Valens Semiconductor Ltd. (NYSE:VLN) Q4 2022 Earnings Call Transcript

Valens Semiconductor Ltd. (NYSE:VLN) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good morning. My name is Yaumi and I will be a conference operator today. At this time, I would like to welcome everyone to Valens Semiconductor Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode. Opening remarks Valens Semiconductor management will be followed by a question-and-answer session. I will now turn the call over to Daphna Golden, Vice President of Investor Relations for Valens Semiconductor. Please go ahead.

Daphna Golden: Thank you and welcome everyone to the Valens Semiconductor’s fourth quarter and full year 2022 earnings call. With me today are Gideon Ben-Zvi, Chief Executive Officer, and Dror Heldenberg 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 today with the SEC for a discussion of the factors that could cause actual results to differ materially from those expressed or implied.

We do not undertake any duty to revise or update such statements to reflect new information, subsequent events or changes in strategy. We will be discussing certain non-GAAP measures on this call, which we believe are relevant in assessing the financial performance of the business. And you can find reconciliations of these metrics within our earnings release. In the coming weeks, we will be in California and in Europe for investor conferences and meetings. 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

Gideon Ben-Zvi: Thanks, Yaumi, and thank you everyone for joining our call. 2022 was the year of many successes for Valens Semiconductor. In 2022, Valens Semiconductor continues to strengthen its leadership position in the audio-video market and focus on increasing its share also in the automotive space. A record number of Valens Semiconductor audio-video and automotive chipsets were sold for use in diversified business activities that support people’s daily lives. We accomplished record revenues of $90.7 million driven mainly by greater than expected revenues in audio-video and we doubled our annual automotive sales. We also achieved better than anticipated gross margin and adjusted EBITDA and are well on the way to achieve an important milestone of adjusted EBITDA breakeven by the end of this year 2023.

Looking at the most recent quarter Q4, 2022 the trend of growth continued, and the revenues reached a record of $23.5 million, up 13% from Q4, 2021. We also achieved better than anticipated profitability metrics. We believe Valens Semiconductor is well positioned to address the near and long-term opportunities in the market that we serve for four reasons. First, we benefit from being an industry startup leader in both audio-video and automotive, which are two large and growing markets. Second, we never disrupted connectivity offerings across both our business segments. This is expected to help us to enrich our product offerings and accelerate the ROI on new products. Third, we are expecting the ecosystem to work mass production of our automotive VA7000 A-PHY compliant chipsets.

Fourth, our continued investments new products to augment our disruptive offering for both markets. Turning to our segments starting with audio-video. In 2022, we continue to expand our footprint in the audio-video market into new applications and verticals such as education, corporate medical and industrial. In education, we are very proud that the largest Public County School District of Florida, which is the fourth largest in the United States, has selected our audio-video product to modernize these classrooms. This State District has over 330,000 students. As part of an awarded Elementary and Secondary School Emergency Relief Known as ESSER initiative, they selected Valens to be empowered pension product together with Logitech, Logitech video conferencing camera for a better hybrid in class and remote educational experience.

One of the main goals is to prepare for an avoid future closure of schools to enable continuous learning and improved student achievements. With our video conferencing extension solution, teachers and students can now efficiently teach and learn regardless of the physical location, opening up possibilities to boosting knowledge, retention and achievement of all locations. The first phase of installation has been completed and we look forward to implementing the next phase. In corporates, Puma, the well known sports brands announced in Q4, the Crestron Electronics, a leading electronics company and one of the longest serving audio-video customers completed the installation of a presentation system in the New North American headquarters in Boston.

The system which incorporate Valens Semiconductor chipsets answer Puma’s needs for seamless communication between employees by offering one unified meeting room experience replicating a consistent experience across their conference rooms that are using Microsoft Teams-enabled rooms. These two examples demonstrate how remote and hybrid work and education models which are here to stay require equipping spaces with the proper audio and video distribution solutions to foster equity, increased efficiency and accommodate a better film experience for both small and large groups. Our products were also recently deployed by a healthcare organization upgrading the Orbis Flying Eye Hospital airplane, which features a teaching facility in operating room, a classroom and a recovery room.

I decided to share this example as it demonstrates how Valens Semiconductor and its customer help make the world a better place. All these is an international charity working to make item available everywhere for everyone, so no one has to experience the consequence of avoidance blindness. Its mission is to use a network of partners, supporters, medical professionals, and sector leading volunteers to empower local communities to fight blindness and restore vision. The Orbis Flying Eye Hospital staff travel worldwide to share their knowledge and expertise with local eyecare teams. They required resilient technology solutions to provide the best training opportunities to eyecare professionals around the world serving communities in need that have limited access to such services.

We are proud to be part of this critical mission. We continue to invest in expanding our offerings in audio-video verticals. We believe that as the need for efficient, lower cost higher connectivity increase, there will be new opportunities to expand our business and customer base. For example, in 2021 we introduced the VA3000 chipset family, which enables our customers to innovate and design products across industries. Our VX3000 which extend uncompressed 4k60 frames per second resolution video is one of the most advanced integrated chipsets offering long range high bandwidth connectivity solution. The successful adoption of the VX3000 product family by industry leading customers also contributed in 2022 to the increase of our audio-video revenue in various applications.

Last month, at ISE 2023 in Barcelona, more than 25 leading audio-video manufacturers showcased over 80 VX3000 based products. This was four times the number exhibited ISE 2022. We also demonstrated new capabilities of the VX3000 chipset that can extend signals from multiple media sources, displays and other accessories in this target list. We already see traction by customer who intend to develop the next generation video conferencing product using our VX3000 chipset. These new capabilities of the VX3000 can also be applied in digital signage applications for consultation, retail, sports stadiums and digital out of home markets. In 2022, we made progress in the development of a new low-cost USB 3.2 and USB 2.0 extension solution, the VA6320, which is ideal for distribution of video conferencing peripherals, as well as for industrial and medical applications.

We expect sales engineering samples to be shipped to select prospective customers towards the end of this year. Our ability to leverage our disruptive offering across both our business segments is demonstrated by our VA6000 in VA7000 Cheap subfamilies originally designed for automotive, which are now also targeting audio-video. In 2020, we grow the sales for our VA6000 for USB in power extension applications in the audio video segment, primarily for video conferencing applications in leading roles in classrooms. We expect it to also expand into industrial applications. We also continue to promote the VA7000s for audio-video applications. Meeting Rooms are increasingly equipped with multiple displays and cameras, we believe the VA7000 is ideal for extending multiple cameras in video conferencing systems in industrial and medical imaging.

Photo by Yogesh Phuyal on Unsplash

These verticals need uncompressed high resolution, long rage affordable connectivity solutions for video over flexible wiring with electromagnetic immunity. This new approach will enable to drastically reduce the size and cost of the camera located on the table and/or on the wall and to achieve a 360-degree room view. Current automotive is doubling up for automotive revenues in 2022 from 2021 was driven by sales of our VA6000 chipset which provides symmetrical activity and enable data flow for infotainment and telematics. You can find our chips today in Mercedes Benz S, C and E-Class models including the electric vehicles known as EV models. In parallel the VA7000 meet the A5 compliant chipset provide a non-symmetric high-speed connectivity solution for advanced driver assistance systems known as ADAS and for software defined vehicles.

At the end of 2022, we announced that the Japanese launched validated for its network of OEMs and Tier 1 specification, just called network includes Toyota, Nissan, Honda, Mazda and then so. These came after our VA7000 chipsets passed the rigorous testing for electromagnetic compatibility known as EMC, which is required by automotive OEMs. This is an important milestone for the integration of these chipsets into safety critical either. Further demonstrating the momentum the VA7000 is gaining in Japan. We recently announced that Hosiden Cooperation, a Japanese global provider of automotive electronic equipment components, completed rehabilitation of its connectors and cables use the VA7000 chipset. At least you will see as we showcase the benefits of our automotive high speed connectivity product suite alongside a comprehensive set of demonstrations from companies in the expanding ecosystem for the VA7000 chipset family.

Innovis , a larger supplier demo, it’s neutral 160 degrees kind product, which uses our VA7000. These slider is planned for use in automotive and non-automotive markets. But let’s semiconductors VA7000 chipset was the only alternative able to get the performance they we’re looking for to send a signal from the rotating parts of the LiDAR through an air gap down to the processing part to cover the entire field of view. We are participating in several automotive OEMB for the use of our VA7000 chipset and we believe we will be announcing our first design wins this year. It’s typically paid a few more years following automotive design wins before generating initial revenues. ADAS is projected to run towards at least $8 billion in the coming year, driven by the growing number of sensors per car, which will require a greater number of high speed connectivity chips like ours.

We recently completed the development of the safety solution developed in partnership with Stone Ridge, a leading designer and manufacturer of highly engineered electrical and electronic vehicle systems for the trucking industry. The next step is to promote the safety solution in the market and to start generating revenues. We continue to monitor the current turbulent geopolitical and economic environment. Macro changes such as the increase of inflation rates, which triggers the rise of interest rate globally may affect our customers and their end customers. While we keep following the trend in the semiconductor industry that may have influence on our business, we remain focused on what is in our control innovation, or a go to market strategy and execution.

I will now turn it over to Dror Heldenberg our CFO to review our Q4 and full year 2022 financial results and provide our financial outlook.

Dror Heldenberg: Thank you, Gideon. I’ll start with our fourth quarter and full year results and then provide our outlook for the first quarter and full year 2023. Starting with the fourth quarter 2022 results, we achieved record quarterly revenues of $23.5 million, an increase of $2.7 million or 13.2% from the fourth quarter of 2021 and 1.4% from Q3 2022. The other anticipated revenues, led by audio-video also contributed to an overall and expected gross profit and gross margin. Fourth quarter 2022 gross profit was $16 million up from $14.8 million in Q4, 2021. Fourth quarter 2022 gross margin exceeded our expectation and reach 68.3% compared to last year’s 71.2%. Non-GAAP gross margin reached 69.2%, compared to 71.5% in Q4 2021.

The change compared to Q4 last year reflects our share of revenue coming from our automotive business, which incurs a lower gross margin than audio-video. Operating expenses in Q4 totaled $24.1 million compared to $23.4 million in Q4 2021. Research and Development accounted for approximately two thirds of Q4 2022 OpEx coming in at $16.5 million and included expenses attributed to the successful completion of for automotive VA7000 family chipset tape out as we prepare for mass production by our potential customer. SG&A expenses was $7.7 million 9.8% lower than $8.5 million in Q4 2021. In Q4 2022, we benefited from renewal of the VLN insurance at a significantly reduced premiums. Turning to net loss and adjusted EBITDA. Q4 2022 GAAP net loss was $7.3 million better than the $8 million loss recorded in Q4 2021 and adjusted EBITA in Q4 2022 was a loss of $4.6 million better than the $7 million loss in Q4 2021.

This substantially better than guidance, adjusted EBITDA loss in Q4 2022 was due to a combination of several factors. The strength of the U.S. dollar, which positively impacted expenses payment in Israeli shekel mainly for compensation to employees based in Israel. The other than expected audio-video revenue which positively impacted or gross profits. And our laser focus on internal efficiency and savings of cloud in OpEx. GAAP loss per share for Q4 2022 was $0.07 compared to a $0.08 loss per share in Q4 2021. Non-GAAP loss per share in Q4 2022 was $0.03 better than the $0.06 loss per share in Q4 last year. Removing the stock-based compensation from the non-GAAP loss was the main reason for the delta between GAAP and non-GAAP loss per share.

Looking at the full year 2022. Our total revenues exceeded the higher end of our guidance, increasing to a record of $90.7 million up $20 million, or 28.3% from 2021. Both business units from your video eligibilities reached new highs which were driven by higher number of chips sold and higher ASPs. Audio-video revenues reached a record $74.5 million, up a remarkable 18.7% from $62.8 million in 2021. In 2022 our customers demand was notably strong mainly to applications in the corporate education and medical verticals. In the education space, we are especially proud of the Florida Public School District award, which didn’t discuss in this prepared remarks. Automotive revenues reached a record $16.2 million, up 105% from $7.9 million in 2021, driven primarily by the expansion of our products into additional Mercedes Benz cars.

Gross profit in 2022 reached $63.4 million, up 25.3% in 2021. The higher gross profit was mainly driven by the increase in the number of chip sold and higher ASP in 2022 compared to 2021. 2022 gross margin was 69.9% compared to 71.6% last year. 2022 non-GAAP gross margin was 70.7%, compared to 71.8% last year. The difference in the gross margins was mainly due to our product mix as detailed earlier. Looking at our gross margins by business segments. Audio-video carries higher margins. 2022 gross margin in audio-video was 78.4%, up from 77.9% in 2021. Automotive gross margin increased to 30.7% up from 21.2% in 2021, reflecting the margin improvement as volume ramps up. Full year operating expenses were $91.8 million, compared to $77.6 million in 2021.

The year-over-year increase was primarily due to an increase of $11.3 million in research and development expenses as we invested in enhancing our product offering to address the business opportunities we see ahead in audio-video and automotive. This included investment in the development of the VA6320 our new USB suite of two extension products for audio-video. In automotive, we invested in original feature set of the VA7000 and in its preparation for mass production. We also started the development of the new VA7100 chips of family, this will further enhance the capabilities of the VA7000. Another reason for the change in OpEx was our salary and related expenses recorded due to the competitive employment market we faced in 2022. These salary hikes were partially offset by the revaluation of the U.S. dollar compared to the new Israeli shekel.

SG&A expenses increased in 2022, mainly due to the expansion of the sales and marketing team to support the promotion of our new products. Furthermore, we recorded an increase in travel and exhibition expenses, as restrictions were lifted and the global market began to recover. The finance expenses for the full year 2022 were $1.8 million, compared to an income of $1.1 million for the full year 2021, a decrease of $2.9 million. The year-over-year change was primarily due to a 2022 $4.4 million of financial expenses related to FOREX, this was offset by an interest income of $2.3 million. This compares to a 2021 FOREX income of $1.3 million and an interest income of $0.3 million. Moving to net loss and adjusted EBITDA. GAAP net loss for the full year 2022 was $27.7 million compared to $26.5 million in 2021.

Adjusted EBITDA for the fourth year 2022 was a loss of $14.9 million versus the $16.1 million in 2021. The improvement was mainly due to the revenue growth and higher gross profit, which was partially offset by the increase in 2022 OpEx. GAAP loss per share for 2022 was $0.28, compared to a loss per share for the year 2021 of $1.16 calculated as the net loss divided by 97.8 million shares and 33 million shares, respectively. Non-GAAP loss per share for 2022 was $0.17, compared to $0.47 last year. This improvement reflects a combination of improved non-GAAP loss in 2022 and the increase in the number of shirts that I just mentioned. Turning to our balance sheet, we ended up 2022 with a strong balance sheet. Cash cash equivalents and short term deposits totaled $148.4 million and we had no debt.

This compared to $152.9 million at the end of Q3 2022. Our working capital as we ended the year was $163.7 million, compared to $166.6 million at the end of Q3 2022. This difference of $2.9 million is mainly due to the loss incurred during Q4 2022. Our inventories as of December 31, 2022 was $23.8 million, an increase of $1.9 million from the end of Q3 2022. Approximately 60% of the inventory at the end of 2022 was attributed to finished goods. There are three primary reasons for this change. First, we live in an inflationary environment and the value of new inventory is higher. Second, as we have discussed previously, to secure production capacity with vendors in the prior constrained supply environment, and to also address our customers demand, we placed longer term purchase orders.

Goods from these purchase orders continue to arrive in the fourth quarter. Furthermore, approximately 40% of the inventory is attributed to work in process to streamline the production of our finished goods. Third, this level of inventory is needed to meet the demand from our customers that we see ahead of us in 2023. Specifically, we anticipate significant growth in automotive revenues from 2022 to 2023. And accordingly, most of the increase in our inventory is related to our automotive business. Given the demand environment in the first half of 2023 and considering production lead time, we expect inventories to remain at approximately this level in the first quarter of 2023. Now, I would like to provide our guidance. For the first quarter of 2023, we expect revenues in the range of $23.6 million to $23.8 million.

We expect some for customers with a crude inventory during the constrained supply environment to consume their inventory during the first half of the year. We expect Q1 gross margin to be in the range of 63% to 63.4%, reflecting the projected product mix to include the higher portion of revenue from our automotive business. Adjusted EBITDA loss in the third quarter is expected to be in the range of $6.5 million to $5.9 million. As of December 31 2022 shares outstanding totaled $98.9 million, excluding approximately 1 billion shirts that are subject to forfeiture. For the full year 2023, we expect revenues to range between $97 million and $100 million. We expect sales growth a little bit steeper in the second half of the year. As we anticipate substantially more demoted revenue in 2023, compared to 2022 up from 18% of our total annual revenues to a range of 27% and 29%.

We expect both modules to be in the range of 62% to 62.7%. Adjusted EBITDA is expected to be a loss in the range of $15.4 million to $13.6 million. We remain on track to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2024, the company should reach cashflow profitability. I’ll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.

Gideon Ben-Zvi: Thank you, Dror. We are proudly present semiconductors performance in the fourth quarter and full year 2022 as we once again achieved notable progress in both audio-video and automotive. Looking to 2023, the level of uncertainty is currently higher, and what we have seen through the past couple of quarters, and will remain focused on those elements in our control. We’re expecting to secure new designs wins in audio-video and our initial wins with VA 7000 in automotive. Valens Semiconductor will continue to innovate, leverage our core technology across both our business segments and deliver new disruptive products to address market needs. We will continue to focus on the best opportunities, which we believe will drive sustainable growth and profitability for the company.

Finally, before opening the call for questions, I want to thank all our stakeholders, including of course, our employees, for their ongoing commitment to the company success. Operator, I would now like to open the call for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. The first question is from Suji Desilva of Roth Capital. Please go ahead.

Suji Desilva : Hi, Gideon, hi, Dror. Congratulations on the strong ’22 and the strong finish to ’22. Looking ahead, you guided gross margin lower on automotive, I guess increasing in the mix? Would it significantly increase in 1Q versus 4Q’22? Do I know the full year? It’ll be up strong to the lower 62% gross margin. But is that going to start in the first quarter? And related to that, what is the timing of the VA7000 design announcements? Would it be more second half ’22 or ’23 or could we see them in the first half as well?

Gideon Ben-Zvi : So let’s start with — first of all, thank you, Suji. Let’s start with the gross margin, you’re absolutely correct. In the first quarter of 2023, we’re going to see higher revenue than Q4 2022 as we guided here. Indeed given the fact that automotive is going — the automotive contribution revenue contribution is going to be a bit higher. We’re going to see that the gross margin is going to be a bit lower in the first quarter of 2023. Going forward, as we anticipate higher portion of audio-video, probably in the second half of the year, we expect this gross margin to be again a bit higher in the second part of the year. In total we just gave you the guidance for the gross margin for 2023 overall, between 52% and 52.7%. With respect to the second question, just remind me what was the question?

Suji Desilva : The VA7000. You said you’re going to see announcements in 2023. I’m wondering if we can expect some of the earlier part of ’23 or whether those announcements would most likely come in the second half of ’23.

Dror Heldenberg : Sure. So we continue to work and progress with the work that we’re now having with potential automotive customers. Obviously, the focus at the moment is to achieve these by 2023. As Gideon mentioned in his prepared remarks, we’re already involved in several phases with automotive OEMs. And we believe that we’ll be able to secure our first design this year, if it’s going to be in the in the first half of the second half I don’t know. But high probability, as we say today that we’re going to achieve these design wins in 2023.

Gideon Ben-Zvi : Yeah, I would like to add. Hi, Suji. Thanks for the question. That of course, we don’t have full control about the date of design win. But regardless whether the design when would be with in which certain date in 2023 are ready for production, which is actually when the revenues start to step in is not related to when the design win days achieved because we are doing the preparation to do so. So actually the — although the their celebration is variable. We are giving ourselves lower flexibility in readiness for RTP.

Suji Desilva : Okay, great. Two more questions. First of all on VA7000, will that give you an ASP uplift from the current VA6000 that you’re ramping? Just understand the contribution to revenue?