Valens Semiconductor Ltd.

Good morning. My name is Yoni Schottenstein, and I will be your conference operator today. At this time, I would like to welcome everyone to Valens Semiconductor's fourth quarter and full year 2021 earnings conference call and webcast. All participant lines have been placed in the listen-only mode. Opening remarks by Valens 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 Valence. Please go ahead.

Thank you and welcome everyone to Valence Semiconductors' fourth quarter and full year 2021 earnings call. With me today are Gideon Benci, Chief Executive Officer, and Roald Heldenberg, Chief Financial Officer. Earlier today, we issued a press release that is available on the Investor Relations section of our website under investors.valence.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 20F 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. Dror and I will be on the West Coast and in New York City later this month for IR meetings, Those interested in booking a one-on-one slot, please feel free to email me at investors at valence.com. With that, I will now turn the call over to Gideon.

Thanks, Daphna, and thank you, everyone, for joining our call today. Q4 was a strong finish to 2021. We achieved solid results in both our audio, video, and automotive segments. Revenue and gross margins topped the high end of our guidance. We ended the year with a record backlog and a robust balance sheet that will support our continued growth. In the fourth quarter, we reported record quarterly total revenues of $20.7 million, up 47% compared with Q4 2020. Audio-video revenues increased 40% from Q4 last year. Our automotive revenues increased by more than 140% from Q4 last year, crossing the $2 million quarterly revenue mark for the first time. For the full year 2021, we achieved record revenues of $70.7 million, an increase of 24% from 2020. Audio-video revenues increased to $62.8 million, up 15% from 2020. Our automotive revenues approached $8 million, almost four times greater than 2020, reflecting the first full year of mass production of our VA6000 chipsets and expansion of our product into additional car models. Throughout the year, we met all the demand from our customers in a severely supply-constrained environment. We anticipate the strong demand for our products to continue in 2022 and have taken proactive measures to ensure we will again be able to timely fulfill our customers' needs. As our customers in the audio-video markets already know, Valence is the industry leader for advanced high-speed connectivity solutions. We are on our way to replicating this success in the much larger and faster-growing automotive markets. This leads me to one of our most recent achievements in automotive. In December 2021, we shipped the first in the industry MIPI A5 compliant chipset, our VA7000 family, to select customers and partners. This secures our first mover advantage. We shipped engineering samples of our next generation VA7000 chipset family to more than 25 automotive customers and partners. These include four leading automotive OEMs and more than 10 tier one potential customers, who are in the process of evaluating these chipsets for integration into their platforms. The MiG PA5 standard, which is based on Valence technology, has the bandwidth and performance specification that today's and tomorrow's vehicles require and that current analog-based legacy technologies can no longer support. In addition, the automotive market is moving away from proprietary legacy solutions and deploying standard-based products such as MIPI AFI. Last month, we demonstrated the unique capabilities of our MIPI AFI compliant chipset family to hundreds of representatives from leading automotive companies in the US, Europe, and Asia Pacific. We showed how the VA7000 provides best-in-class bandwidth and distance over a simple low-cost wiring harness with end-to-end safety. It supports a wide variety of sensor types and provides robust electromagnetic compatibility performance, known as EMC. It has a simple architecture design that provides OEMs and Tier 1 cost optimization. It is evident that enhancing passenger safety remains a top priority for OEMs and is driving an increasing number of advanced driver assistance systems, otherwise known as ADAS, in each vehicle. Another top priority for automotive OEMs is preventing recalls. We have seen a number of recalls recently due to harness-related challenges. The growing number of ADA systems is leading to more in-vehicle sensors. All these sensors require long-reach high-speed connectivity and, more importantly, zero latency to detect and act upon safety events within microseconds. They also require near zero error rate to mitigate the growing electromagnetic influence and this too is where our chipset excels. Our high-speed connectivity solutions are uniquely agnostic to the types of sensors, cameras, LIDARs or radars being deployed in cars and will provide automotive OEMs with better and faster connectivity for their ADAS systems. We see growing interest in the MIPI AFI standards from companies across the automotive supply chain as they prepare for the AFI revolution. We are already engaged with several sensor and SOC companies such as Mobilife, Sony, and Sunny Optical that plan to embed AFI solutions within their product offering. We are also working with leading industry players such as Aptiv, Denso, Jasper, LG Innotech, and Sumitomo Electric. In the case of Sumitomo Electric, for example, we are collaborating to match their wiring harness technology with MIPI AFI requirements. Sumitomo controls more than 30% market share in wire harness manufacturing and assembly. Having their off-the-shelf cables meeting AFI channel requirements will serve to further accelerate the deployment of MIPI AFI connectivity solutions in vehicles. 2021 was the first full year of mass production of our first-generation automotive chipset, the VA6000, in select Mercedes-Benz car models. We expect the VA6000 will be added to additional Mercedes-Benz car models in the very near term. The VA6000 is the only multi-gigabit connectivity solution available on the market that can work with unshifted wiring in today's cars and support multiple interfaces for infotainment and telematic systems now being required by customers. Our VI6000 chipsets are also a good fit for trucking industry. In late 2020, we engaged with Stone Ridge, a leading designer and manufacturer of highly engineered electrical and electronic vehicle systems for the trucking industry. In 2021, we continued to make progress in developing a connectivity solution related to vision systems to address critical safety issues of truck drivers. The solution will also reduce fleet operation costs. We expect initial revenues from the StoneRidge partnership towards the end of 2022 and to increase in 2023 and onwards. Towards the end of 2021, we taped out the VA6003, a derivative product of the VA6000. The VA6003 provides significant power reduction and very efficient cost performance. It is designed to fit both advanced infotainment use cases and the next generation of telematics units, also known as smart antennas, which require low power and resilient connectivity. It also supports the vision of zonal architecture resilient connectivity between ECUs and ADAS. We estimate that initial revenues from this new product will start in the second half of 2024. The VA6003 alongside the VA7000 is part of our strategy to become a one-stop-shop for all in-vehicle high-speed symmetric and asymmetric links. We expect continued revenue growth from our first-generation automotive chipset and its derivatives. Longer term, we are highly focused on achieving design wins for our next-generation chipset, the VA7000, which we believe will drive a significant increase in revenue. As you may know, the selection process in today's automotive industry is very extensive and needs to answer growing regulatory demands and stricter standards. As a result, once our chipsets are designed in by automotive OEMs, they become sticky with a long production life cycle that generates a steady revenue stream for Valence. In addition to its automotive use cases, the VA7000 chipsets family is well suited for applications in markets served by our audio-video business unit, such as medical machine vision and other industrial applications. Turning to our audio-video business. We are the market leader in language audio-video connectivity. Our products are used today by most of the leading manufacturers in this industry, such as Crestron, Epson, Xtron, Harman, LG Electronics, Logitech, NEC, Panasonic, Samsung, Siemens, Sony, and many more. Our audio-video products power millions of video conferencing applications such as signage, home entertainment, as well as command and control. In the beginning of 2021, we started seeing growing demand for high-speed connectivity audio-video products in multiple regions, most notably in APAC and EMEA. that had been negatively impacted by COVID-19 in 2020. Towards the end of 2021, we also started seeing a positive recovery in North America. Furthermore, our distributors are telling us that they are currently holding lean inventory levels. All these themes, which are reflected in our current backlog, are driving our audio-video revenue growth in 2022. We are well positioned to capitalize on some new opportunities in the audio video market following the pandemic. First, Valence technology delivers the enhanced and seamless user experience that is key to a successful hybrid environment while also reducing total cost of ownership. There are many hybrid model use cases, incorporation, There are huddle rooms which are small private meeting areas with audio and video conferencing equipment and other work from home applications. Additional market segments adopting hybrid models including medical and education. In education, for example, we see educational institutions planning to use government budgets to upgrade their classrooms. We believe classrooms will undergo a significant connectivity infrastructure upgrade to also enable remote learning, thereby requiring multiple high-quality displays, cameras, and audio products. As the world continues to adapt to hybrid models, we expect the demand for audio-video solutions to continue to grow significantly. Second, we continue to see solid demand in both the industrial and medical equipment markets from leading equipment vendors. For example, Our extended video technology is deployed in large medical diagnostic equipment such as MRIs and x-ray machines. In industrial, for example, our video extension technology is used in machinery and computer vision system for line inspection. Third, other audio-video growth areas which accelerated recently include government due to the growing number of command and control rooms as they are seeking new ways to convey public safety information. Signage, as institutes, municipalities, federal and state governments increase mandatory public announcements. Finally, while we continue to win new designs with our earlier generation of audio-video solutions, our focus today is on securing design wins and ramping production of our newest generation, the Stelo VS-3000. It is the first and only solution on the market that supports long-range transmission of uncompressed 4K60 as well as HDMI 2.0 and USB 2.0 over a single cable. Destello is already embedded in designs of more than 100 different products from leading manufacturers. Shipments started in 2021 and we expect to see revenue ramp in 2022. To summarize, Valence had a very strong year in 2021. We successfully became a public company on September 30, achieved robust performance and record revenue. We ended the year on a strong note with record backlog, growing customer's demand and a strong balance sheet to support our future growth. The technologies we created have matured into industry standards in both markets we address. Our leadership enables us to leverage our first mover advantage, expand our foothold and secure increasing demand. To cement our leadership position, we continue to invest in expanding our innovative product portfolio. We're extremely proud to provide offerings that are essential in forming a more advanced and safer future of connectivity as we build upon our leadership position in the audio video market and are gaining share in the larger and faster growing automotive markets. Valen's success and plans give me great confidence as I look forward to the rest of 2022 and beyond. I'll now turn it over to Dror Heldenberg, our CFO, to review our fourth quarter and full year 2021 financial results and provide our financial outlook for 2022.

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 2022. All comparisons are ear over ear unless otherwise noted. As Gideon stated, our Q4 and full year results demonstrated the substantial progress we are making in our audio-video and automotive businesses, especially in a constrained supply environment. Beginning with our fourth quarter of 2021 results, We achieved record total revenues of $20.7 million, which represents an increase of 46.8% from the fourth quarter of 2020. Breaking it into our two business segments, audio-video revenues increased 40.4% to $18.6 million, and the automotive revenue reached $2.2 million, a remarkable 141.2%, compared to the last quarter, to the last year. Q4 2021, gross profit grew to $14.8 million from $10.3 million, an increase of 43.5%. Fourth quarter 2021, gross margin was 71.2% compared to last year's 72.8%. Non-GAAP gross margin was 71.5% compared to 73.4% in Q4 2020. The difference in gross margin was primarily due to a higher revenue contribution from our automotive business. Operating expenses in Q4 were $23.4 million up $6.7 million from Q4 last year. The increase was mainly due to an increase of $4.1 million in research and development expenses as we invested in growing our ad count to accelerate the execution of projects to address business opportunities in both our audio-video and automotive businesses, including the VA-6003 tape-out. The remainder was a mix of sales and marketing expenses related to promotion of our new audio-video and automotive products, as well as G&A expenses that increased primarily due to our listing as a public company. Fourth quarter adjusted EBITDA was a loss of $7 million compared to the $4.6 million in the fourth quarter of 2020. Loss per share for Q4 2021 was 8 cents, 91% lower than Q4 2020, which was 90 cents. Q4 2021 is calculated as a loss of $8 million divided by 97.1 million shares. Q4 2020 is calculated as a loss of $9.7 million divided by 10.7 million shares. The increase in the number of shares is derived from the conversion of our preferred shares into ordinary shares and the shares issued as part of the transactions related to our listing. Looking at the full year 2021, Total revenues increased to a record of $70.7 million, up 24.2% from 2020, exceeding the high end of our guidance. Audio-video revenues reached $62.8 million, up 14.5% from 2020. In 2021, the growth in audio-video revenues was primarily driven by a rebound in multiple regions that has slowly exited the pandemic restrictions, and by notably higher customer demand for hybrid applications that require the unique capabilities that our solutions provide. Automotive revenues were $7.9 million, up 281% compared to 2020, driven by the first full year of mass production of our VA6000 chipsets, and the expansion of our solution into additional car models. Due to the global semiconductor chip shortage during 2021, our supply chain vendors raised prices, leading us to increase our prices to our customers. We implemented those price increases towards the end of the year. Despite the very challenging supply environment and the capacity constraints we faced in 2021, we successfully supported our customers' needs and were able to fulfill all the orders received in a timely manner for the full year. While the impact of the price increases to our customers on 2021 revenues was minor, we will see the full impact of the price increases on our revenues in 2022. Gross profit in 2021 reached $50.6 million up 16.3% from 2020. Our gross margin was 71.6% compared to 76.4% last year. And 2021 non-GAAP gross margin was 71.8% compared to 76.9% last year. The difference in margins was mainly due to the much higher revenue contribution from our automotive business. We achieved strong bookings in 2021, which translated into a book-to-bill ratio substantially greater than one, and reported a robust year-end backlog of more than $78 million, supporting our gross projections for 2022. Operating expenses were $77.6 million, compared to $66.3 million in 2020. Primarily, due to one-time New York Stock Exchange issuance cost of $5.6 million of which $3.4 million are expenses related to stock options acceleration triggered by the listing as a public company. We also reported an increase of $2.2 million in research and development expenses as we invested in enhancing our product offering given the business opportunities we see ahead. Most of our employees are based in Israel, and their payroll is paid in the Israeli currency, the shekel. The devaluation of the US dollar compared to the shekel was 3.3% in 2021, and had an adverse impact on our operating expenses. With respect to adjusted EBITDA, we reported a loss of $16.1 million in 2021, compared with $16.4 million recorded in 2020. Lost per share for the year 2021 was $1.15, 65% lower than the $3.25 in 2020. The 2021 figure is calculated as a loss of $37.9 million, which is a total of a net loss of $26.5 million, and the 2021 theoretical accrued dividend related to preferred shares in the total amount of $11.3 million divided by 33 million shares. figure is calculated as the net loss of $34 million, which is the total of net loss of $19.6 million, and the 2020 dividend related to preferred shares of $14.3 million divided by 10.4 million shares. Following the listing as a public company, all preferred shares were converted into ordinary shares So going forward, we anticipate a simpler calculation of our income or loss per share. Turning to our balance sheet, we ended the year with a strong balance sheet with cash, cash equivalents, and short-term deposits of $174.4 million and no debt. The net proceeds from the transactions related to our listing in September 2021 totaled approximately $132 million. We intend to use our strong balance sheet to fund the development and commercialization of Valence next-generation products. For new products, the time from design initiation and manufacturing until we generate revenue can be lengthy, typically within three years in the audio-video market and up to five years in the automotive space. However, We believe our strong balance sheet and projected revenue growth will fund our business through break-even. During 2021, we placed longer-term purchase orders for raw materials and manufacturing services to ensure sufficient and timely supply to support our customers and our anticipated 2022 revenue growth. This grew our inventory by $6.2 million at the end of 2021 as compared to 2020. We believe this inventory will be consumed during 2022. Now, I would like to provide our guidance. For the first quarter of 2022, we expect revenues in the range of $20.6 to $21 million. Gross margins to be in the range of 66.5% to 67%. Adjusted EBITDA to be a loss in the range of $10.7 to $9.7 million. For modeling purposes, please note that as of today, we have 97.1 million outstanding shares, excluding approximately 1 million shares that are subject to forfeiture. For the full year 2022, we expect revenues to be in the range between $83 and $85 million. As we anticipate more automotive revenues in 2022 compared to 2021, at about 20% of our total annual revenues, we expect gross margins to be in the range of 65.5% to 67.2%. We will continue to invest in enhancing our current product offering and developing and commercializing Valence next-generation products. In part, the increasing demand in audio-video and the continued expansion of the automotive revenues give us confidence in meeting our 2022 projections. Adjusted EBITDA is expected to be a loss in the range of $38.4 to $37.8 million. In summary, 2021 was another good year for Valence. Going forward, we remain focused on delivering value to all our stakeholders by increasing revenues year after year, optimizing margins, and diligently managing our operations. Our ultimate goal is to achieve and then continue to amplify our profitability. I'll now turn the call back to Gideon Bensby for his closing remarks before opening the call for Q&A. Thank you, Dror.

As you all have heard, We are off to a strong start in 2022, and we are well positioned to create long-term shareholder value. We operate in two large and fast-growing markets, audio-video and automotive. We have a clear go-to-market strategy. We set industry standards for high-speed connectivity and therefore have a significant first-mover advantage. We have a compelling financial model, strong revenue visibility, and a solid balance sheet that supports our investment in our product offering that will further expand our business. Finally, I would like to take this opportunity to thank our amazing team of 300 employees around the world who have contributed to the company's success. Their execution, talent, dedication, and continued flexibility made 2021 another great year for Valence. Operator, I would now like to open the call for questions.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Suji Da Silva of Roth Capital. Please go ahead.

Gideon, hi, Gerard. Congratulations on the strong finish to 21 and the strong outlook as well. I had a question first on the supply chain. You talked about proactive measures to ensure you can meet your backlog in 22. Can you elaborate on what some of those measures might have been if any balance sheet capital was used for that, etc.? ?

sure and uh thank you suji for the question so uh i'd like to start uh by saying that uh i'm proud of the fact that we met all our customer commitments and deliveries despite the global supply chain issues during 2021 you know as we see strong demand for our products continuing this year As you said, we have taken proactive measures to ensure that we will be able to timely fulfill our customer needs, which means for us that we increased the level of inventory, and you can see it at the balance sheet. We reported an increase of $6.2 million in our inventory level compared to the same balance as of last year. At this point, I would like to mention a few things. One is that Valence is not exceptional. Basically, we acted like the rest of the industry and we saw several issues related to the supply chain. The first one is that we saw extended lead times that, as I mentioned, it required Valence first to increase its inventory, but also it forced us to increase the lead time to our customers. The second thing is that the supply chain vendor expect or expecting to see and ask to secure capacity by placing long-term binding orders. And again, this again explains the increase in the level of inventory. And finally, it's the fact that, and we mentioned it in the previous session, that we saw some price increases from our supply chain vendors. Later on, I assume that you're going also to ask about what we did with our customers, but this increase in the prices also contributed to the increase in our inventory levels. Right, I got it.

I did hear that you guys passed along some of the prices and the gross margin was strong, so I'm assuming that was the takeaway there. Okay, great. And then I'm curious on the trucking market, can you update the timing of the revenue contribution? Obviously, Mercedes is going well. How soon can that support the, I guess, auto revenue segment?

So I would say that with respect to automotive revenues in general, as of today, there are two main drivers for this revenue growth. The first one, obviously, is the project that we have with Mercedes-Benz. And we just mentioned that 2021 was the first full year of mass production. And that explains the increase, the significant increase that we've seen in the revenue, the automotive revenues in our P&L. With respect to the storage project, I can say that everything is progressing according to the plan. And we assume that it will get into mass production at the beginning in early 2023, which means for us that we'll start to see some initial revenues towards the end of 2022. And I would say that in terms of the new product that we just introduced to the market, the VA7000, that's the MEPA-FI compliant chipset, So we continue to ship, we see some traction, lots of traction in the market. We continue to ship evaluation samples, engineering samples to our customers. But we believe that this will ramp up to mass production around 25, 26. Okay, great.

And two quick follow-ups. On the trucking, are there multiple customers? If you could clarify how many might be coming in from the Stone Ridge partnership, that would be helpful.

So at this point, we only work with StoneRidge. That's the only project that is in advanced stage. But I can tell you that in parallel, we have started some initial discussion with other trucking companies that are watching the progress of this development project.

Got it. And then one last question. On the VA7000, you're sampling with 25 customers. Did any of those customers, I'm curious, also sample the VA6000 and choose to wait for them to be A5 standard, or are they all new to this?

Well, hi, this is Guido, and thank you for the question, and I'm happy to hear you guys again. So the VA7000 is the revolutionary product of Valence, and definitely this is the flagship of the next generation. And people who are looking for the VA7000 look for a very particular answer for a future need, which is the robustness, the electromagnetic, being a standard, and so forth. while the V6000 is the generation where we put HDBC first time in vehicles and the derivatives of these. They are very much complementary because if you look at the one-stop-shop solution, which is actually what we want to provide, we will have all the asymmetric, which are the 7000 and the future generation, And the symmetric could be the 6,000 or 6,003. So this is a comprehensive one-stop-shop solution that is built by different generations of the company, but definitely with the first between the very futuristic, or sorry, very revolutionary, which is the 7,000, and the 6,000, which is actually a derivative of existing technology.

I appreciate the clarification. You got the forms of full portfolio. Thanks. I'll pass it along. Congratulations again.

Thank you.

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

Hi, this is Kern. Let's reach over here just standing in for Vivek. Thanks for taking my question. My first question is just in relation to your FOIA guidance. roughly $84 million at the midpoint. It kind of implies relatively flattish revenue cadence, roughly of about $21 million per quarter, give or take. I was wondering if you could talk a little bit about the extent to which supply chain issues are perhaps driving this relatively flat cadence and the extent to which there could be some upside to these numbers as we go forth throughout the year.

So let's start with the Q1 2022 revenue guidance that we just mentioned. So, you know, first of all, with respect to Q1, it's typically impacted by the Chinese New Year. And this year specifically, Q1 was also suffered a bit from the outbreak of the Omicron. In general, I would say that we expect Q1 year-over-year revenue growth to be more than 30%. In terms of the overall revenue for 2022, I would say that the current backlog that we have is definitely give us confidence that we are going to support or to meet the revenue guidance that we have provided. But then, you know, let's not forget, we're just at the first quarter of the year, and let's see how things develop.

Okay, great. Thanks. And then just for my follow-up, just a very general sort of industry question. So as we look across the industry, we're seeing record revenue growth from many sort of auto semi-chip vendors. And at the same time, many of these vendors are struggling to rebuild inventories, particularly in the channel. So if you could just take a very high-level view, where do you sort of see chip inventory levels currently in the automotive space, and when do you sort of expect the situation to normalize?

Okay, so I'll split my answer to the audio video and to the automotive. I know that you just asked about the automotive, but in terms of the audio video, I must admit that we don't hear from our customers that they have lots of inventory. More than that, we hear from our distributors that they have a lean level of inventories, and this is a very encouraging sign for us. that they will continue to consume, and we are not going to see reduction in revenue in this business plan. With respect to automotive, you know, we work not directly with Daimler, with Mercedes. Mercedes is the OEM, but we work directly with the different T1s that serve Daimler. And according to what we hear from these guys, and they are very organized, and we hear from them, we get on a monthly basis their rolling forecast, So we get the indication that the level of inventory that they keep of our products are very minimal and they don't stock. They don't have lots of inventory in their premises.

Okay, great. Thank you. Thanks for answering my question.

The next question is from Rick Schaefer of Oppenheimer. Please go ahead.

Hi, this is Waymock on the call for Rick. Congrats on the quarterly results and positive outlook. So in regards to my first question, it looks like you guys are guiding 1Q revenues, flat to slightly up, which is better than a down seasonal quarter. So I was wondering if you can comment on what are some of the factors that you're seeing that's driving this upside?

So if we look, you know, if we look on the revenue growth for 2022, I would say that basically we're going to see the impact of two parameters. The first one we mentioned in the call that our supply chain vendors increase their prices and we add to pass portion of the price increases from our supply chain to our vendors. And that was the first reason that we see some increase in revenue, not that dramatic. The main trigger for the increase in revenue is mainly triggered by the increase in the unit volume that we see for 2022.

Great. Thank you on that. My second question is on the recent truck partnership with Stone Ridge. So I was wondering, how should we think about the average dollar content in a truck compared to a passenger vehicle?

So in the case of Stone Ridge, the revenue per truck is going to be richer compared to the revenue per car that we have today from the OEM that we work with. You know, I think that it's fair to say, if we say today that with respect to Mercedes-Benz, where we deploy today in average between three to four chips in every car and the revenue, the average revenue per car is north to $25, I would say that in the case of the truck, it will be fair to say that you can double. this revenue and this is a representative number for the tracking team.

May I add one thing here in the truck industry, Gidon and thanks again for being with us and for the question. The truck industry has also a scale up because it's further is a potential in the same truck. There is a significant aftermarket and there are more future applications which can be embedded in trucks. So the comparison is quite not apples to apples, but it's definitely a market which we look at the potential of growth.

Great, thank you, Linda. As for my last question, I wanted to ask about your first generation VA6000 family of chipsets. It looks like you expanded into the VA6003. So I was wondering, what are some of the features in this product, and does this tap into a specific area or application in passenger vehicles, and what does this mean for your TAM? Thanks.

The 6003 is a subset of the 6000, and the You know, in developments of chips, I guess you know that better than me, once you have a chip that is successful and performing, default of different applications can be higher-end, subset, or any other derivative. The 6003 features significantly smaller power and size and give us more robustness and more confidence in future use of it for many years. Of course, like the 6003, it benefits from the UTP, the unshielded capability, which is a very important feature in the industry. Also, it's really complementary for our vision of a one-stop shop that will complement the 7000. If you look at some of the drawings and some of the thoughts of tier ones and in regards to zonal architecture and many other thoughts, you see that there is a lot of correspondence between the symmetric and asymmetric links. And the 6003 plays a very important role to complete the whole picture. And this is the reason we thought it is good to have this chip as well.

Great, thank you. Congrats again.

The next question is from Atif Malik of Citi. Please go ahead.

Thank you for taking my questions. First one for Gideon. You talked about working with 25 auto customers. Can you give us some color of how many of them are the Chinese? Because China seems to be growing faster. some of the auto areas that you can provide some color on how many Chinese customers you're working with.

Thank you for the question. Unfortunately, I cannot give information about future customers and geographic diversification. We have a lot of tier ones. a lot of OEMs actually, and a lot of other collaboration. At this moment, I can just say that the four OEMs and growing are in the list, but we cannot supply more information than that. I'm sure you can understand and have empathy to my answer. So I'm sorry this is it, but definitely thanks for the question.

Fair enough. And then I have a follow-up for Drawer. Just to be clear, Drawer, on the gross margin outlook for this year, 66.5 to 67, the decline from last year predominantly is driven by the increasing mix of autos and the price increases you're doing and the better cost that increases that you saw, that is a wash. Are those the puts and takes in your gross margin outlook?

So yeah, absolutely. I think that your analysis is correct. The main reason, or I would say the main reason for the small decline that we see in the gross margin in 2022 compared to 2021 is driven by the different mix of revenue and the fact that next year we expect to have an higher contribution from our automotive to the level of about 20% of the total revenues of 2022 revenues for the company. And as you probably remember, in the audio video, we have higher margins than in automotive, so the more we increase the portion, the contribution for automotive, obviously the weighted average gross margin declined a bit.

Okay, and the last one, on the 20% of revenues for auto this year, any comments on the mix of V6000 versus VA7000? Is it mostly VA6000 for this year?

So as I explained before, at least in the next two, three years, the main or the only product in automotive that will generate revenue for the company in mass production will be the 6,000. And later on, we are going to see some revenue contribution from the VA 6003. But the 7,000, we started to ship samples towards the end of December of 2021. We continue, by the way, to ship to additional customers, prospect customers, evaluation kits and samples this year as well. But as you know, we're dealing with the automotive industry, which is very conservative. The decision-making process can be quite lengthy. We believe that it will be somewhere between one and one and a half years, so we do not expect any significant revenue, at least not in mass production of the VA7000 in the next two or three years. We expect, saying that said that, we do believe that by mid-2023, we will have two design wins of VA7000 with two leading audience. Great, thank you.

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

Hi, good morning. So you held an event last month highlighting your BA7000 ship series. Have you received any feedback from your customers to the samples that you sent out or to that event day? And if so, could you maybe share it with us? Yeah.

Well, thank you for the question and nice to have you here on board. The 7000 was just shipped a month and a half ago. The time it takes for a customer to learn, to adopt and actually, I would say, to play with the chip is quite long. We are in the auto and chip industry, industry that's together, we call it created geological speed. and it's not those things that you can download from the internet and play. It's cheap and it takes the time to evaluate and understand. However, I can share with you that we demonstrated on the web real time that we showed some of our customers by filming the 7,000 performance and people were literally astonished. by the performance, and especially by what we demonstrated in electromagnetic capability, which is one of, I think, the increasing concerns of the industry. How to deal with all this electromagnetic that influence the safety of the car? And so the answer is, we are in the process, it looks good, the answers are positive, But we're speaking about a chip that's the mass production is two years ahead, and we're in the stage of first evaluation, and this is the stage.

Great. Thank you very much. And in terms of the backlog that you referenced at year end, can you give us a little bit more color on the composition of that backlog, perhaps the percentage between audio, video, and automotive chips?

Okay, thanks for the question. You know, we do not provide the composition of the backlog for the two segments that we run in the company. I can just say that the backlog supports the growth that we see in both segments, and we feel very confident that we will be able to meet the revenue, the ambitious revenue target that we have in both business lines. The only thing that I, maybe the last comment on this one is that only really small portion of the backlog is scheduled to be shipped after December 2022. Most of it, the lion's share of this backlog is scheduled for shipment delivery during 2022. Great.

Thank you very much for that, Colette.

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

First, I want to thank everyone for joining, for asking questions, and we are very pleased to be with you and hope that actually it's going to be again and again in all the further year and the coming reports. I would like to thank you for joining today for our Q4 and full year 2021 call. and for your continued support and interest in Valence, and let's keep in touch. Thank you very much.

Thank you. This concludes the Valence Semiconductor Fourth Quarter 2021 and Full Year Results Conference Call. Thank you for your participation. You may go ahead and disconnect.