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spk02: Ladies and gentlemen, thank you for standing by. The call will begin shortly. Thank you. 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 second quarter 2023 earnings conference call and webcast. All participant lines have been placed in the 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.
spk01: Thank you and welcome everyone to Valence Semiconductor's second quarter 2023 earnings call. With me today are Gideon Bensley, Chief Executive Officer, and Laura Heisenberg, 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 with the SEC on March 1, 2023, 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 to find reconciliations of these metrics within our earnings relief. In the coming weeks, we will be conducting investor conferences and meetings virtually and in Chicago and Tel Aviv. 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 Gidon.
spk03: Thanks, Daphna, and thank you all for joining our Q2 2023 call. In Q2 2023, Valence Semiconductor revenues reached a record of $24.2 million. metrics on our journey towards adjusted EBITDA break-even by the end of this year. We continue to make progress, executing against our long-term growth opportunities as well. As we further push the boundaries of connectivity with our advanced offering and enable our customers to bring to market new disruptive products to existing and untapped markets. We continue to track the current macroeconomics headwinds. the rising inflation, interest rates, and slower than anticipated inventory digestion. While these trends are driving some near-term uncertainty, long-term trends for the semiconductor industry and balance remain positive. I will start our second quarter business discussion with our audio-video business. The audio-video market is highly correlated to macroeconomic trends. We can now see indication for a recovery of the market, which we believe will start to improve at a relatively slow pace towards the end of 2023 and through the first half of 2024 and gain momentum into the second half of 2024. We have identified that one of the main contributors for the expected improvement is the increasing demand for high-performance USB peripherals. As such, Balen Semiconductor is driving adoption globally across verticals. Valet Semiconductor's long-term vision is to accelerate the transformation of the video conferencing market with an extensive product portfolio. Our latest chipset, the VS6320, is the first single chip in the market for extension of high-performance USB. It targets its growing market and can extend USB 3.2 peripherals at up to 100 meters or 328 feet. We recently received the first samples of the VS-6320 from the successful tape of Accretuted in C1-2023, and we remain on track to ship the first engineering samples to selected customers by Q4 of this year. We believe that revenues from the new product will start ramping up during the second half of 2024 as our customers will introduce their new products, embedding these new chipsets. The VS6320 chipset is ideal for connecting the many remote USB 3.2 peripherals required in videoconferencing, industrial, and medical applications. Each of these applications presents a large market. Multicamera videoconferencing is one of the fastest growing areas for audio-video equipment in the coming years. As modern video conferencing applications increasingly require a unified meeting room experience with a flexible, efficient, and high-performance connectivity solution. Many leading audio, video, and PC manufacturers are investing in the development of advanced solutions for small, medium, and loud meeting rooms. The video conferencing market is projected to essentially double from about $7 billion in 2022 to more than $14 billion in 2029, or 11% to 12% bigger, according to Research Fair Fortune Business Insights. We recently demonstrated how another one of our products, the VA7000 chipset family, that was originally designed for automotive, can be leveraged for multi-camera video conferencing applications. At Infocom International in June, we announced our collaboration with iTech Technology, a leading AI image processing fiber semiconductor design company. The two companies are working together to develop a flexible, efficient, and high-performance multi-camera video conferencing solution that leverages our VA7000 chipset family and iCatch Technologies AI imaging system on chip known as SOC. While we're deploying, the solution will benefit from the ability to cover the entire room and enhance the in-room and remote participants' equity. Another benefit of this new solution is the ability to use smaller cameras that consume less power at reduced cost. During the many discussions held with customers about the VS6320 and the VA7000 chipset, it was clear that with these innovative solutions, valence semiconductor is once again at the forefront of the industry. Turning to automotive. First, our symmetric automotive chipset family, the VA6000. 2023 is the first year in which our BA6000 chipset is being broadly deployed in Mercedes-Benz S, C, and E-Class models, including the electric vehicle EV model, the EQ series. As such, our annual sales in 2023 are expected to increase as a result of being deployed in more models than prior years. We expect to stay in the same car model going forward. As such, beyond this year, the expected growth rate for our VA6000 chipsets should be correlated to Mercedes-Benz passenger car growth rate. In Q2, we recorded initial sales of the tractor-trailer railview safety solution we jointly developed with Stone Ridge for the fleet operator customers. These customers are in the process of conducting pre-production extensive live on-road evaluations. We expect this will result in ramping sales during the second half of 2024. Moving to the VA7000, our MIPI-A5 non-symmetric automotive chipset family for safety applications known as ADAS. There is a growing demand from automotive OEMs for ADAS, including vision-based systems, which are key enablers for ADAS and 360-degree perception sensor for applications such as surround view, parking assist, and reverse assist. The VA7000 perfectly fits for vision-based systems. And over the past quarter, we grew the big pipeline with automotive OEMs considering the deployment of the VA7000 in mass production. The ongoing discussion with the OEMs looking at potentially selecting the VA7000 give us confidence that we remain on track to announce our first design wins this year. As a reminder, it typically takes fewer years following automotive design wins before generating additional revenues. To close out my opening remarks, I want to spend a moment discussing the plan we announced in June to improve the efficiency of our operations. In light of our focus on reaching profitability, while maintaining our ability to reach our technological and business goals, we arranged our R&D and development infrastructure in a more efficient manner and streamlined our development platform. This enables us to operate a stronger and leaner organization for the benefit of Valen Semiconductor stakeholders. Drog will provide more detail in his prepared remarks. I'll now turn it over to Goran Hildenberg, our CFO, to review our Q2 2022 financial results and provide our financial outlook.
spk04: Thank you, Gideon. I'll start with our second quarter results and then provide our outlook for the third quarter and the full year 2023. Starting with our second quarter 2023 results, we achieved record quarterly revenues of $24.2 million, an increase of $1.7 million, or 7.5% from the second quarter of 2022, and an increase of 1.2% from Q1 2023. Second quarter 2023 gross profit was $14.9 million, with a gross margin of 61.8%, compared to $15.8 million, or 70.2% gross margin in Q2 2022. Non-GAAP gross margin reached 63.1%, compared to 71% in Q2 2022. The change compared to Q2 last year was mainly driven by a substantially higher share from automotive as we doubled the portion of revenue coming from this business, which incurs a lower gross margin than our audio-video business. Before referring to APEX, as Guillaume stated, during the second quarter, we have implemented our plan to improve efficiency, The annual saving of this plan is expected to be $9 million, as previously announced. The additional charge incurred in Q2 specifically was $250,000, coming mainly from R&D. Operating expenses in Q2 2023 totaled $20.1 million, down from $23.7 million in Q2 2022. Research and development accounted for approximately 60% of Q2 2023 APEX, coming in at $12.2 million, lower than $14.9 million in Q2 2022, mainly due to purchasing of IP in the amount of $2 million in Q2 2022. We also benefited from the strong U.S. dollar versus the Israeli shekel. SG&A expenses were $8 million, down from $8.8 million in Q2 2022, mainly due to $0.6 million reduction in DNO insurance premium as well as positive Forex-related impact. Turning to net loss and adjusted EBITDA. Q2 2023 gap net loss was $4.6 million, substantially better than the $10 million net loss recorded in Q2 2022, and adjusted EBITDA in Q2 2023 was a loss of $0.8 million, also significantly better than the $4.5 million loss in Q2 2022. The better-than-guided adjusted EBITDA loss in Q2 2023 was mainly due to two factors. Rescheduling of certain IP purchases for a new product we are developing, which is now planned for Q3 2023, and the strength of the U.S. dollar in Q2 2023, compared with the company's estimates. This has positive impact on expenses paid in Israeli shekels, mainly for compensation to employees based in Israel. Gap loss per in Q2 2022. Non-GAAP earnings per share reached break-even in Q2 2023, compared with the loss per share of $0.08 in Q2 last year. Excluding the stock-based compensation of $4 million was the main reason for the delta between GAAP loss per share and the non-GAAP earnings per share break-even in Q2 2023. Turning to our boundaries, We ended Q2 2023 with a strong balance sheet, which is a clear indication for the current and future strength of the company, as we expect to reach adjusted EBITDA break-even towards the end of 2023. Our sound cash position provides us with operational flexibility to grow our business. Cash, cash equivalents, and short-term deposits total $138 million, and we add no debt. This compares to $139.7 million at the end of Q1 2023. In Q2 2023, we generated $.4 million from operating activities compared to $4.3 million cash used in Q2 2022. Q2 2023 was the first quarter in which the company's cash from operating activities was positive. While in the short term, we might face some quarters with negative cash flow from operating activities All in all, we expect that the improvement in our profitability will support a positive trend of cash generation on an annual basis. Our working capital as we entered the quarter was $160.8 million, compared to $161.4 million at the end of Q1 2023. This difference is mainly triggered by the purchase of fixed assets during Q2 2023. As expected, our inventory balance as of June 30, 2023, was substantially lower than at the end of March 2023, reaching $19 million, down from $23.6 million. This approximately 20% reduction reflects the fact that the company is returning to a more balanced supply-demand inventory management. As part of our inventory planning, we assume shorter lead times from our vendors. Yet, we have not yet seeing them formally announce a change in their lead times policies. While we expect a continuous improvement in our inventory balance, we are still seeing our inventory levels impacted by a few factors that have been evident in the past couple of quarters through today. The macro environment is still negatively impacting our customer demand and sales. This is leading to inventory digestion that is taking longer than many of originally anticipated We expect the recovery to continue at least through the end of the first half of 2024, which implies a modest pace of recovery in the short term. Second, higher interest rates are driving the cost of inventories up, which means that customers are more cautious in placing orders and stocking up their warehouses with new inventory. To sum up this point, we expect our inventories to continue and go down in Q3 2023, but in a slower pace. Now, I would like to provide our guidance. For the third quarter of 2023, we reaffirm our expectation for revenues in the range of $14 to $14.2 million. As we have shared with you previously, we anticipate that the third quarter will be the lowest quarter of the year. We expect Q3 gross margins to be in the range of 57.6% to 58%, reflecting on one hand the projected product mix with a higher portion of individual revenues, which incur higher gross margins, and on the other end, the negative impact of fixed operation expenses on the lower Q3 2023 revenues. Adjusted EBITDA loss in the third quarter is expected to be in the range of 12.2 to $11.9 million. As of June 30, 2023, shares outstanding totaled 101.8 million, excluding, of course, approximately 1 million shares that are subject to forfeiture. For the full year 2023, we are reaffirming that revenues are expected to range between $83.8 and $84.2 million. Automotive revenues are expected to approximate 30% of total revenues. Full year 2023 gross margins are now expected to be in the range of 62.2% to 62.5%. We are improving our adjusted EBITDA guidance for the full year, and it is now expected to be a loss in the range of $16.2 to $15.6 million. We reiterate our expectation to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2024, we expect to be cash flow positive. I'll now turn the call back to Guillaume for his closing remarks before opening the call for Q&A.
spk03: Thank you, Dror. In face of the ongoing macroeconomy and semiconductor sector-specific headwinds that continue to impact most of our end markets, we remain focused on elements in our control and our progress towards profitability. Our main targets in the second half of the year are, first, to secure design wins from automotive OEMs for our VA7000 chipset family. This is a major milestone we all have been marching towards. Second, to further enhance our profitable audio-video business with our new offerings. Our strong balance sheet provides the foundation for us to execute our long-term growth strategy and pursue the promising opportunities that will deliver value for all our stakeholders. I would like to close by thanking our employees for their commitment and ongoing dedication to the company's success and for the support all our stakeholders. Operator, I would now like to open the call for questions.
spk02: 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 pulled 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.
spk06: Oh, thanks. And good morning, good afternoon. Nice job managing through a pretty tough macro. I had two questions, if I could. The first is, it's just a little more color on channel inventory. Particularly, it sounds like it's all pretty much in ProAV, Jor, if I think I heard your comment correctly. How much do you think you're undershipping consumption? And when do you expect the channel to normalize? I think I missed it. I think you mentioned something about it on the call, but I think I missed it.
spk04: Eric, good to hear you again and thank you for the question. So, yes, I think that your observation is correct. I think that we see most of the impact of the slower than anticipated inventory digestion on the audio-video business. And in a way, I think that at this point in time, we see, I would call it three phases. The first one is the one that is in the quarter that we are now in the middle of it. It's the third quarter. I believe that audio video business is going to button in this quarter. You know, according to the guidance that we just provided, we expect to see all and all audio video and automotive revenue in the level of $40 million this quarter. Second, I believe that we're starting to see some improvement in the fourth quarter. We are starting to see better demand from our customers. We see more inventory digestion from our customers along the channels. And third, I believe that we, according to what we are hearing from our customers in all the discussions that we have with them, that we expect to see soft rebound into the first half of 2024. And then, as we mentioned in our prepared remark, we believe that we're going to see that this momentum will continue, will mainly gain momentum into the second half of 2024.
spk06: Okay, thanks for that added color. And maybe just for my second question, I'm curious, you know, I know you mentioned that you're on track to add, I think you said at least, to announce at least one new customer in auto. So I didn't know if there was any other color you could give around that. And as part of your answer, either Gideon or George, are customers taking a little longer to launch new products? I mean, we've heard that from a couple of your clients. your auto peers your component peers um are you seeing shifts in sort of order patterns order velocity uh you know in in vehicle you know in in product launch and any change there um that you've noticed within auto okay so uh you know like in the past we cannot be more specific on the and mention the names of the opportunities that we have right now in the space of automotive
spk04: I can mention here that we see growing demand for our connectivity with the VA7000-based solutions for various types of vision-based solutions, for example, the surround view systems. With respect to the second part of your question, if we see some slowdown or it takes more time for the automotive players to reach a decision, you know, It's a market with players that takes their time. I don't think that it's a surprise. If you remember, we said that we expect to see the initial design before the end of this year. At this point in time, we are confident that we're going to reach this target. Okay, thanks.
spk02: The next question is from Suji Da Silva of Needham. Please go ahead.
spk07: So maybe to follow up on Rick's question, the pipeline closure for auto, what are the drivers for the auto customers for the time frame of those closures? And I guess because you may see one by the end of the year and more in 24. What's driving their time frame at this point? Are they sampling the chip and testing it? Or what other factors are there?
spk03: Hi, Sochi. This is Gidon. Thank you for your question. The process with the automotive player, the OEMs, is actually, it's a shift. They're shifting from the old system that they use to new systems, and they have their own learning curve about what is needed to understand for newer bandwidths and for more information in order to predict an accident, in order to predict it's something going to happen. And this is a process that actually they're doing their own shift of understanding new needs in the market. And some of them is not predictable for us to know how long it takes, but we see that actually the learning curve in most of them happens and we see and hear more and more pipeline of companies that understand that for the next generation of ADAS, and the next generation of understanding what happens on the road, they will need to cope with higher resolution, higher bandwidth, and the solutions exist today, we have superiority, and yes, it takes the time, and some of the time is their own learning curve of the new world, of the new demands. But we see that actually in most of them, that the, actually not most of them, all of them, that they understand and that they come to very similar conclusion and we hope that this will yield to a design win that we'll be able to have this year.
spk01: Okay.
spk07: Thanks, Gideon. And then perhaps to follow up there, as they compare your solution to perhaps competitor offerings like Ethernet and so forth, what are the one or two key factors you think are standing out that with being a customer toward the availability of the H5 solution?
spk03: Well, the explanation is technologically. And the higher the bandwidth, the more exposure to electromagnetic influence you have. And this is not a linear thing. Like, if you have a camera of 8 megabit versus 4 megabit, it's not double the exposure. It's far more than that. And this is the reason that the need for the EMC becomes such a serious thing. This is the first thing. And the second is the total cost of ownership. In our technology, we allow them to use unshielded cables. And the unshielded cable is actually having a total cost of ownership, which the whole system cost less because we enable a user cheaper cables and cheaper connectors and actually cheaper labor because with unshielded a lot of things can be done automatically and there is also a lot less depreciation over the years of what's called aging cables. So these are the key factors, the EMC, electromagnetic, the total system cost, and the bandwidth. That's the three key parameters. Okay, great. Thank you, Gideon.
spk02: The next question is from Vivek Arya of Bank of America. Please go ahead.
spk00: Hi, this is Blake Freeman on for Vivek. Thanks for taking my question. Just wanted to focus on kind of the full year guide, specifically Q4, and I know you only guide one quarter out and don't really discuss Q4 specifically, but just taking the full year guide kind of implies pretty steep sequential growth in December. I'm just curious what you're seeing maybe from kind of your customer perspective that's giving you confidence in that strong ramp up just because we've heard across the ecosystem, maybe some continued digestion for a couple quarters, whether it be across industrial and consumer and a variety of other markets. Just any clarity there would be helpful.
spk04: So, first of all, good to hear it again, Blake. You know, the guidance, first of all, we are not providing guidance today for Q4, basically. It's only for Q3 and the full year. But given the fact that we already provided the first half and we gave the third quarter, it's not that complicated to calculate the Q4. I think that the confidence that we have in the Q4 numbers are based on the fact that we know our customer product and based on what they are telling us. But on top of that, it's based on backlog and we see the level of booking that we already have with them. You know, I think that given that fact that we know what they're expecting and what they see in front of the end customers and the fact that we already received the backlog, we see the backlog, this is the reason why we see this correction in terms of the Q3 versus Q4.
spk00: Got it. And then just to kind of follow up, you know, this is kind of more of just a broader question beyond Q3, but if I think about from a gross margin perspective, obviously with audio-video down, you know, the gross margins are kind of coming down into this, you know, below 60% level. Just as we move forward, if you can kind of give a high-level overview of how we should think about the gross margin recovery in the business, that would be great. Okay.
spk04: In a way Q3 is kind of an exception. It's an exception because it's kind of a perfect storm. We just mentioned that we see that audio video reached a button which means that we do not enjoy the gross margin that we usually see in audio video. The fact that we report this lower revenue at the level of about $40 million, we expect to see $40 million in Q3, also means that the impact of the fixed operating expenses in this calculation of gross margin is going to be more dominant. So Q3, in a way, is kind of an exception. It's not a good reference. Going forward, when we go back to the right proportion between audio-video and automotive, I think that it's fair to say at this point in time that we should continue and expand gross margin that will be nose to 60%. Thank you.
spk02: The next question is from Brian Dobson of Sheridan Capital Markets. Please go ahead.
spk05: Hi, good morning. So just a quick follow-up on your commentary. You know, you did a good job laying out the near-term headwinds for the business or for the sector, rather. As you look at industries of your end user, excuse me, as you look at the industries of your various end users, which are impacted the most currently and which are in the best position to recover in 2024?
spk03: Yes, sir. Hi, it's Guido and thank you for the question and nice to hear from you. There are, I will describe it as follows. We are, you know, a strong player in the audio-video world and in the audio-video, we are traditionally working with, I would say, quite high-end chips, quite high-end customers. And with this new chip, the VS6320, we expect, which is a USB extension, USB 3 extension, we expect to go to a broader market, which I would say is a shift from the very large conference room to medium, small and even other room, which are bigger markets and far, far bigger markets and some new players as well. So this is actually one of the growing engines of the AV. Another growing engine is we see more and more demanded interest for what's called industry 4.0, which is an adjacent market to the audio-video. It's an audio-video technology that is used not for conference room, it's used for a different application. And these are some of the growing engines. I would just mention also the education world. Again, it's an audio-video technology, but not going for a regular audio-video conference room or video distribution. It's targeted more to the education market, hybrid education, and these are some of the growing engines from the AEV. I guess the automotive dances are the same. We are looking after the ADAS and autonomous cars and actually another market in the automotive which more and more we see interest in the surround view. um and so actually these are where we see growing engines in the industry but from cash point of view it is the audio video because you know the the automotive uh any design we now the time it takes until you see it's in cash and revenues take take some years thanks very much
spk02: There are no further questions at this time. Mr. Benspe, would you like to make your concluding statement?
spk03: First, I want to thank everyone. I would like to thank you for joining us today for our Q2 2023 call and for your continued support and the interest in Valence Semiconductor and all have a great day. Thank you and goodbye.
spk02: Thank you. This concludes the Valence Semiconductor first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.
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