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 third quarter 2023 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 third quarter 2023 earnings call. With me today are Gideon Bensley, Chief Executive Officer, and Yair Rosenberg-Heine, Interim 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 1, 2023 and 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. I invite you to read our recent ESG report, issued in September, to learn how Valence Semiconductor constantly strives for excellence and innovates daily to ensure our products and solutions meet the highest standards of our customers and provide society the connectivity it requires in an ever-evolving environment. In the coming weeks, we will attend the Roth MKM Technology Conference in New York, the UBS Global Technology Conference in Phoenix, and the Goldman Sachs Global Automotive Conference in London. 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 Guido.

Thanks, Daphna, and thank you all for joining our Q3 2023 call. I'm joined today by Yael Rosenberg-Heine, our Interim CFO. Yael joined Valence Semiconductor over 10 years ago and has been managing our finance department since. Previously, she worked at two semiconductor companies, Broadcom and Provigent. With Yael's finance and industry knowledge, we are fortunate to have her step into the role of interim CFO. Today, I'll begin with a review of the markets we operate in, our quarterly performance, and longer-term vision. Since the last call, our world has changed dramatically with the brutal attack by Hamas terrorists at the break of dawn of October 7th. In the face of deep sorrow and tragedy, we stand strongly united with our fellow citizens and soldiers as they defend our country. In Israel, we have developed a culture of flexibility and strength as a nation, as individuals, and as a company. Given our country's history and the global pandemic, our team in Israel and abroad is experienced in working seamlessly and efficiently under unusual conditions. Valen Semiconductor works in a fabulous business model, and their manufacturing is outsourced to third-party manufacturers in Asia and Europe. Zooming out. The semiconductor industry is still working through a cycle of global uncertainty due to the macro environment of high interest rates, ongoing inflation, and inventory adjustments that are causing customers to remain relatively cautious. Valen Semiconductor Q3 revenues came in at the high end of our guidance at $14.2 million, reflecting the impact of our customers' inventory digestion in line with global trends. In Q3, we were successful in achieving gross margin and adjusted EBITDA above our guidance. Looking ahead, we're confident that the long-term opportunity of Valen Semiconductor's long-reach connectivity solutions is very strong in both our existing and new targeted markets. I will elaborate more in my prepared remarks. I will start with our audio-video business. Our audio-video connectivity solutions are at the forefront of the industry and are deployed where long-reach, high-performance video systems are required. The applications for our solutions cover many industries such as corporate, medical, education, industrial and transportation. Our latest exciting news is the launch of the VS6320 chipset for long reach high performance extension of USB 3.2 peripherals at up to 100 meters or 328 feet. We began shipping engineering samples to select customers during Q4 and some have begun embedding our unique low power single chip USB 3.2 extension into their products for video conferencing, IT, industrial and medical applications. As such, we expect to start ramping revenues from this new chipset during the second half of 2024. We expect to capture a substantial share also in this new untapped market for this high-performance USB extension. The traditional audio-video market is also constantly evolving, presenting new opportunities. For example, More and more corporations are implementing return to office policies. To promote office presence and ensure effective interaction that bridges the physical and virtual divide, corporations will need to invest in their video conferencing platforms. Another projected growth area is multi-camera video conferencing. As modern video conferencing applications increasingly require a unified meeting room experienced with a flexible, efficient and high-performance connectivity solution. Our offerings are increasingly relevant for all types of meeting rooms from large corporate boardrooms to small huddle rooms and small office home office setups known as SOHO. We are well positioned to continue to advance our company's vision to drive the transformation of people's digital experiences in our targeted markets. Turning to automotive, we are excited about the huge opportunity this growing multi-billion market presents. Our technology is designed to provide seamless connectivity for the increasing number of sensors and infotainment systems in today's and future cars. This is an unstoppable trend. Supported by content uplift, as regulatory and safety requirements are increasingly adopted, primarily for advanced driver assistance systems known as ADAS and other safety-related solutions. Over the past quarter, our VA6000 symmetric chip continued to contribute to our automotive revenues in infotainment and telematic systems in Mercedes-Benz cars, including in EV models. Now, for an update on our VA7000, our MIPI A5 non-symmetric automotive chipset family for safety applications. We continue to gain traction in the third quarter that will set us up for eventual mass production of the VA7000 chipset family. In August, we shared that LG Electronics Vehicle Component Solutions selected our VA7000 for its Active Safety Next Generation Camera System project. They were especially intrigued by the VA7000 feature set and excellent electromagnetic compatibility, known as EMC, after having examined different connectivity solutions on the market. The automotive industry continues to evolve towards sensor fusion, which leverages a combination of different sensors, cameras, LIDARs, and radar to deliver data and functionality required by safety applications. This is coupled with continuous effort to transition to software-defined vehicles which rely more and more on software. At AutoSense Brussels in September, together with our partner smart radar solution SRS, we showcase how our VA7000 chipsets are transforming high-speed sensor connectivity for ADAS applications. Embedding our VA7000 into the SRS centralized processing radar optimizes central radar processing and sensor fusion in a more efficient and accurate way than what conventional processing can deliver. We are also making progress on the various bids we are participating in for the VA7000. While we continue to move forward, the decision process may take longer than originally anticipated and design mini awards could be extended into 2024. Once customers choose to embed our chipset into cars, we expect to have a long-term revenue opportunity and efficiencies of scale that in turn are expected to generate a large and recurring revenue stream. To close out my opening remarks, at Valen Semiconductor, we keep the focus on managing those elements within our control as we aim to reach our revenue and profitability goals. We are developing relationships with long-term partners that see the value in our differentiated high-performance connectivity solutions. Our customers need to stay ahead of the technology curve and we are ready to meet their needs with our innovative solutions as we continue to develop the right products that set industry standards in our targeted markets. I will now turn it over to Yael to review our Q3 2023 financial results and provide our financial outlook.

Thank you, Guido. Hello all, I'm pleased to present our financial performance and outlook. Let's jump right in, starting with our quarterly results. Q3 2023 revenues reached the top end of our guidance, and we exceeded both our gross margin and adjusted EBITDA guidance. Third quarter 2023 revenues were $14.2 million, compared to revenues of $23.1 million in Q3 2022. reflecting inventory digestion patterns. Q3 2023 gross profit was $8.3 million and gross margin reached 58.9% compared to $16.1 million or gross margin of 69.7% in Q3 2022. Non-GAAP gross margin reached 61.1% compared to 70.5% in Q3 2022. The difference in year-over-year gross margins was mainly due to a higher mix of automotive revenue compared to our audio-video business, which generates a much higher gross margin. Operating expenses in Q3 2023 totaled $21.3 million, similar to the same quarter last year. Research and development totaled $13.4 million, compared to $12.7 million in Q3 2022. Third quarter R&D included an investment of approximately $3 million in certain IP purchases. It was offset by lower payroll expenses related mostly to streamlining our development platforms and to a positive impact associated with exchange rates. SG&A expenses were $7.9 million down from $8.6 million in Q3 2022. This was mainly due to a $0.6 million reduction in DNO insurance premiums and lower payroll-related expenses. Moving on to net loss and adjusted EBITDA. Q3 2023 GAAP net loss was $12.5 million compared to the $5.3 million net loss recorded in Q3 2022. Adjusted EBITDA loss in Q3 2023 was better than guided, coming in at $8.8 million, compared to the $1.7 million loss in Q3 2022. The better than guided adjusted EBITDA loss in Q3 2023 was mostly due to lower operating expenses associated with a strong US dollar. Get loss per share for Q3 2023 was 12 cents compared to a loss of 5 cents in Q3 2022. Non-get loss per share was 8 cents in Q3 2023 compared with a loss per share of 2 cents in Q3 last year. Turning to the balance sheet. Maintaining a strong balance sheet allows us to execute our strategy, fund our future growth, and drive profitability. Cash, cash equivalents, and short-term deposits totaled $142.7 million at the end of September 2023, up $4.7 million from $138 million at the end of June. We do not have any outstanding debts. In Q3 2023, we generated $6.1 million from operating activities compared to $3.6 million used in Q3 2022. Our working capital as we ended the quarter was $152.6 million compared to $160.8 million at the end of Q2 2023. This difference of $8.2 million is mainly related to the Q3 2023 adjusted EBITDA, which was offset by $0.3 million gained from stock option exercises. As of the end of September, our inventory balance was $16.9 million, down from $19 million at the end of June 2023. We expect inventory levels to be slightly lower at the end of Q4 2023. Now let's move to our outlook. We are introducing guidance for Q4 and updating our full year 2023 guidance. For Q4 2023, we are introducing revenues in the range of $21.6 million to $22 million. We expect Q4 gross margins to be in the range of 61.6% to 62.7%. Our most recent adjusted EBITDA guidance was to reach breakeven by the end of 2023. We now expect adjusted EBITDA in Q4 to range between breakeven to a profit of $0.6 million. We ended the quarter with 102.6 million shares outstanding, excluding the approximately 1 million shares that are subject to four features. For the full year 2023, we are reaffirming revenues in the range of $83.8 to $84.2 million, of which automotive revenues are expected to reach about 30%. We are increasing the full year 2023 gross margins guidance to a range of 62.5% to 62.8%. Finally, we are also substantially improving our adjusted EBITDA guidance for the full year and it is now expected to be a loss in the range of $12.5 to $11.9 million. To conclude my comments, Q4 is expected to be substantially stronger than Q3, supported by audio-video orders that were pushed into the fourth quarter of the year. As the industry is walking through a longer than typical cycle, with inventories above normalized levels, we are expecting some softness in our revenues during the first half of 2024. While we typically provide guidance only one quarter out, the current booking pace suggests that Q1 2024 revenues will be in the range of $11 million to $13 million. Having said that, we plan to provide 2024-related guidance on our next quarterly results call. Looking ahead, we are confident Valen Semiconductor has considerable opportunity ahead. Once the industry recovers, we will be ready to continue executing our growth plan with an even broader portfolio. Our extended portfolio is designed to penetrate the untapped markets and verticals that Guido discussed earlier. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.

Thank you, Yael. At Valen Semiconductor, we remain focused on what's in our control. That means continuing to develop and deliver cutting-edge high-performance connectivity solutions, carefully managing our expenses, and maintaining a strong balance sheet that supports our ability to execute our long-term growth and profitability plans to pursue promising opportunities that will deliver value for all our stakeholders. I am confident that once our industry stabilizes, Valen Semiconductor has the ingredients to grow its business and capture additional market share with our new innovative leading long-range connectivity solutions. We continue to focus on winning additional awards in the automotive market, where we see a significant market opportunity that has a long runway. In the audio-video market, we believe our investments in new offerings will deliver meaningful results as we expand in both our traditional markets and into new emerging verticals and segments. On a personal note, I'm grateful to all of our dedicated employees and I'm extremely proud as everyone is involved in supporting our country in some way. Many employees and their families are donating their time and personal resources to aid their fellow citizens in a time of great need. While some of our colleagues are answering the call for reserve duty, we draw strength from their resilient, unbreakable spirit as they are determined to safeguard our country and people. These are the fundamentals that are part of our DNA, and they are embedded in the fabric of Valence Semiconductor. With that, I will now open the call for our questions. Operator.

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.

Hi, this is William Ock on the line for Rick. Congrats on the results. Firstly, thoughts and prayers go out to our friends at Valens and those affected by the events on October 7th. My first question is on inventory and channel inventory. It looks like inventory dollars are $17 million. And you talk about lowering this in Q4. So how do you feel about these levels now when you expect them to normalize? and what is your visibility on channel inventory?

Hi, Wei, and thank you for joining the call. As you know, there is a lot of uncertainty currently in the market. We are hearing this from all over the sector, the industry, and we are working very closely with our customers to understand their inventory levels. Like any other, our customers are very cautious in measuring their steps. Yet, when the industry recovers, we are fully prepared to serve the needs.

Great. Thank you. My second question is on the VA-7000. It looks like the timelines have been pushed out for a design win, and these things are understandably hard to predict. But I was wondering if you can dive a little bit more in terms of some of the reasons for the push out. Is this more of a more rigorous testing, or was there anything that set this back?

Thank you for the question. And actually, the answer has two parts. One part is our confidence in the technology. As the time moves, we get more and more excitement about the solution that the VA7000 brings. At the same time, the timing in this industry, certainly at this time, is more tricky, and this is why it's pushed up. It's pushed out, and it's not that it is pushed away. It is pushed out, and we predict it will come, and we hope that it will not take long before we can announce something.

Great. And maybe if I could squeeze one last one in, you know, it looks like adjusted EBITDA numbers looks pretty good. You guys are even raising the year-end targets. Can you talk about some of the main drivers that allow you to raise this target and possibly be profitable by the end of the year? Thanks.

On you speak about 2023? About this quarter?

Yes, yes, on the adjusted EBITDA target. It looks like it was expected to be between break-even and a profit of

We now estimate that Q4 revenues, actually we have quite visibility on Q4 revenues and this is why we have this confidence. Obviously there is softness in the market, but in Q4 we have the visibility and the confidence. Of course nothing is 100% sure, but we have the confidence that we will make the numbers and this is why we raise the number. Great, thank you. That's what you meant? I'm sorry, that's what you asked?

Yes, yes, that's what I asked. Thank you. Thank you.

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

Thanks very much for taking my question. Certainly, our thoughts are with you all during this challenging period for Israel. In terms of customer inventory backlogs, are those beginning to normalize? How do you characterize broader demand trends heading into 2024?

Hi, Brian, and thank you for your kind words. As I said before, answering Ray's question, there is a lot of uncertainty currently in the market. I assume you see this all over the ecosystem we are working in. We are in constant communication with our customers and we can't really predict at this stage the exact trend, but as I said before, we are managing the supply chain very closely and once the industry recovers, we are fully prepared to to deliver.

Great. Thanks very much. And then just as a follow-up on automotive design contracts, I believe you mentioned that those could begin to be awarded next year. Do you have any more clarity on potential timing? Is that a back half of the year event or front half of the year event?

It's not something we can predict. It's very important to say several things here. It's a long runway. Once we have a design win, of course, the products are embedded in the cars themselves after at least two years, but then the stickiness and the longevity of the relationship is very long. That's the nature of the automotive industry. This is why companies are working so hard to get in. and this is why we're so confident and believe we're doing the right thing than being so eager and so keen to create this design win. We see our advantages, we understand that we need patience here and we understand that the reward in question of quantity, timing, longevity of the relationship awards us for this effort, and this is why we stick so long.

Excellent.

Thank you very much.

The next question is from Suji De Silva of Roth Capital. Please go ahead.

Hello, Katie and Julio, and I echo my hopes for safety for you and your families there. The LG partnership you have for the VA7000, does that target just the radar, or can it be applied to a broader set of L2 plus or ADAS applications?

The lens technology and the VA7000 technology can support any delivery from any source to the ECU. If it's radar, LiDAR, or a camera, we will capture the image and the video and pull it back. In this particular case, actually, I'm not sure we are able to give the exact what the project is above what we announced, but it's important to understand that this is one of the beauties of our technology that it can take any image and send it back. And we're... We don't need it to be a particular source.

Okay, that's very helpful, Gideon. And then on the AV business, I'm sorry, go ahead.

Sorry, in this particular, it was for safety mirror cameras, but it could be other sources as well. And, of course, everyone who works with us have in mind that this is a first project and can lead to other projects as well. And this is part of what we offer.

Good. And then my other question is on the AV business, the newer VS6320 handling the USB 3.2 protocol. I'm wondering what kind of incremental applications and or addressable market that may bring to you above and beyond what you already serve in the AV market.

Okay. Thank you for this question. I apologize in advance. Now I'm going to have a longer answer, not as usual. Not a problem. And 6320, we believe in Valence, is a very big thing. we see the 6320 not only give us the ability to go in the same vertical to more segments, not all the way down to the consumer, but lower than the lucrative market, which we're usually active, and also give us verticals which we're less active or active only in very small quantities, such as industry and others. The VS6320 is one of the most sophisticated chips Valence ever did. And we feel that it has a very high technological barrier, which leaves us there for many years as a unique solution. And second, a very, very blunt need. And many of the reason that such a technology does not exist is not because of the need, it's because it is so hard to make one. And this is why we have so much confidence and believe that this is a chip that we trust a lot. I hope I answered that. what you asked for?

Yes, you did. Thank you.

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. This concludes the Q&A session. This concludes the Valence Semiconductor Third Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.