Valens Semiconductor Ltd.

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 first 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.

Thank you and welcome everyone to Valence Semiconductor's first quarter 2022 earnings call. With me today are Gideon Bensvey, Chief Executive Officer, and Laura Helgenberg, 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 20-F 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. We will be in Boston, New York, Tel Aviv, San Francisco, and London later this month and in June for investor conferences and meetings. If you're interested in meeting with us, please 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. Q1 was a record quarter for Valence Semiconductor and a very strong start to 2022. Revenue and profitability exceeded our guidance sales driven by continued solid demand for our core audio video solutions, as well as exceptionally strong demand for our emerging automotive products. We reported the company's highest ever quarterly revenues of $21.6 million, 62% higher from Q1 2021. I am proud to say that we continue to successfully meet customer demand, even in today's challenging supply chain environment, and we'll continue to do so taking proactive measures, working closely with our customers and suppliers. As a result of the better than anticipated start to the year and our outlook for the rest of 2022, we are raising our full year guidance. Most of this revenue increases attributed to audio video while also essentially doubling the automotive revenue from the full year 2021. Don will elaborate on our guidance in his parts. Valence is well positioned to benefit from significant growth trends in both the automotive and audio-video markets. Starting with audio-video, the demand for our audio-video solutions continues to build across all geographic regions and is expanding into new applications within multiple verticals, corporate, education, government, industrial, and medical. Companies recognize the potential of our cost-effective, high-performance, and easy-to-install audio-video solutions that can be used in conference rooms, boardrooms, and training facilities in both hybrid and remote settings. We see a growing number of customers rolling out their next-generation products that embed a brand-newest member of the audio-video products, the VS-3000. As a reminder, the VS-3000 transfers uncompressed signals to deliver The most crisp picture possible in HDMI. It is versatile, supports full 4K HDMI video, and can transfer audio video, 1 gigabit internet, and USB format all over a simple, off-the-shelf single cable. Last quarter, I discussed the role we believe the LEN technology will play in what's called the next normal for hybrid environments such as work, education, medical, and others. In education, we are seeing more schools and universities upgrading their classroom infrastructure to enable more advanced in-classroom and remote learning. This trend is supported by the fact that the U.S. federal government recognizes the important role technology will play in keeping schools operating most effectively and enabling students ongoing studies even under the scenario that would have previously put schooling on hold. U.S. Congress has allocated to date a budget of approximately $190 billion in elementary and secondary school emergency relief, ESSER, funding for kindergarten through 12th grade K-12 schools, which includes funds for educational technology, including hardware, software, and connectivity that enables remote and hybrid learning. We believe the use of advanced technology will expand to education systems worldwide, which is an opportunity for Valence to further enhance its business in the large education market segments. By implementing our solution, we enable schools to stay open, even in extreme scenarios such as severe weather and pandemic outbreaks. To that point, last month we announced that we joined the Learning and Collaboration Program to develop a solution using our technology and products in Logitech's USB peripherals suite to products for hybrid setups. Another interesting use case in education is a university in Japan. It was looking to build a modern classroom where students could easily see professors on video screens from anywhere in the large classroom. The university also required true 4K video quality as well as remote control of the in-class camera. our audio-video solutions met all these requirements, while extending HDMI, USB, control, and power between PC and camera sources, projectors, and displays over a single off-the-shelf, low-cost category cable. We also continue to see demand for our audio-video connectivity solutions from leading equipment vendors in the industrial and medical equipment markets. The medical equipment space is undergoing significant transformation due to remote and hybrid healthcare, robotic surgery, and deep artificial intelligence AI diagnostics. These applications require uncompressed high-resolution video connectivity that is medical-grade and patient-isolated to ensure patient safety. For example, a US-based center for special surgery requires real-time uncompressed audio-video connectivity in surgery rooms. They recently completed updating the center's video signal transport infrastructure using Valence audio-video solution. Using the VS-3000, simple cabling was all that was needed to enable control and signal distribution, easy installation, and increased flexibility. Now, this medical center can retrieve videos from any of the surgical rooms in real time, as well as imaging such as x-ray, on multiple displays. I'm also encouraged to see that our VA7000, that was originally developed as a high-speed camera connectivity solution for automotive, is also gaining traction in the medical industry. It perfectly fits medical equipment targeted for use in critical procedures that require long-reach, reliable, uncompressed, high-resolution video. And recently, several prospective customers in medical imaging have begun evaluating the VA7000. While the sales cycle in medical is typically long, we are off to a very encouraging start and expect the medical market to become a meaningful business for Valence. We are proud of the role our technology will play in improving patient care. Turning to automotive. In the third quarter of 2022, we increased the number of OEMs, Tier 1 and Tier 2s, looking to integrate our newest VA7000 chipset into the platform from the 25 reported previously to more than 32 dates. In fact, since December 2021, we have doubled the number of OEMs that are evaluating our MIPI H5 standard compliance VA7000 chipset. To date, we have eight OEMs evaluating this solution. Furthermore, we have also been receiving positive feedback on our engineering samples from prospective customers and partners who have already started to evaluate the VA7000 samples. This is clear testament to the positive momentum and traction we see for the adoption of the A5 standard in the markets. We expect the next step will be OEMs requiring NIPI AFI standard compliance high-speed connectivity technologies as part of their RFIs and RFQs. We believe we will begin to see these requests towards the beginning of 2023, resulting in new design wins by mid-year 2023, which will translate into mass production starting in 2025. In parallel, the larger AFI ecosystem also continues to grow. Earlier this week, we announced an important partnership with OmniVision, a leading Tier 2 supplier for in-vehicle camera sensors on a MIPI-A5 compliant sensor solution for Advanced Driver Assistance System applications, ADAS. OmniVision will embed our VA7000-A5 compliant chipset in their automotive reference design system camera modules. The initial camera module will also include an image sensor from OmniVision. As we speak, we are demonstrating this A5 reference design at OmniVision's booth at the AutoSense Detroit exhibition. Also at AutoSense, we are leading a session on turning sensor fusion into reality for ADAS. It is clear that the fusion of data from various types of sensors, radar, lidars, and cameras, and the integration of data in the compute unit will play an essential role in reliable ADAS systems and autonomous driving. These concepts of sensor fusion will require a reliable high bandwidth video connectivity solution that can aggregate the data from the VIA sensor to the compute unit. We believe that our AFI compliant solution will play a vital role in the realization of these important trends. We are also advancing with our joint project with StoneRidge and continue to expect ramping revenue from this project in 2023 and beyond. As a reminder, StoneRidge is incorporating our VA6000 chipset into a connectivity solution to enhance vision and safety systems in tractor trailers to address critical safety issues in the trucking industry. The trucking industry TAM is quite extensive. with more than 2 million new heavy trucks sold each year globally, in addition to a significant aftermarket opportunity. With our automotive product portfolio currently comprised of the non-symmetric VA7000 chipset and the symmetric VA6000 chipset families, Valence is one-stop shop for the in-vehicle wired high-speed connectivity required by OEMs. Why is this important? For today's infotainment and telematics, data flows in cars mostly over symmetric links. In parallel, to enable tomorrow's automotive applications such as ADAS and autonomous vehicles, manufacturers require video connectivity over non-symmetric links. The automotive market is looking to deploy standard-based products for high-speed video connectivity for ADAS and autonomous vehicle applications rather than today's legacy solutions which are proprietary and require dependency on specific vendors. All told, our end-to-end symmetric and non-symmetric offerings and primarily the NIPI A5000 compliant chipset, the VA7000, provide huge advantage to automotive OEMs looking for comprehensive sets of solutions addressing their high bandwidth connectivity needs. I'll now turn it over to George Hildenberg, our CFO, to review our Q1 2022 financial results and provide our financial outlook. Thank you, Gideon. I'll start with our first quarter 2022 results and then provide our outlook for the second quarter and updated full year 2022 guidance. Beginning with our first quarter 2022 results, we topped our revenue guidance. achieving record total revenues of $21.6 million, an increase of 61.8% from the first quarter of 2021. Q1 2022 gross profit grew to a record of $15.4 million from $9.5 million in Q1 2021, an increase of 62%. First quarter 2022 gross margin was 71.4%, similar to last year's 71.3%. Non-GAAP gross margin increased to 72.1%, up from 71.8% in Q1 2021. The better-than-anticipated gross margins were driven by a favorable product mix in audio-video, as well as the increase in automotive gross margins from prior quarters as this business begins to scale. In addition, in Q1, we enjoyed the benefits from sales based on today's IRASP, while a portion of the cost of goods was still based on previous lower pricing. Operating expenses in Q1 2022 were $22.6 million, up from $15.7 million in Q1 last year. The $6.9 million increase was mainly due to an additional $3.7 million in research and development expenses, representing 54% of the total year-over-year increase in optics. This demonstrates our continued investment in expanding our product offerings to address the business opportunities ahead of us. Sales and marketing expenses increased $1.1 million due to higher levels of promotion of our new audio, video, and automotive products. And G&A expenses were up by $2.1 million, primarily due to public company expenses such as costs related to DNO insurance and professional services. We also exceeded our adjusted EBITDA guidance with our first quarter 2022 adjusted EBITDA loss coming in at $4.1 million compared to the loss of $4.3 million in the first quarter of 2021. Our Q1 2022 adjusted EBITDA was $6.1 million better than the midpoint of our guidance of a $10.2 million loss due to our higher than expected revenues and gross margins, as well as the fact that most of the better than internally projected operating expenses were related to certain R&D expenses that were deferred from Q1 into subsequent quarters in 2022. Lost per share for Q1 2022 was $0.05, 91.6% lower than Q1 2021, which was $0.93 per share. Q1 2022 is calculated as a net loss of $5.1 million, which includes an income of $2.6 million related to fair value of forfeiture shares divided by 97.2 million shares. Q1 2021 is calculated as a loss of $10.1 million divided by 10.8 million shares. The non-GAAP loss per share for Q1 2022 was 2 cents, based on the net loss excluding $3.1 million of stock-based compensation and depreciation expenses, divided by the 97.2 million shares. The higher number of shares outstanding is the result of the conversion of our preferred shares into ordinary shares, the shares issued as part of the transactions related to our listing, and options exercised into shares during the period. Turning to the balance sheet. We entered Q1 2022 with a strong balance sheet with cash, cash equivalent, and short-term deposits of $166 million and no debt. As we stated in the past, we intend to use our strong balance sheet to fund the development and commercialization of Valence Next Generation products. As a reminder, 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. Inventory increased by $3 million from the end of 2021, driven by two main factors. First, the anticipated increase in the number of chipsets we intend to sell this year, and second, The constrained supply chain environment resulted in higher cost raw materials and services from our supply chain, as well as the need to place longer-term purchase orders and accrue more inventory to serve our customers' needs on a timely basis. Considering our strong background, we believe that $12.5 million in inventories will be consumed during 2022. Now, I would like to provide our guidance. For the second quarter of 2022, we expect revenues in the range of $21.6 to $22 million. We expect gross margins to be in the range of 66.3% to 67.3% and adjusted EBITDA to be a loss in the range of $9.8 to $8.8 million. For modeling purposes, please note that as of today, we have 97.2 million outstanding shares. As Gil said earlier, we are raising our guidance for the full year 2022. We now expect revenues to range between $86.5 and $88 million, up from $83 to $85 million provided in March. Further increasing demand in audio-video and the continued expansion of our alternative revenues, which we expect to essentially double from 2021, drove our higher 2022 projections. We expect gross margins to be in the range of 66% to 67.3%. This new gross margin range is up from the previously guided range of 65.5% to 67.2%. We are also improving our projected adjusted EBITDA loss to be between 37.2 and 35.5 million dollars, up from a range of 38.4 to 37.8 million dollars. We will continue to invest in enhancing our current product offering and developing and commercializing Valence next-generation products. In summary, Q1 was a strong start to the year, positioning us for a better-than-anticipated 2022. As we look further out, we are seeing growing demand and adoption of our next-generation connectivity solutions in multiple industries. Together with our robust balance sheet, we should fund our business through breakeven and beyond. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A. Thank you, Jerome. Our continued success demonstrates once again why we believe Valence is well positioned to create value for our stakeholders. First, Valence operates in two large and fast-growing addressable markets, automotive and audio-video. Second, Valence enjoys a first-mover advantage for its wide, high-speed connectivity solutions over a simple and low-cost infrastructure by setting industry standards. We first did it in the audio-video market, having established our leadership position in audio-video, and we are now replicating this success in the automotive market. Third, our business model offers compelling financial metrics. As the fastest semiconductor company, we are driving environmentally responsible growth. I would also like to take this opportunity to thank our incredible and talented team of employees around the world for their exceptional education and execution. They made this very impressive start of 2022 possible, and I am confident that they will drive a little continued success.