and short term deposits totaling $130,600,000 and no debt. This compares to $139,800,000 at the end of the Q1 of 2024. The reduction is related to ongoing operational expenses and one time expenses of $7,800,000 associated with acquisitions. Our working capital at the end of the quarter was 142 $300,000 compared to $153,300,000 at the end of the Q1 of 2024. Our inventory as of June 30, 2024 was $14,100,000 of which $2,500,000 was from Acronym.

Speaker 3

Excluding this amount, inventories were $11,600,000 down versus $12,500,000 at the end of the Q1 of 2024. We continue to carefully manage our inventory and have effectively reduced them over the last 5 quarters. Now I would like to provide our guidance for the Q3. We expect 3rd quarter revenues to be in the range of $14,700,000 to $15,400,000 of which $1,200,000 to $1,400,000 are expected to come from Acroname. We expect gross margin to be in the range of 52% to 53% and we expect adjusted EBITDA loss in the 3rd quarter to be in the range of negative $6,800,000 to $6,300,000 Turning to the acquisition of Acronym.

Speaker 3

As Gikul mentioned, this was our first acquisition. The purchase price was $7,800,000 in cash, an additional $1,300,000 was transferred to Acronym in consideration for the amount Acronym held in cash at closing. Further, the company will be obligated to pay the sellers earn out payments of up to $7,200,000 depending on the achievement of certain revenues, EBITDA and cash flow targets in 2024 2025 and the development of a certain product by June 2026. Based on financials provided to the company, Acronem's revenue for the 1st 6 months of 2024 was $3,300,000 However, since the closing was on May 31, 2024, we consolidated revenue of $400,000 in our financial results during the Q2. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q and A.

Speaker 2

Thank you, Guy. Today, we demonstrated how Valens' new offerings not only expand our presence in existing markets, but also enable us to enter AI driven markets addressing the critical connectivity needs in machine vision. The synergies of our solutions across the various markets we serve continue to prove their value. As we look to the second half of twenty twenty four, Valens Semiconductor remains committed to executing our long term growth strategy and capitalizing on the promising opportunities within our target markets. Our innovative standard setting, high speed connectivity solutions and highly sophisticated chipsets position us to achieve our goals and deliver value for our stakeholders.

Speaker 2

Our strong balance sheet provides us with flexibility to continue to invest, acquire and innovate, and importantly, to navigate dynamic market conditions. We're also excited to announce that we are planning to host an Investor Day in New York this November. Stay tuned for details. Before opening the call for questions, I want to express my gratitude for exceptional teams whose hard work, talented dedication are the driving force behind Valens Semiconductor. With that, I will now open the call for your questions.

Speaker 2

Operator?

Operator

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

Speaker 4

Hi. This is Wei Mok on the line for Rick. Congrats on the results. It looks like you guys delivered upside results to 2Q and from the guide, it looks like 11% for the Q3. So you mentioned that you guys started clearing inventory for the last 5 quarters.

Speaker 4

So how far are you guys from seeing inventory bottoming? And considering the macro, what are you considering in terms of the shape of recovery for the second half of the year, particularly in 4Q?

Speaker 2

First, hi and thank you very much for the question. Before I answer, I want to apologize for the technical problems we all experienced today with the provider of the conference call. I apologize sincerely. And then just wanted to mention it and Guy will take the answer for these questions. So please Guy.

Speaker 3

So in terms of the inventory, we definitely in the inventory in our balance sheet, we're still on the trend of reducing the inventory and in consumption in line with our long term goals, achieving a reasonable number of inventory days.

Speaker 4

Okay, great. Thank you. As for my second question, it's on acronym. It looks like part of the deal requires reaching certain key milestones and metrics and also the development of a new product. How confident are you on reaching those milestones?

Speaker 4

Any color you could provide on this new development product?

Speaker 2

Well, in our world, being confident is not an easy thing to do. We live in a world of a lot of uncertainty, it seems that a lot of the good signs are here and you know that we're not providing a very long term forecast. But it seems like that we have the positive signs. But other than that, I feel irresponsible to give projections.

Speaker 4

Thank you. Maybe if I could squeeze in one last one. It's on that new VS-six thousand three hundred and twenty audio and video product. It seems like there's a lot of engagement, a lot of partnerships. You guys mentioned 50 or so product.

Speaker 4

What type of applications do you see first adoption? Are they in traditional conference rooms, huddle rooms? Or are you seeing more interest in industrial applications? And when do you start to see these revenues start to contribute? I believe they ramp in second half of this year.

Speaker 4

Is that correct?

Speaker 2

Yes. Well, thank you for the question. And actually, I have a bit longer answer to this. And I'm happy you asked it because I think my answer can put light on this product. Inovalent for a long time and we were playing in the Pro AV world.

Speaker 2

And the 6,320 opens for us felt in the world of audio video more markets, which are more lower end markets such as the huddle room and small and medium sized conference room, where people simply want to have a camera that covers more people and they want to use the full USB 3 extension and not to compromise in USB 2 extension, which will reduce the resolution, reduce the bandwidth and the frame rate or any other things. So this is the first application, it's the Huddle room. And my core, the Logitech CEO, who said there are 100,000,000 rooms in the world that it's clear that in 10 years all of them will have a solution and the question is what's the speed to get there. So this is when looking about the same vertical where we are in, which is the audiovideo moving from the very high end to medium end, not to the low end. We're not a consumer company, but definitely for the medium and less high end than we are, which is far, far larger market.

Speaker 2

The second market, which you asked about the industrial, it's a very, very big market. Today, we are aware of quite many millions, actually it's just a little bit below 7,000,000 cameras produced every year in this world and a lot of them need extension. And the reason they are very sensitive to high resolution, it's a world where you need the bandwidth because of several reasons. You need the resolution to inspect. You need the frame rate in order to stop the machine or to act when something happens.

Speaker 2

And you need the high depths of the many bits per pixel because you need the sensitivity because sometimes you need to inspect the color or a change in color. All these on the 3 components that creates bandwidth. And this is why industrial market is very demanding for high bandwidth and this is where we are and the USB 3 extension is a solution for that. And if I may even say a little bit speak a little bit more, I would say that the same is about a medical market, which we are now looking at. I don't I can't elaborate too much.

Speaker 2

But also in medical, you can imagine that those three parameters are very sensitive. The bandwidth of which comes from frame rate, from resolution and from the number of bits per pixel, right? And the last question you asked was about when we already have orders and deliveries in this second half. It looks ramped up nicely. Yes, we are in the semiconductor market, which we always say in Valens that compared to software, this figure is geological.

Speaker 2

But this is yet we see the ramp up and we are very happy about it. And it reminds us the ramp up when the company started. We never had such a fast ramp up in the product before as one as such as we have now with the BS6320. Rick, this answers the question.

Operator

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

Speaker 2

Sure. First, I want to thank everyone for the time and for being with us. I want to thank our devoted employees, the talent and the contribution to be where we are. And we see you next time in our next earning call. Earnings call.

Speaker 2

Thank you very much for your attention, for your support, and we should continue. And that's it. All the best, and have a good day.

Operator

Thank you. This concludes the Valens Semiconductor Second Quarter 2024 Results Conference Call.

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