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 2024 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 Michal Ben-Ari, Investor Relations, for Valence Semiconductor. Please go ahead.

Thank you, and welcome everyone to Valence Semiconductor's third quarter 2024 earnings call. With me today are Gideon Bentsby, Chief Executive Officer, and Guy Nathanson, Chief Financial Officer. Earlier today, we issued a press release that is available on the investor relations sections of our website under investor.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-X filed with the SEC on February 28, 2024 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 earning release. With that, I will now turn the call over to Gideon.

Thank you, Michal. Hello, everyone, and thank you for joining Valens Semiconductor's third quarter 2024 earning call. We are pleased to report solid results and strong execution in the third quarter. We are proud to be an industry leader in audio-video and automotive markets. Demand for our high-performance connectivity solutions grew as customers adopted our technology to create cutting-edge products. With this momentum, we exceeded the top end of our revenue guidance. We advanced our long-term growth strategy with some key accomplishments. These included three new automotive design wins with leading European OEMs and a successful entry into the industrial machine vision markets. We push the boundaries of connectivity. Our advanced chipsets empower customers to bring disruptive products to both established and emerging markets. We are very encouraged to see an enthusiastic customer response and rapid adoption of our VIS-S6320 chipset in audio-video applications. Inventory digestion continues to impact our industry. However, we believe we are emerging from the bottom of the cycle. As such, we are seeing increasing interest in our solutions that will be embedded into products and expected to hit the market in the next few years. We are proactively introducing our new chipsets to existing and new customers where there is strong interest in audio-video, industrial and machine vision verticals. We expect more design wins over the near and mid-term. Moving on to a quick overview of our third quarter financial performance. We reported revenues of $16 million, which exceeded the top end of our guidance. We are pleased that Acroname, the recent acquisitions we made in May 2024, contributed $1.6 million of revenue. This was also above the guidance we provided last quarter. Gas gross margin for the third quarter came in at 56.4% and adjusted EBITDA loss was $5.1 million, both beating our guided ranges. Importantly, we have a very strong balance sheet with $133.1 million of cash-on-cash equivalents We're well positioned to continue investing in innovation and exploring strategic M&A that will support long-term growth. Now, I'll discuss the trends and opportunities we see in our markets. Starting with professional audio-video, which includes applications such as entertainment, video conferencing, education, and digital signage. Since its introduction late last year, the VS-6320 has attracted over 50 customers that are developing and launching products for audio-video applications. This is an extremely high adoption rate and is expected to contribute to a record number of customers' products that should be launched in the next 9 to 12 months. This validates the chipset's groundbreaking technology and reflects the market need for reliable, streamlined, and affordable connectivity. We expect initial sales before the end of the year with further ramp up towards the end of 2025. One exciting new video conferencing product, the Logitech Xtend, is based on our HD-based technology. Xtend allows meeting rooms users to connect using a single USB-C cable and launch a meeting from a laptop or a mobile device utilizing the room's peripherals. We expect it's high performing easy-to-use extension solutions to fuel demand for advanced meeting room solutions. Moving on to the machine vision and industrial verticals. Based on market research, the broader machine vision market is expected to reach $7.8 billion by 2029. Factory and warehouse automation combined with more demanding inspection regulations will drive this growth. We anticipate that the time for the segment in which we compete can reach $460 million by 2029 and believe we are well positioned to capture a significant market share. Last month, we showcased our innovative solutions for the industrial machine vision market at the Vision Trade Show in Stuttgart, Germany. Vision is the leading international trade fair for machine vision. The show attracts thousands of visitors from a wide range of industries. I am pleased to report that Valence received outstanding feedback from prospective customers for two of our latest products, our VA7000-CSI2 extension solution as well as the VS6320-USB3 extension solution. Both chipset enhance commonly used interfaces in the industrial market and eliminate the constraints of choosing between expensive long cable connectivity or compromising on short cables with no flexibility to modify the length. Our solution enables the capability and flexibility that machine vision for industrial installation is eager for. We also announced the release of our USB3 industrial-grade extender product. Based on the VS6320 chipset, this product allows vendors to extend their existing portfolio of USB3 cameras. This is done without any product redesign, providing a ready-to-use solution and significantly decreasing time to market. Currently, we are engaged with leading camera module manufacturers in industrial machine vision. These OEMs include Teledyne E2V, a global innovator of imaging solutions, Framos, an embedded vision system leader, and Leopold Imaging, a machine vision camera supplier, among others. We're also excited about Acroname's potential to expand our position in the industrial market. We are very pleased with our progress in the audio-video sector. We are confident about our growth potential and are acting to leverage significant opportunities across verticals with focus on industrial machine vision. To this end, Valence is conducting strategic organizational changes with the audio-video business unit. Audio-video business is transitioning to cross-industry business encompassing verticals including audio-video, industrial, machine vision, and medical. To facilitate our growth strategy, the cross-industry business unit will also include a transition in leadership. We are confident that these changes will enable us to achieve our goals in these new high-growth markets. As part of this change, and after over a decade, Gabi Schricke, will be stepping down as head of audio-video business. Gaby has been instrumental in establishing and growing the audio-video business from the ground up and has played a pivotal role in positioning Valence as the unrivaled leader in professional audio-video connectivity. On behalf of the Valence team, I would like to thank Gaby for his outstanding dedication and vast contributions to the company. The new head of cross-industry business whose name will be disclosed at a later date, will join Valence starting February 16, 2025. Gabi will remain at Valence for a period of time to facilitate a smooth transition. Next, I'll talk about automotive. We are thrilled to have achieved three design wins with leading European OEMs this quarter. The OEMs are expected to begin integrating our VA7000 chipsets into certain vehicle models starting in 2026 with further acceleration in 2027 and 2028. Automotive OEMs take a measured approach when introducing new safety-critical ADAS features. They often integrate them into limited vehicle models first before deploying across broader vehicle lineups. We believe These wins show that our superior technology is advancing the MIPI AFI global standard for high-performance connectivity. Importantly, we believe they position us for future design wins with other OEMs looking to adopt this standard. Furthermore, we believe these design wins should strengthen our partnership with leading Tier 1 suppliers who have more evidence of our superior technology. We remain confident that additional Tier 1 will promote our solution as the preferred connectivity standard for the other OEM customers. Since the announcement, we were received many questions as to why we can't disclose the names of the OEMs. It is common practice in the automotive industry for OEMs to avoid revealing the technology inside their cars, at least until the start of production. This is also true for tier two suppliers like us, who need to protect the OEM customers' development of new technologies, which is an important competitive advantage to them. Our goal over the next 12 to 24 months is to support the recent design wins and to receive new wins. We currently have several evaluation processes with multiple OEMs in various stages. I would like to take this opportunity to thank Gidon Kedem head of our automotive business for his instrumental role in securing these three pivotal design wins. As he prepares to retire at the end of 2024, we would like to recognize his dedication and success in positioning Valence as a key player in automotive connectivity. Gideon Hedem's tenure at Valence has been marked by exceptional leadership, dedication, and an unwavering focus on advancing our automotive business. I would like to thank Gideon Kedem for waiting with his personal retirement plans until achieving his goal of securing new design wings for Valence. After laying the foundation for future success, he is now ready to pass on the leadership of the automotive business. Effective January 1st, 2025, Adar Segel will assume the role as head of automotive business. Adar joins Valence with over 20 years of expertise in technology-driven sales, complex deal structures, and partnerships across multiple high-tech industries. We are confident in his ability to drive our automotive strategic growth. Gidon Kedem will remain at Valence for a period of time to facilitate a smooth transition. Turning to our first-generation automotive chipset, the VA6000 business with our legacy automotive customer Mercedes-Benz remains on track. In the tracking segment, we're making progress in field trials with StoneRidge. Turning to a brief update on the MIPI AFI standard. We are pleased that AFI is gaining wider adoption beyond OEMs. For example, Continental, a leading global automotive supplier, introduced an 8 megapixel camera that deploys MIPI AFI connectivity, further expanding the AFI ecosystem within the automotive industry. Also, companies in test and measurement systems are using Valence chipsets in their connectivity solutions. Recently, the MIPI Alliance highlighted the large and rapidly growing ecosystem supporting AFI technology. Currently, 32 companies are developing products based on the standard according to public announcements. We're excited to see meaningful progress in our automotive business. This is a vast long-term opportunity with an expected sum of $4.5 billion per year by 2029. With that, I will turn the call to Guy to discuss our financial performance in more detail.

Thank you, Guido. I'll start with our third quarter 2024 results and then provide our outlook for the fourth quarter and full year of 2024. We achieved quarterly revenue of $16 million, exceeding our guidance of between $14.7 million to $15.4 million, of which Acronym contributed $1.6 million, exceeding our guidance of $1.2 to $1.4 million. This compares to revenues of $13.6 million in the second quarter of 2024, and $14.2 million in the third quarter of 2023. The audio-video segment, including Acronym, contributed $9.4 million, or approximately 60% of total revenue, and Automotive contributed $6.6 million, or approximately 40% of total revenue this quarter. This compares to audio-video revenue of $8.1 million and automotive revenue of $5.5 million, representing 60% and 40% of total revenue, respectively, in the second quarter of 2024, and $9.7 million of audio, video, and automotive revenue of $4.5 million, representing 70% and 30% of total revenue, respectively, in the third quarter of 2023. Third quarter of 2024, gross profit was $9.5 million, million compared to $8.3 million in the second quarter of 2024 and compared to $8.3 million in the third quarter of 2023. Third quarter 2024 gross margin was 56.4% compared to our guidance of range between 52% and 53%. This compared to 61.4% in the second quarter of 2024. and compared to 58.9% in the third quarter of 2023. On a segment basis, our audio-video gross margin was 70.2% and automotive gross margin was 37%, compared to 75.4% and 40.9%, respectively, in the second quarter of 2024, and 75.8% and 21.6% respectively in the third quarter of 2023. The increase in the automotive gross margin compared to the third quarter of 2023 was due to improvement in our chip cost. The decrease in audiovisual gross margin was due to product mix shift and lower fixed cost absorption. Non-GAAP gross margin was 60.7% compared to 64.5% in the second quarter of 2024 and compared to 61.1% in the third quarter of 2023. Operating expenses in the third quarter of 2024 totaled $21.3 million compared to $17.8 million at the end of the second quarter of 2024 and compared to $21.3 million in the third quarter of 2023. Research and development expenses totaled 10.3 million dollars compared to 10 million dollars in the second quarter of 2024 and compared to 13.4 million dollars in the third quarter of 2023. SGN expenses were 10.7 million dollars compared to 7.8 million dollars in the second quarter of 2024 and compared to 7.9 million dollars in the third quarter of 2023. The increase was mainly driven by $2.2 million expenses due to certain batch production incident. The third quarter of 2024 gap net loss was $10.4 million versus a net loss of $8.9 million recorded in the second quarter of 2024 and versus a net loss of $12.5 million recorded in the third quarter of 2023. Adjusted EBITDA in the third quarter of 2024 was a loss of $5.1 million compared to a guidance range of a loss between $6.8 million and $6.3 million. This compared to adjusted EBITDA loss of $5.2 million in the second quarter of 2024 and $8.8 million in the third quarter of 2023. Gap loss per share for the third quarter of 2024 was $0.10 compared to gap loss per share of $0.08 the second quarter of 2024 and compared to 12 cents for the third quarter of 2023. Non-GAAP loss per share in the third quarter of 2024 was 3 cents compared to a loss per share of 4 cents in the second quarter of 2024 and compared to 8 cents in the third quarter of 2023. The main difference between GAAP and non-GAAP loss per share was due to a stock-based compensation, depreciation and amortization, and to a certain batch production incident expenses. We ended the third quarter of 2024 with a strong balance sheet, with cash, cash equivalent, and short-term deposits totaling $133.1 million and no debt. This compared to $130.6 million at the end of the second quarter of 2024 and $142 million at the end of 2023. Our working capital at the end of the quarter was $136.1 million compared to $142.3 million at the end of the second quarter of 2024 and $158.8 million at the end of 2023. Our inventory as of September 30, 2024 was $11.7 million, down versus $14.1 million on June 30, 2024 and $13.8 million on December 31, 2023. Now, I would like to provide our guidance for the fourth quarter and full year of 2024. We expect fourth quarter revenue to be in the range of $16 to $16.3 million. We expect gross margin for the fourth quarter to be in the range of 58% to 62%, and we expect adjusted EBITDA loss in the fourth quarter to be in the range of $4.9 to $4 million. For the full year 2024, we expect revenue to be in the range of $57.2 to $57.5 million. Gross margins are expected to be in the range of 58% to 60%. And adjusted EBITDA loss is expected to be in the range of $22.3 to $21.4 million. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.

Thank you, Guy. Valen Semiconductor is a strong position to grow across our target markets with our industry-leading technology and Fortress Balance Sheet. We look forward to executing our long-term strategy and restoring growth and profitability. As a reminder, we are hosting our first ever Investor Day in Midtown New York next week on Tuesday, November 12th at noon. At this event, we will discuss our enhanced strategic plans and long-term financial objectives, our expanded go-to-market strategy focused on high-growth industries and applications. We will also be demonstrating our advanced technology and sharing video testimonials and leading customers and partners. If you're interested in attending, please email Michal at investors at valence.com. Before opening the call for questions, I want to express my gratitude to the entire Valencia team for their ongoing commitment and dedication. With that, I'll now open the call for your 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 one. If you wish to cancel your request, please press star two. If you're 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 Suji Da Silva of Roth Capital. Please go ahead.

Hello, Gideon. Hello, Guy and Gabby and Gideon. Best of luck in the next stages. So, Gideon, the visibility here, or Guy... The visibility here with the inventories being worked down, do you feel you're at a point now where you can ship to demand, to consumption again, starting in 25 or certain pockets of inventory still remain to be worked down?

First, thank you, Sujit. And I want to thank everyone that after such an interesting day, you found the time and hearing us, I guess we cannot compete. the interest that you have in news, and I do appreciate that you still decided to devote your time for this earning call. And the answer is yes, the visibility is improving. And I believe that it's improving because of several reasons. One of them is the sales cycle shrunk. The time to order chips is not as bad as we had in the past during the COVID that the supply chain went up until sometimes to 40 weeks, and it's not the case anymore. On the other hand, we have no interest, so a lot of the purchasers have in consideration that zero interest is over. So there are pros and cons in the change of the money regime of making an order, yet we feel that we have some visibility of recovering the market. We don't give yet the whole forecast for where it is, but we invite everyone to come next week to our, I think, very interesting event.

um uh investor day maybe better competition to the news that the one we can bring today and i i i'll be happy to elaborate more than i hope it answered you so did you like yes it's very helpful we'll look forward to that and then the um the acronym acquisition can you talk about how that integration is going and what the end market initial traction there is and you know more and more significantly the industrial uh machine vision what's the design cycle there how Quick Weekend New Programs, New One and RAMP.

A lot of the sales of acronyms are ad hoc. A lot of them are like someone needs them and they simply go to the internet and make an order. Very, very different than the process that we have. And the main surprise that we have with acronyms is we have no surprises. It looks like Everything that we saw in the due diligence seems to be very transparent. I hope it's both sides. I hope they feel the same with us. I think they are. It looks as promised. They have some cells which are B2B and are more kind of, as you said, in order, but the rest are Simply, they need, the customer makes an order of five or ten or whatever, sometimes of more, and press the button and get it after some days. This is the kind of the acronym sales cycle. So, yeah, it's not typical. It's very different than the semiconductor industry.

Okay, that's helpful. And then switching to auto on the OEM wins, just a clarification here. Are these programs, the three you've discussed, are they EV-only programs, or are these across a platform of EV, hybrid, traditional, combustion, any color that would be helpful?

Well, there is no difference in ADAS in EV and non-EV. And even the electromagnetic influence of EV car, in our case, is also different. So it's a... We are... For us, it doesn't matter. And for you, for instance, in... what we do with Mercedes for many years it goes both for the S and C and E series and the same as the EQ series and it's the same so the EV is not any distinguished for us in the OEM it's the same it's ADAS and ADAS is you know people in gasoline and EV cars they want to be protected in the same way and the OEMs want to protect them the same way

And then the last question, I'll switch on, for Guy, perhaps. The gross margin trend here, what is the expectation going into 25? Is it mix-driven, or are there gross margin tailwinds, any color that would be helpful? Thanks.

Okay. Hi, Suji. Great to meet you again. So we do not provide specific guidance at this point for the gross margin for the future. What I can say that typically our gross margin are impacted by the ratio between the revenue coming from the audio video and the automotive. There is significant difference, say, of the gross margin between these two business units, as well as the level of the revenue due to the fixed costs. So this is the main principle that will be relevant for the future as well.

Okay. Thanks, everybody.

Thank you.

The next question is from Kevin Cassidy of Rosenblatt. Please go ahead.

Yeah, thanks for taking my question. Congratulations on the strong results. During the quarter, did you have any 10% plus customers? And maybe my follow-on question is going to be, with all the new designs in your pipeline, do you see this changing, or are you expecting this to be a broad-based growth, or is there going to be a few customers that will leave the way?

Sorry, can you repeat the question? It was quite rough. If you can repeat the questions, please, for me.

Sure. Did you have any customers that were more than 10% of revenue during the quarter?

Guy will take this one. So, no. The simple answer is no.

Okay. And then my follow-on question is, with your design pipeline that you have, do you see this changing or are there certain customers that would be growing faster or expect this to be a broad-based growth?

Are you referring to the automotive customers or to the audio-video customers?

Both, your total revenue. Is there going to be one customer that leads the way?

Well, definitely no. The difference between the 7A in audio-video and automotive are the difference of climbing on a mountain and climbing on a... reef and it's in automotive every deal is a huge deal takes a long time it's a climb on a cliff and then it's a big cliff And the mountain is step-by-step, another account in another account. So every time we have an OEM, it will influence in the future as a significant percentage, like can be five, seven, whatever percent of the revenues at once. It's not a step-by-step. While in the audio-video and the industrial, the customers are in a magnitude of between whatever, one and five million dollars, so they're never a big percentage as they can be in automotive. It very much belongs to the characteristic of the customer, whether it's automotive or not. But as far as we see in the long term, there are no risk of being a company dependent in a single customer in the coming years. I hope never.

Okay, great. Thank you.

Thank you. Thank you.

If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. The next question is from Dustin Flower of Oppenheimer. Please go ahead.

Hey, guys. This is Dustin. I'm for Rick Shaver. I just have one quick question. On the call, I think you said Stone Ridge is on track. Can you just remind us of the timing and the opportunities, Isaac?

Thank you for the question. And actually, it's an excellent question. You helped me by asking me this question, and I'm thankful. This was a long shot with StoneRidge, and it took a long time to start the pilot and to make the pilot and to generate a forecast and so forth. But we've been patient. And it seems like that the truck industry, you know, it's never be as big as the regular automotive industry, but the truck industry will reward us. And Stone Ridge made a very successful pilot and the customers were very happy with the results and the feature. It's a very important feature for a truck driver. And we believe that although it took time, and we see in automotive world, the word although it takes time is probably an initial of every sentence. but although it took time, it is going to be a fruitful market for us and I'm happy we stick to it and we see results. Furthermore, we have now achieved the 700R, which is suitable for further features specifically for the truck industry and we consider it, and we'll speak about it next week in the investor event, we see the truck industry as a real segment. So please come and hear in a week from us the details that I believe will be, you'll find very interesting.

Thank you.

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

Yes, I would. And I want to thank again all for continued interest in Valence. And we hope you'll be joining our Investor Day in New York next week. And I wish you have a great day. And I guess it's going to be interesting day for all. So all the best and goodbye.

Thank you. This concludes the valence semiconductor results conference call. Thank you for your participation. You may go ahead and disconnect.