Valens Semiconductor Ltd (NYSE: VLN) Third Quarter 2022 Results Conference Call 9 November 2022 08:30 AMm. ET
Participating companies
Daphna Golden – RI Vice President
Gideon Ben-Zvi – Executive Director
Dror Heldenberg – Chief Financial Officer
Conference Call Participants
Rick Schafer – Oppenheimer
Suji Desilva-Roth Capital
Brian Dobson – Chardan Capital Markets
Operator
Bonjour. Je’m Lenny and I will be your convention operator today.
At this time, I would like to welcome everyone to Valens Semiconductor’s third quarter 2022 earnings conference call and webcast. All of the participants’ lines were placed in listen-only mode. Valens Semiconductor’s control opening remarks will be followed by a response session.
I will now give the floor to Daphna Golden, Vice President of Investor Relations at Valencia Semiconductor. Continue.
Golden Daphna
Thank you and welcome everyone to Valens Semiconductor’s third quarter 2022 earnings call. With me today are Gideon Ben-Zvi, President and CEO; and Dror Heldenberg, Chief Financial Officer. Today, we issued a press release that is located in the Investor Relations segment of our online page, in inverter. valens. com.
As a reminder, today’s call for effects would likely come with forward-looking statements and projections, which are not promises of events or long-term results. Form 20 filed with the SEC on March 2, 2022 for a discussion on points that may also cause actual effects to differ materially from those expressed or implied. We assume no legal responsibility to revise or update those statements to reflect new information. Upcoming events or adjustments in strategy. We will discuss certain non-GAAP measures on this call that are applicable to evaluating the Company’s financial performance, and reconciliations of those measures can be found in our earnings report.
In the coming weeks, we will be in New York, Scottsdale, Arizona and London for investor meetings and meetings. If you want to meet us, email me at inverter@valens. com.
With that, I will now pass the message on to Gideon.
Gideon Ben-Zvi
Thank you, Daphna, and thank you all for joining our call. Quarterly effects in the third quarter exceeded our expectations. Third quarter 2022 earnings reached a record $23. 1 million, up 21% from the third quarter of 2021. We also achieved a better-than-expected gross margin and adjusted EBITDA. We are extending our full-year earnings guidance and improving our full-year adjusted EBITDA guidance. Our generation of high-speed connectivity is used in diversified business activities that are the daily lives of other people and industries in two industries. [ Technical difficulty] Demand for our high-bitrate, uncompressed media distribution responses was strong, and our audio and video business continued to expand into new programs and verticals ranging from enterprise, education, government, industry, medicine, and more.
Starting with education. The trend of hybrid models of educational entities to allow academics and staff to transfer between face-to-face and remote learning is here to stay, and we are seeing more and more study rooms around the world equipped with video collaboration systems. Blended learning allows for continuity of training and learning. It increases equity by giving academics access to more educational opportunities that fit their educational means. In this way, our generation democratizes opportunities and contributes to equity.
In the enterprise sector, the opportunities across industries and geographies are huge for generating audio and video connectivity, like ours, and video conferencing is a must for workspaces, video conferencing and remote work.
In command and control, the use of our generation is growing. Many entities around the world want to visualize their larger operations, power, and protection communities. A recent use case in the corporate sector is a multinational electrical applications company where safety is of paramount importance. The company wanted to isolate the operations of certain departments from the rest of the IT network while offering an uncompressed long-distance [multimedia] extension. Our stressed AV distribution products enabled them to achieve this goal.
I’m also proud to note that, earlier this year, the Valens Semiconductor chipset incorporating Panasonic’s 4K HD suite for video products was used to delight athletes and spectators from around the world at the [Beijing Olympics and Peak] Winter Games. everyone revels in stunning immersive images in [Indistinguishable] at the various sporting events.
Overall, our audio and video business grew in terms of earnings and generated solid margins with a healthy mix of customers, industries and geographies. In the third quarter, we also continued to sell our VA6000 automotive chipset in [indistinguishable] audio and video applications. Going forward, we will see a greater contribution to profits in the audio and video sector through the reorientation of our automotive products. This brings me to our automotive business.
Valens Semiconductor provides a unique set of symmetrical and non-symmetrical high-speed stressed connectivity required by the automotive industry. Our VA6000 chipset family group provides symmetrical connectivity and enables data for infotainment and telematics. Mercedes-Benz started using our chips in the [S-Class Model] in the fourth quarter of 2020. And today, you can locate our chips in sleek models S, C and E, adding the electric vehicle known as EV [models]. The VA7000 chipset family circle, our non-symmetrical product, was the first in the industry to comply with the MIPI A-PHY standard. It addresses the growing need for high-speed video productivity for automotive applications, such as complex motive force assist systems known as ADAS, which are expected to succeed in a $8 billion to $10 billion market in the coming years.
The popular MIPI A-PHY that was released in the fourth quarter of 2020 is the industry’s popular for long-range in-vehicle video productivity. First, it will be necessary for high-speed connectivity between the sensors and the automotive computing unit. programs such as [Indistinguishable] and autonomous driving. Valens Semiconductor’s generation of non-symmetrical DSP-based connectivity is the basis of the popular MIPI A-PHY, which aims to upgrade the legacy analog solution that exists in automobiles to date. Valens, the VA7000 product family, features exceptional resistance to electromagnetic interference called EMI, making it an ideal connectivity solution for high-resolution [high-value] sensors that detect and classify objects dramatically.
Our API compliance chips have greatly simplified camera, LiDAR, and RADAR integration. They also make it difficult to integrate those sensors into a sensor organization that is connected to a single link. This is called sensor fusion. Sensor fusion opens the door to more accurate centralized computing and is a key component for Level 3 ADAS.
Speaking about [RADAR] in particular, it becomes transparent that in addition to camera sensors, radar is a must to meet our ADAS and automotive OEM level 1 requirements. VA7000 with its sensors. In our previous calls, we communicated our expectations related to the speed of adoption of our VA7000 solutions. I am pleased with the percentage with you that we have already obtained initial RFIs from prospective consumers for our VA7000 compatible MIPI A-PHY chipsets. We are on track for [Indistinguishable] next year and mass production is expected to begin in 2025.
In accordance with our strategic plan, the developing MIPI A-PHY ecosystem continues to offer and is well placed for large-scale deployment through automotive OEMs worldwide. A vital pillar is the consolidation of the [Indistinguishable] ecosystem, which supplies the board of directors [MIPI A-PHY aligned] and we have decided that MIPI A-PHY is the ultimate generation of complex broadband connectivity in the automotive industry. In the third quarter, we announced a collaboration with Intel Foundry Services to help advance MIPI A-PHY compliance for its automotive customers. Our leading partnership with Intel Foundry will inspire our automotive chipmakers to enroll in the developing MIPI A-PHY ecosystem, as automotive OEMs want multiple production resources. Interoperability between systems from a number of vendors is the requirement for sectors of any industry standard.
In the third quarter, we announced the successful finishing touch of the industry’s first joint interoperability verification between a Valens Semiconductor VA7000 chip on the receiver side and Sony Semiconductor Solutions incorporated prototype sensor chipsets and transmitters on the other side. Sony Semiconductor Solutions under pressure the importance of introducing this cutting-edge generation in its symbol sensors. We also anticipate that the integration of the MIPI A-PHY transmitter will bring significant charging and functionality benefits to the global automotive visitor base.
Last month, we hosted the webinar with Sony Semiconductor Solutions in [Indistinguishable] in agreement with Japan’s original equipment manufacturers (OEMs) and Tier 1s, such as Toyota, Nissan, Honda, Mazda, Suzuki and Denso, on how automotive corporations can advance ADAS in autonomous driving with MIPI A. -PHY. Hundreds of attendees from the Japanese automotive industry joined the webinar to hear speakers from [Jasper] Toyota’s next-generation broadband networking group, Sony Semiconductor Solutions Automotive Development and Valens Semiconductor talk about the progress of MIPI A-PHY and the growing importance of electromagnetic compatibility known as EMC in automobiles.
The automaker’s built-in sensor requires EMC’s superior bandwidth in next-generation ADAS and interoperability of autonomous systems between vendor parties will be crucial. To meet this need, suppliers of verification appliances are beginning to create out-of-the-box verification solutions. [Indistinguishable] Providing a complex design and validation solution, Technologies responds to market demand for high-speed virtual interfaces for next-generation integrated networks.
In September, they announced their partnership with several companies, adding Valens Semiconductor, to expand a MIPI A-PHY compliant generation solution that promises knowledge transmission quality and interoperability at scale. Before moving on to our finances. This call marks Valens Semiconductor’s first anniversary as a public company. Since our initial public offering, we have made significant progress in executing our business plan and expansion strategy, which is supported by our strong balance sheet. So far in 2022, we have operated effectively in a turbulent geopolitical and economic environment. In the short term, we will continue to monitor the macro environment and, in particular, elements that may have an effect on our business in 2023, such as deadlines, [former] partners and the call for securities across all sectors. Our goal is to create a long-term price for all our shareholders. We believe we have sufficient resources and features to continue to invest and expand our competitive advantages, enhance our product portfolio and market presence. We will continue to focus on our most productive opportunities, which we believe will generate sustainable expansion and profitability for the business.
I now give the floor to Dror Heldenberg, our Chief Financial Officer, to review our third quarter 2022 monetary effects and provide our monetary outlook. Thank you, Gillian. Je will begin with our third quarter 2022 effects and then provide our outlook for the fourth quarter and updated guidance for the full year 2022.
Starting with our third quarter 2022 results, we exceeded the upper limit of our earnings guidance, gross margin and adjusted EBITDA. We achieved record quarterly earnings of $23. 1 million, an increase of 21. 3% compared to the third quarter of 2021. [Other ] Planned earnings primarily for audio and video also contributed to an overall gross margin that differed from expectations. Gross margin for the third quarter of 2022 69. 7% compared to 72. 4% last year, reflecting another portion of our automotive business’ profits, which leads to lower gross margins [in a video above].
Non-GAAP gross margin 70. 5% compared to 72. 7% in the third quarter of 2021. Operating expenses were $21. 3 million in the third quarter of 2022, down 3. 4% from $22 million in the third quarter of last year. Research and progression expenses increased by $2. 1 million compared to the third quarter of 2021. This reflects our continued investment in upcoming product offerings to meet the new business opportunities that await us in the automotive and audio and video industries, taking into account our R efforts.
Let’s move on to net loss and adjusted EBITDA. GAAP net loss for the third quarter $5. 3 million, compared to a loss of $8. 5 million in the third quarter of 2021, and we exceeded our adjusted EBITDA guidance, recording an adjusted EBITDA loss of $1. 7 million. Better-than-expected adjusted EBITDA reflects a mix of revenue and gross profit that are different from expectations. Rescheduling of certain expenses R
Non-GAAP loss consistent with a consistent percentage for the third quarter of 2022 $0. 02, corresponding to a non-GAAP net loss of $1. 5 million, divided by $98. 1 million consistent with percentages. This compares to the 3rd quarter 2021 non-GAAP loss consistent with a consistent percentage of $0. 23, which is calculated as a net loss of $3 million divided by the $13. 2 million percent.
Let’s move on to our balance sheet. We ended the third quarter of 2022 with a strong balance sheet. Cash, cash equivalents and short-term deposits totaled $152. 9 million and we had no debt. This compares to $156. 8 million at the end of the current quarter of 2022. In addition, in terms of current capital, — we ended the 3rd quarter with a balance of $166. 6 million, compared to $168. 3 million at the end of the current quarter of 2022. This $1. 7 million difference is primarily due to the loss in the 3rd quarter of 2022 after reconciling non-cash expenses such as stock-based compensation, amortization and fair adjustment of the long-term stock market price. Our shares as of September 30, 2022 $21. 9 million, an accumulation of $4. 6 million compared to the end of the moment. 2020 quarter.
There are two main reasons for this increase. First, we are operating in an environment of inflation and the rate of new inventories is higher.
Second, as we have discussed in previous calls, to ensure production capacity with suppliers in a restricted [pro] source environment, we position longer-term procurement orders. Point of stock is mandatory to meet the visitor demand that we will see in the next 12 months, specifically in the automotive industry, where we intend to double our revenue from 2022 to 2023. I would like to emphasize that stock orders under long-term purchase orders allow us to mitigate the impact on our gross margins of [indistinguishable] product prices expected in the first part of 2023. While we continue to face rate increases from some of our origin chain suppliers, we anticipate that origin restrictions will begin to ease and the deadline to begin normalizing today is part of 2023.
Now I would like to provide our advice. For the fourth quarter of 2022, we expect diversity revenue of $23. 1 million to $23. 2 million. We expect gross margins to be between 66. 1% and 66. 5%. In the fourth quarter, we expect [flash-outs] from our VA7000 automotive family chipsets. In order to be able to offer our potential customers, in achieving a feature set and greater functionality in line with the market, transactions are expected. This is another very important step towards the long-term mass production of our customers. At the same time, in line with our existing roadmap, we have [Technical Difficulty]. out] prices in our source of income as they occur.
As of September 30, 2022, notable shares amounted to $98. 4 million. We are raising our guidance for the full year 2022, in large part because we outperformed the more sensitive guidance for third quarter 2020 profit, gross margin and adjusted EBITDA. We now expect earnings to be between $90. 3 million and $90. 4 million. , plus. of $89. 1 and $89. 8 million provided in August. Given the continued expansion of our automotive earnings, we continue to expect to necessarily double this portion of the business in 2022 compared to 2021. We expect 2022 gross margins to be between 69. 3% and 69. 4%. This new gross margin diversity exceeds the previous guided diversity of 68% to 68. 5%. We are also particularly improving our forecast for an Adjusted EBITDA loss of between $20 million and $19. 3 million for the full year, particularly higher than the previous difference of $25. 7 million to $24. 3 million. This improvement in Adjusted EBITDA is basically due to the alignment of our product roadmap with the wishes of our customers, supported also through the benefits of the strength of the US dollar in our expenses based on [Israeli- shaken]Array
We remain on track to break even in adjusted EBITDA until the end of 2023, which means that in 2024 the company deserves to achieve cash flow profitability.
I will now call Gideon back for his final comments before opening the call for questions and answers. We are pleased with our third quarter results, which once again exceeded expectations. We have made significant progress in many facetas. de our business. In addition, our automotive business continues to evolve and we expect revenue from first-generation VA6000 products to continue to grow and be used in more car models.
Secondly, we received positive feedback from potential consumers and partners who rate the VA7000. The initial inquiries we won are a vital step toward adopting A5 products through automotive OEMs, [as] we continue to see new opportunities in verticals for our high-margin and diversify audio-video businesses into corporate, educational, medical and commercial [technical difficulty] among others.
Fourth, even in today’s challenging economic environment and limited source environment, we have controlled meeting all of our customers’ requests in a timely manner. I would like to thank our employees once again for their commitment and continued determination for the success of the company.
Finally, in the last quarter, we published our new sustainability report, less than a year after going public. At Valens, we constantly seek excellence and cutting-edge tactics to ensure that our products and responses meet our customers’ highest criteria and supply. Society with the connectivity required in an ever-changing environment.
Operator, now I would like to open the forum for questions.
Q&A session
Operator
Thank you girls and gentlemen, at that time we will start the response session. [Operator Instructions] The first is by Rick Schafer of Oppenheimer.
Rick Schaffer
Congratulations, I know it’s complicated right now. [Indistinguishable] to almost everyone, I feel like balanced growth. So I was curious if you can communicate to me any adjustments you see in your positive or negative patterns, everything you see out there in terms of impulses, whether it’s AV pro or automatic or any significant replacement for leadx?Just a concept of what you see in terms of order book?
Unidentified corporate representative
It’s smart to communicate with you again. Obviously, at this stage, we will not give our forecast for 2023. However, if we take a look at our business and start with the automotive industry, I think what we’re seeing today is that we start to see indications that our automotive business is expected to double its profits between 2023 and 2022. So, in that sense, we think the automotive business is pretty resilient.
So in terms of activity, I would say audio and video activity is probably more correlated with some of the global macro trends that we’re seeing today. Therefore, we assume that at least the first component of 23, consumers basically consume the stocks they have accumulated in the complicated environment of source and demand.
That said, when we look at the audio and video segment in 2023, we still see the following opportunities. Obviously, we continue to see the expansion of the VA3000 just to refresh your memory. It is the newest member of our audio and video segment. Product family. And we see this product in the designs of many industry-leading companies, and we expect a greater contribution from the profits of those chipsets next year in 2023.
In addition, our other responses are being evaluated lately, as Gideon discussed in his prepared comments, for new applications, and we assume that at least some of them will become mass-produced products over the course of ’23. So, I would say perhaps to summarize, while we expect a more moderate rate of expansion for this component of the business compared to the projected annual expansion rate for 2022, we still think that we will continue to see an annual expansion in audio and video.
Regarding the last component of your inquiry about some cancellations or setbacks, I would say that those are also difficult days for our customers. And, obviously, their plans also become more complicated for them. I can tell you that we have recently won a valuable request from at least [some of our] clients. However, those outputs were offset by [pooled] requests from other customers, resulting in an advanced recommendation we shared with you on this call.
Rick Schaffer
It’s a beautiful color. And then, maybe as a follow-up. The gross margin was much higher than you had indicated, much higher than I had modeled. So I just hoped that maybe I could provide some insight into what drives this and where we’re headed. Did you expect gross margin to stabilize now? I think he’s talked in the afterlife about a low guy in the mid-’60s, but he didn’t know if there was an update on some kind of gross margin, I guess.
Gideon Ben-Zvi
Yes, of course. Therefore, the better-than-expected gross margin is basically due to the combination of profits between audio and video and automotive. Why. The current explanation for why is that in the third quarter we still fed on stocks that produced at a lower cost. Obviously, as we update stocks, in this environment, the inflation environment, this comes with higher costs. So I guess we will. see the implications in the future.
In terms of gross margin going forward, again, we give you the gross margin we expect for the fourth quarter and full year. I believe that we will do so to achieve this goal.
Operator
Next is from Suji Desilva of Roth Capital.
Suji Desalinates
So maybe we can communicate first about audio and video and what led to the increase?Is this prospective [Indiscernible] each and every quarter?Is there some kind of old trend that is helping them have a tailwind in the environment?
Gideon Ben-Zvi
Suji, and thanks for the question. I think there is nothing dramatic to report here. I think one thing that helped us in the previous era is the fact that this component of the business is very diverse. And it’s a very solid company. This is a strong point for us. And each and every quarter we see strength in other areas of the business. Again, we continue to see this, as I mentioned to Rick before, we continue to see the expansion of the VA3000. This is a very encouraging sign for us in terms of penetration of this new product which, by the way, comes with superior ASP for customers. That’s a smart sign. And again, it’s nothing special. It’s just the nature of the business and the expansion we expect from that business.
Dror Heldenberg
I would like to upload [Indistinguishable] thanks for the question. And I’d like to upload that some of the verticals in some of those audio and video markets are less inflamed across the globe environment. As you know, Valens is not exposed to some of the most sensitive markets today, and we are more exposed to a hybrid education market and hybrid learning and convention halls, which are at 0 impacted by the environment, — of course, not everything is accurate, however, that’s one of the reasons we continue to see the expansion of corporate and. . . The expansion of the corporate, and that is one of the reasons for caution for next year.
Suji Desalinates
It is ok. So maybe switching to the car, I wonder, beyond customer number one, when perhaps Stoneridge and trucking dating would make a material contribution to profits if that were already the case?Just [a little] curious about that, the moment when support would overlap with the main customer?
Dror Heldenberg
So, I think as stated in the past, the allocation with Stoneridge continues to move forward, and we’re not converting our previous predictions that we’re forecasting mass production and gradual increase next year in 2023. In this sense, everything is underway, okay?No adjustment to the Stoneridge assignment, to the truck assignment.
Suji Desalinates
It is ok. If I can sneak into one last fast Dror, can you give us some main points about reprogramming the R.
Dror Heldenberg
Of course Suji. So I think that’s something that we discussed last time, we discussed that after we started shipping the first samples of the A-PHY product, the VA7000 engineering samples to consumers, obviously we’ve done a lot of work with our prospective consumers to better perceive your roadmap. and timeline. And based on all those close relationships and working in combination with the OEMs and some of the Tier 1s, we realize that we want to realign ourselves a little bit and adjust the development of our product roadmap. It’s basically similar to the next generation we plan. And now, based on the feedback we get from consumers, what’s most important to them, what’s least vital, and when they want more new devices, we realize we want to adjust our roadmap. I think the current purpose for consumers is to make sure that the VA7000 can succeed in mass production on its schedule, they are. . . I think the next generation can wait a bit. Certainly some other derivatives we are planning.
I think today’s consumers are very focused on the benefits of the VA7000. To call a few, it’s the most productive EMC, it’s bandwidth, the overall load of the formula, it’s a set of benefits that they recognize. Obviously, the ability to paint with [Indistinguishable]. This is a set of benefits, and we want to make sure that we develop your production as soon as possible.
Operator
Next up is Brian Dobson of Chardan Capital Markets.
Brian Dobson
Could you tell us about some of your key partnerships and collaborations, namely with leading players in the space?And how do you see those who inspire popular adoption moving forward?
Gideon Ben-Zvi
It is ok. I’ll take you. Thank you very much for the question and it is a pleasure to listen to you. One of the strengths of the MIPI A-PHY is that the transmitter can be incorporated into the AA silicon. sensor. And [it works solidly]. And in fact, it is, I would say, almost the brain of the transmission of components of the MIPI A-PHY and the collaboration with Sony provides several merits. First of all, Sony has a very, very strong market share, almost 50% in sensors and a developing market share in automotive sensors. And once they integrate the transmitter as a component of their [any] sensor, they give them a merit either in price, in quality, in simplicity, in area on the board, in power, as if it were a game in which everyone wins. And it’s a kind of collaboration that we’re very proud of and very proud to be part of respectful corporations like Sony Semiconductors.
Intel’s foundry is a great collaboration and would encourage MIPI A-PHY automotive implementations by allowing corporations to compete with us, but we are very pleased because this is what will drive the market. And we’re pleased that a company like Intel identified and selected MIPI A-PHY as the generation they need to inspire silicon players to integrate and manufacture in the future. Those are two of the collaborations. Of course, there’s more. I think those are the most attractive for the percentage right now.
Dror Heldenberg
Maybe just to jump on what Gideon mentioned, it’s the press release and collaboration we have with Keysight. Now, that’s a smart signal for adulthood, for adulthood of the market. We begin to see corporations only expanding checking machines when they realize and feel like they’re talking about a market that will grow, a market that will mature very quickly. And the fact that the company, an established company like Keysight, understands that it wants to expand, and expand, check the apparatus that, obviously, serve not only Valens, but other players in this market. This is an indication that the ecosystem evolved and the fact that they anticipate that they are going to see business, vital businesses for corporations that will expand [hybrid] solutions.
Brian Dobson
Yes, excellent.
Operator
[Operator Instructions] There are no questions in this momento. Sr. Ben-Zvi, would you like to make your final statement?
Gideon Ben-Zvi
Oui. Merci. Je would like to thank you all for joining us today for our Q2 2022 call and for your continued interest in Valens Semiconductor. Let them end the day intelligently.
Operator
This concludes Valens Semiconductor’s third quarter 2022 earnings convention call. Thank you for your participation. You can go ahead and log out.