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spk03: Good morning. My name is Yoni, and I will be your conference operator today. At this time, I would like to welcome everyone to Valence Semiconductor's third quarter 2022 earnings conference call and webcast. All participant lines have been placed in a listen-only mode. Opening remarks by Valence Semiconductor Management will be followed by a question and answer session. I will now turn the call over to Daphna Golden, Vice President, of Investor Relations for Valence Semiconductor. Please go ahead.
spk02: Thank you and welcome everyone to Valence Semiconductor's third quarter 2022 earnings call. With me today are Gideon Bensley, Chief Executive Officer, and Dwell Hasenberg, Chief Financial Officer. Earlier today, we issued a press release that is available in 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 with the SEC on March 2, 2022, 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 New York, Scottsdale, Arizona, and London for investor conferences and meetings. If you're interested in meeting with us, please email me at investorsatvalence.com. With that, I will now turn the call over to Gideon.
spk07: Thanks, Dasnak, and thank you everyone for joining our call. Q3 quarterly results exceeded our guidance. Q3 2022 revenues were a record of $23.1 million, up 21% compared with Q3 2021. We also achieved better-than-anticipated gross margin and adjusted EBITDA. We are increasing our full-year revenue guidance and improving our adjusted EBITDA guidance for the year. Our high-speed connectivity technology is used in diversified business activities that supports people's daily lives and industries in two business segments, audio-video and automotive, in which we continue to diversify and expand our footprints. Now I will turn to a review of our business. Starting with audio-video. Demand for our high-speed, uncompressed multimedia distribution solutions was strong and our audio-video business continued expanding into new applications and verticals from corporate, education, government, industrial to medical and more. Starting with education. The trend of educational entities using hybrid models to enable students and staff to switch between on-site and remote learning is here to stay, and we are seeing more and more classrooms around the world equipped with video collaboration systems. Hybrid learning enables the continuity of teaching and learning. It increases equitability by giving students access to additional education opportunities that meet their academic needs. In this way, our technology democratizes opportunity and contributes to equity. In the corporate sector, the opportunity across industries and geographies is substantial for audio-video connectivity technology, such as ours, as video conferencing technology is increasingly essential for the office space, video meeting, and remote work. In command and control, the use of our technology is growing. Many entities across the globe need to visualize their operations, enhance their efficiency, and better safeguard communities. A recent use case in the corporate sector is a multinational electric utility company where security is of paramount importance. The company needed to isolate a certain department's operations from the rest of the IP network while still providing uncompressed long-distance multimedia extensions. Our wired audio-video distribution products allow them to meet this goal. I am also proud to share that earlier this year, Valence semiconductor chipsets embedded in Panasonic's 4K HD suite of video products were used to enhance the experience of athletes and spectators from around the world at the Beijing Olympic and Paralympic Winter Games. They all experienced breathtaking immersive visuals in real time in the different sporting events. All in all, our audio-video business grew on the top line and generated strong margins with a healthy mix of customers, industries, and geographies. In Q3, we also continue to sell our automotive VA6000 chipset in USB extension applications for audio-video use. I believe that going forward, we will see additional revenue contribution in the audio-video business by repurposing our automotive products. This leads me to our automotive business. Valet Semiconductor offers a unique set of in-vehicle wired symmetric and non-symmetric high-speed connectivity required by the automotive industry. Our VI6000 chipset family provides symmetric connectivity and enables data flow for infotainment and telematics. Mercedes-Benz started using our chipsets in the S-Class model in Q4 2020, and today you can find our chips in the S, C, and E-Class models, including in the electric vehicle known as EV models. The VA7000 chipset family, our non-symmetric product, was the first in the industry to comply with the NIPI AFI standard. It addresses the growing need for high-speed video connectivity for automotive applications such as advanced driver assistance systems known as ADAS, which is projected to run towards an $8 to $10 billion market in the coming years. The MIPI-A5 standard that was released in Q4 2020 is the industry standard for in-vehicle long-reach video connectivity. It will be required initially for high-speed connectivity between the sensors to the compute unit for automotive applications such as ADAS and autonomous driving. Valence Semiconductor's non-symmetric DSP-based connectivity technology is the foundation for the MIPI-A5 standard, which aims to replace the legacy analog solution existing today in cars. Valence VA7000 product family features outstanding resilience to electromagnetic interference, known as DMI, making it an ideal connectivity solution for the high-bandwidth, high-resolution sensors that significantly improve object detection, and classification. Our AFI-compliant chipset greatly simplifies integration of cameras, LIDAR, and radar. It also enables flexible integration of these sensors into a sensor cluster that is connected over a single link. This is known as sensor fusion. Sensor fusion opens the door to more accurate centralized computing and is key element for ADAS Level 3. Speaking on radar specifically, it is becoming clear that in addition to camera and sensors, radar are essential to meet our automotive OEM and T1 ASUS requirements. Our connectivity products are currently being evaluated by leading radar companies that are considering the use of VA7000 with their sensors. In our previous course, we communicated our expectations regarding the pace of adoption of our VA7000 solutions. I'm pleased to share with you, we have already received initial RFIs from potential customers for our MIPI AFI compliant VA7000 chipset. We are on track for fresh design wins next year with smart production expected to start in 2025. In line with our strategic plan, the growing MIPI AFI ecosystem continues to gain recognition and is well positioned for large scale implementation by automotive OEMs around the world. An important pillar is solidifying the ecosystem in Intel, which chairs the MIPI Alliance Board of Directors and determines that MIPI AFI is the most cutting-edge high-speed connectivity technology in the automotive industry. In Q3, we announced a collaboration with Intel Foundry Services to support the development of a MIPI AFI-compliant offering for their automotive customers. We believe our partnership with Intel Foundry will encourage other automotive chip manufacturers to join the growing WIPI-A5 ecosystem as automotive OEMs require multiple production sources. The interoperability between systems from a number of vendors is the requirement for the acceptance of any industry standard. In the third quarter, we announced the successful completion the industry's first joint interoperability test between a Valene Semiconductor VA7000 chip on the receiver side and Sony Semiconductor Solution prototype of integrated sensor and transmitter chipset on the other side. Sony Semiconductor Solution has stated the importance of introducing this cutting-edge technology into their image sensors. They also expect that the MIPI A5 transmitter integration will provide significant cost and performance benefits to the global base of automotive customers. Last month, we conducted a webinar with Sony Semiconductor Solutions and Jet Park, an association of Japanese automotive OEMs and tier ones, such as Toyota, Nissan, Honda, Mazda, Suzuki, and Denso, on how automotive companies can advance ADAS in autonomous driving with SMIPI A5. Hundreds of participants from the Japanese automotive industry joined the webinar to hear speakers from the Jasper Toyota Next Generation High-Speed Network Group, Sony Semiconductor Solutions Automotive Development, and Valen Semiconductor discuss the progress of MIPI-A5 and growing importance of electromagnetic compatibility, known as EMC, in cars. As car companies integrate sensors requiring higher bandwidth and EMC into next-generation ADAS and autonomous systems, interoperability among multiple vendor components will be crucial. To address this need, test equipment vendors are beginning to create off-the-shelf testing solutions. Keysight Technologies, which delivers advanced design and validation solutions, is addressing the growing market demands for high-speed digital interfaces for next-generation in-vehicle networks. In September, they announced their partnership with several companies, including Valen Semiconductor, to develop an EPFI compliance test solution that ensures data transmission quality and broad-scale interoperability. Before turning to our financials, this call marks the first anniversary of Valen Semiconductor as a public company. Since going public, we have made significant progress executing against our business plan and growth strategy, which is supported by our solid balance sheets. So far during 2022, we have successfully operated in a turbulent geopolitical and economic environment. In the near term, we will continue to monitor the macro environment and in particular, items that could impact our business during 2023 such as lead times, order patterns, and demand levels across industries. We are focused on creating long-term value to all our stakeholders. We believe that we have sufficient resources and capabilities to continue to invest in and expand our competitive advantages, enhance our product portfolio and market presence. We will continue to focus on our best opportunities, which we believe will drive sustainable growth and profitability for the company. I'll now turn it over to George Heldenberg, our CFO, to review our Q3 2022 financial results and provide our financial outlook.
spk06: Thank you, Gideon. I'll start with our third quarter 2022 results and then provide our outlook for the fourth quarter and our updated full year 2022 guidance. Beginning with our third quarter 2022 results. we exceeded the high end of our revenue, gross margin, and adjusted EBITDA guidance. We achieved record quarterly revenues of $23.1 million and increase of 21.3% from the third quarter of 2021. The higher than anticipated revenues, driven primarily by audio-video, also contributed to an overall higher than expected gross margin. Third quarter 2022 gross margin came in at 69.7%, compared to last year's 72.4%, reflecting a higher portion of revenue coming from our automotive business, which carries lower gross margin than audio-video. Non-GAAP gross margin was 70.5%, compared to 72.7% in Q3 2021. Operating expenses were $21.3 million in Q3 2022, down 3.4% from $22 million in Q3 last year. Research and development expenses grew by $2.1 million from Q3 of 2021. This reflects our continued investment in developing product offerings to address the new business opportunities ahead of us in both automotive and audio-video, while taking into account our realigned and optimized automotive R&D efforts which match our prospective customers' and partners' roadmap. SG&A expenses were $8.6 million compared to $11.4 million in Q3 2021. Last year's SG&A included one-time expenses in the amount of $5.4 million related to our going public in September 2021. Q3 2022 SG&A was similar to the past three quarters as a public company. Turning to net loss and adjusted EBITDA. Q3 gap net loss was $5.3 million, compared to $8.5 million loss in Q3 of 2021, and we exceeded our guidance for adjusted EBITDA, reporting an adjusted EBITDA loss of $1.7 million. The better than expected adjusted EBITDA reflects a combination of other than expected revenues and gross profits, the rescheduling of certain R&D expenses from Q3 to later this year and early 2023, and the strength of the U.S. dollar, which positively impacted expenses paid in Israeli shekels, mainly for compensation to employees based in Israel. Gap loss per share for Q3 2022 was $0.05, calculated as the net loss, divided by 98.1 million shares. This compares to Q3 2021 gap loss per share of $0.94, which is calculated as a net loss of $8.5 million and accrued dividend related to preferred shares in the amount of $3.9 million, totaling $12.3 million, divided by 13.2 million shares. The non-gap loss per share for Q3 2022 was $0.02. which is calculated as a non-GAAP net loss of $1.5 million divided by the 98.1 million shares. This compares to Q3 2021 non-GAAP loss per share of 23 cents, which is calculated as a net loss of $3 million divided by the 13.2 million shares. Turning to our balance sheet. We ended Q3 2022 with a strong balance sheet. Cash, cash equivalent and short-term deposits totaled $152.9 million, and we add no debt. This compares to $156.8 million at the end of Q2 2022. Furthermore, looking at walking capital, we ended the third quarter with a balance of $166.6 million, compared to $168.3 million at the end of Q2 2022. This difference of $1.7 million is mainly due to the loss during Q3 2022 after reconciling the non-cash expenses such as equity-based compensation, depreciation, and adjustment of the fair market value of the forfeiture shares. Our inventory as of September 30, 2022 was $21.9 million, an increase of $4.6 million from the end of Q2 2022. There are two primary reasons for this increase. First, we live in an inflation environment and the value of new inventory is higher. Second, as we have discussed in previous calls, in order to secure production capacity with vendors in prior constrained supply environment, we place longer term purchase orders. Goods from these purchase orders continue to arrive in the third quarter. This level of inventory is needed to meet the demand from customers we see ahead of us in the next 12 months, especially in automotive, where we intend to double our revenues from 2022 to 2023. I'd like to point out that the inventory ordered under the longer-term purchase orders will enable us to mitigate the impact on our gross margins from the expected higher product cost in the first half of 2023. Although we continue to face cost increases from some of our supply chain vendors, we expect supply constraints to start easing and lead time to start normalizing in the second half of 2023. Now, I would like to provide our guidance. For the fourth quarter of 2022, we expect revenues in the range of $23.1 to $23.2 million. We expect gross margins to be in the range of 66.1% to 66.5%. In the fourth quarter, we are planning tape-outs of our automotive VA7000 family chipsets to be able to deliver to our potential customers richer feature sets and better performance in line with market expectations. This is another crucial step towards our customers' future mass production. At the same time, in alignment with our current roadmap, we are rescheduling certain R&D activities to early 2023. Adjusted EBITDA loss is expected to be in the range of $9.7 to $9 million as we recall tapered costs in our income statement as they occur. As of September 30, 2022, shares outstanding total $98.4 million. We are raising our guidance for the full year 2022 largely due to the fact that we exceeded the high end of our revenue gross margin and adjusted EBITDA guidance for Q3 2022. We now expect revenues to range between $90.3 and $90.4 million, up from $89.1 and $89.8 million provided in August. Given the ongoing expansion of our automotive revenues, We continue to expect to essentially double this part of the business in 2022 compared to 2021. We anticipate 2022 growth margins will be in the range of 69.3% to 69.4%. This new growth margin range is up from the previously guided range of 68% to 68.5%. We are also substantially improving our projected adjusted EBITDA loss to now be between $20 and $19.3 million for the full year, significantly better than the prior range of $25.7 to $24.3 million. This improvement in adjusted EBITDA is driven mainly by aligning our product roadmap to our customers' needs, also supported by the expected benefits from the strong U.S. dollar on our Israeli shekel-based expenses. We remain on track to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2024, we believe the company should reach cash flow profitability. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.
spk07: Thank you, Dror. We are pleased with our results for the third quarter that once again exceeded expectations. we made notable progress in many aspects of our business. First, our automotive business continued to evolve and we expect revenues from the first generation products, the VA6000, to grow further as it will be used in more car models. Second, we are receiving positive feedback from prospective customers and partners that are evaluating the VA7000. The initial RFIs that we received are an important milestone towards adoption of AFI products by automotive OEMs. Third, we continue to see new opportunities in various verticals for high margin and diversified audio-video business, incorporate education, medical and industrial, among others. Fourth, even in today's challenging economy and the constrained supply environment, we successfully managed to meet all our customers demand in a timely manner. I want to thank our employees once again for their commitment and ongoing dedication to the company's success. Finally, during the past quarter, we released our first sustainability report, less than a year after being listed as a public company. At Valence, we constantly strive for excellence and innovate daily to ensure our products and solutions meet the high standards offer customers and provide society the connectivity it requires in an ever-evolving environment. Operator, I would now like to open the call for questions.
spk03: 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. Please ask your question in a loud and clear voice. 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 Rick Schaefer of Oppenheimer. Please go ahead.
spk04: Thanks and congrats. I know it's tough out there right now. Order velocities, and speaking of that, for almost everyone, I feel like it seems balanced to grow. So I was curious if you could talk about any shifts that you are seeing in your order patterns, positive or negative, anything that you're seeing there in terms of any push-outs, whether it's in pro AV or in auto or or any significant change to lead times, just sort of any sense of what you're sort of seeing in terms of your order book. Thanks.
spk06: Hi, Ray. Good talk to you again. You know, obviously, at this point in time, we will not be providing our guidance for 2023. If we analyze our business, and let's start with automotive, I think that what we're seeing today, we're starting to see indications that our automotive business is expected to double its revenue in 2023 from 2022. So in that respect, we feel that the automotive business is quite resilient. With respect to the audio-video business, so I would say that the audio-video business is probably more correlated to some of the global macro trends that we see today. So we assume that at least during the first part of 2023, customers will mainly consume inventories that they accrued in the challenging supply demand environment. Having said that, when we analyze the audio video segment in 2023, we still see the following opportunities. Obviously, We continue to see the expansion of the VS-3000, you know, just to refresh your memory. This is the most recent member of our audio-video product family. And we see this product in designs of many industry-leading companies, and we expect to see more revenues contribution from this chipset next year in 2023. In addition, our other solutions are now being evaluated, as Gideon mentioned in his prepared remark, for new applications, and we assume that at least some of them will mature into mass production products during 2023. So I would say, maybe to summarize, so while we anticipate a more moderate growth rate for this part of the business compared to the projected 2022 year-over-year growth rate, we still believe that we will continue to see an annual growth in audio-video. With respect to the last part of your question about some cancellations or push-outs, I would say that, you know, these are tough days for our customers as well, and obviously their planning is becoming more challenging for them as well. I can tell you that recently we got some push-out requests, at least from certain customers. However, those push-outs were offset by pulling requests by other customers, and this resulted in the improved guidance that we shared with you today in this course.
spk04: Thanks, Troy. That's great color. And then as a follow-up to that, gross margin was a lot higher than you guided it higher, much higher than I had modeled. So I was just hoping that you could maybe provide a little color on what's driving that. and where we should expect gross margin to stabilize now. And I think you've talked in the past about sort of a low mid-60s, but I didn't know if there was any update on sort of gross margin, I guess. Thank you.
spk06: Yeah, sure. So the better than expected gross margin is mainly driven by the revenue mix between audio, video, and automotive. We just mentioned that the growth in revenue was mainly triggered by by the audio-video business that comes with higher gross margins, so that was the first reason. The second reason is that in the third quarter, we still consumed some inventory that was produced at lower costs. Obviously, as we refresh the inventory, it always, in this environment, inflation environment, it comes with higher costs, so I assume that we'll see the implication going forward. In terms of our Gross margin going forward, again, today we provide you the gross margin we anticipate for Q4 and the full year. I think that we're going to meet this target.
spk04: Great. Thanks, you guys, and congrats again.
spk06: Thanks. Thanks.
spk03: The next question is from Suji Da Silva of Roth Capital. Please go ahead.
spk01: Hi Gideon, hi Dror. Congratulations on the progress here. So maybe we can talk about audio video first and just what drove the upside? Is that potential remain each quarter? Is there kind of some secular trend that is helping you guys at Tailwind in a tough environment?
spk06: Hi Suji and thanks for the question. I think that nothing dramatic to report here. I think that one thing that helps us in the audio video is the fact that this part of the business is very diversified and uh you know this is a very strong uh business it's a strong point for us and and uh every quarter we see the strengths in in other area of the business again we continue to see the ex as i mentioned before to rick uh we continue to see the expansion of the vs 3000 It's a very encouraging sign for us with respect to the penetration of this new product, which, by the way, comes with IRASP to customers. It's a good sign. And again, nothing special. It's just the nature of the business and the growth that we expect from this business.
spk07: I would like to end. Hi. Hi. It's Guido. How are you? And thank you for the... For the question, and I would like to add that some of the verticals and some of those markets in the audio-video are less infected by the atmosphere in the world. Like, you know that Valencia is not exposed to some of the very sensitive markets today, and we're exposed more to a market that is hybrid education and hybrid learning and conference rooms, which are less to even zero infected from the, well, atmosphere, of course, not everything is like that, but this is one of the reasons that we keep seeing the growth in the company, and the growth in the company, and this is one of the reasons for the heads up for next year.
spk01: Okay. Thanks, Gideon. Thanks, Farah. So switching over to auto, perhaps, I'm wondering beyond the lead customer when perhaps Stone Ridge and the trucking relationship would contribute to revenue materially, if it maybe already is, just be curious of that. the timing when that would help kind of layer in with the lead customer?
spk06: So I think that as we indicated in the past, the project with Stone Ridge continues to progress, and we are not changing our previous guidance that we anticipate mass production and ramp up of this business next year in 2023. In that respect, everything is on track. Okay? No change to the storage project, to the truck project.
spk01: Okay. If I can seek in one last quick one, Dvorak. Can you just elaborate on the R&D rescheduling? What was behind that? Just understand the dynamic there. Thanks.
spk06: Sure, Sergey. So I think that this is something that we've already mentioned last time. We mentioned that after we started to ship the first samples of the A53, A5 product, the BA7000 engineering samples to customers, obviously we worked with our prospective customers very closely to better understand their roadmap and their schedule. And based on all this close relationship and joint work with the OEMs and some of the tier ones, we realized that we need to realign a bit and adjust our product roadmap development. It's mainly related to the next generation that we originally planned, and now based on the input that we received from customers, what is more important to them, what is less important, and when they need more and new devices, we realized that we need to adjust our roadmap. I think that the focus today of customers is to make sure that the BA7000 can reach to mass production according to their schedule. I think that the next generation can wait a bit. Definitely some other derivatives that we plan. I think that today the customers are very focused on the benefits that the BA7000 brings. just to name a few of them. It's the better EMC. It's the bandwidth. It's the total system cost. It's the, you know, it's a set of advantages that I think that they recognize. Obviously, it's the ability to work with unshifted twisted pair. It's a set of benefits, and we need to make sure that we help them to get to mass production as soon as they can.
spk00: Okay, great. Thanks, Gideon. Thanks, Tor.
spk03: The next question is from Brian Dobson of Sheridan Capital Markets. Please go ahead.
spk05: Hi. Thanks so much for taking my question. I guess shifting gears a little bit, could you speak to some of your key partnerships and collaborations, perhaps specifically with leading players within the space, and how you see those driving standard adoption moving forward?
spk07: Okay, thank you very much for the question, and nice to hear from you. I will start with the collaboration with Sony. And you know, one of the strengths of the MIPI-A5 is that the transmitter can be embedded as part of the silicon of the AA sensor. And this is what Sony did. And actually, this is, I would say, almost the mastermind of the transmitting part of the MIPI-A5. And the collaboration with Sony gives several advantages. First, you know, Sony is a very, very strong, almost 50% world market sharing sensor. growing market sharing sensors for automotive and once they embedded the transmitter as part of their whole sensor they give them advantage both in the price, in the quality, in the simplicity, in the space on the board, in power like it's an all-win game and this is a kind of collaboration of which we are very proud of and very proud to be a partner with a respectful company like Sony Semiconductors. As of Intel, Intel-Fabs is a very important collaboration and they would boost the automotive MIPI-FI implementations by allowing companies actually to compete with us, but we are very happy with it because this is what will drive the market and we are happy that a company like Intel recognized and chose MIPI AFI as the technology that they want to encourage silicon players to integrate and to manufacture in the future. So these are two of the collaborations, of course there are more.
spk06: I think these are the most interesting to share now at this time. Maybe just to add to what Gideon mentioned, it's the press release and the collaboration that we have with Kitsite. Now, it's a good sign for market maturity. You know, you're starting to see companies that develop test equipment only when they realize and they estimate that they are talking about A market that is going to grow, a market that is going to be matured very fast. And the fact that the company, an established company like Keysight, understand that they need to develop, already develop test equipment that is going obviously to serve not just Valence but other players in this market. it's another indication for the developed ecosystem and the fact that they anticipate that they are going to see business, significant business for companies that will develop API solutions.
spk05: Yeah, excellent. Thank you very much.
spk03: If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Mr. Bensfi, would you like to make your concluding statement?
spk07: Yes, thank you. I would like to thank you all for joining us today for our Q3 2022 call. and for your continued support and interest in Valence Semiconductor. Have a great rest of the day.
spk03: Thank you. This concludes the Valence Semiconductor 3rd Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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