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 second quarter 2025 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 second quarter 2025 earnings call. With me today are Gideon Bentzvi, Chief Executive Officer, and Guy Nathanson, Chief Financial Officer. Earlier today, we issued a press release that is available on the investor relations section of our website under investor.valence.com. As a reminder, today's earning 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-S, filed with the SEC on February 26, 2025, 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 reconciliation of these metrics within our earnings release. With that, I will now turn the call over to Gideon.

Thank you, Michal. Hello, everyone, and thank you for joining us. We are pleased with our performance in Q2, where we exceeded our guidance and delivered revenues of $17.1 million. This marks the fifth consecutive quarter of growth for our company. Gap gross margin came in at 63.5% in the mid-range of the guidance and adjusted EBITDA loss was $4.0 million above the guidance range. Nevertheless, like many in our industry, we haven't been immune to the impact of global tariffs. These have prompted some customers to lower their forecast for the second half of the year, which we expect will affect our revenue outlook. Therefore, we are updating our full-year 2025 revenue guidance to be in the range of 66 to 71 million dollars. Still, the momentum continues and the new guidance range reflects a 14% to 23% increase compared to 2024, which is in line with the long-term plans we presented. Before we dive into the activities in Q2, I would like to remind you of our go-to-market strategy at Valence, which begins by targeting integration into high-end products. Our chiefs have always been known across industries for offering the best connectivity available, the highest bandwidth, the simplest wiring infrastructure, the most resilient to interferences. For this reason, when we enter a new market, we expect penetration to take time. Companies start with extensive evaluation of the chip, then integrate it into high-end models. After that, months or sometimes even years later, we see the market catching up. What starts out as a high-end only requirement becomes the new normal, and the volumes increase accordingly. We call it expectation inflation. And when this happens, our chips go from being a niche connectivity solutions for premium products to must-haves for flagship product lines. I'm bringing this up now because in Q2, we saw the latest examples of how this strategy bears fruit with our VS3000 chip. So that's where I'm going to begin our quarterly discussion I'll start with our cross-industry business unit, which covers professional audio-video, industrial machine vision, and medical. In the first half of 2025, we experienced growing demands from our customers, mainly in the pro-AV market, and especially for the VS-3000. This chip remains the only solution on the market for the long-range distribution of uncompressed HDMI 2.0 delivering high fidelity audio, Ethernet, USB 2.0, controls, and power over a simple category cable up to 100 meters. What we saw during the course of Q2 was a surge of new product based on this chip going from around 100 at the end of 2024 to more than 150 today. This is a reflection of a market catching up, so to speak. Where customers may have in the past been OK with slow resolution video processing setup or sub-optimal office layouts, expectations installation has guided our customers to solve these issues with the VS-3000 chipset. Here are a few notable examples of customers who have already launched products built on our VS-3000 chip. Matic Leader Crestron based its DM Essential line on this technology. Innogeny has introduced a 3-host switcher for USB and HDMI. Crema Electronics brought to market an all-in-one hybrid presentation matrix and AVPro Edge has released 18 gigabit 4x4 and 8x8 matrix switches. We expect momentum for this chip to continue as we carry forward into the end of 2025 and beyond. We received further recognition of the VS-3000 growing market penetration at Infocom International, where three of our customers won awards for products based on this chipset. Apantac for its innovative dual-sided digital sign-in solution. Rethink AV for a fully uncompressed 4K and USB 3.2 extension solution in a single box, which also uses the VS-6320. and M-Solution for the first of its kind device capable of extending uncompressed 4K video over USB Type-C using DisplayLink Alt mode. It wasn't just our customers. Valen also won awards during the two InfoComm events in Beijing and Orlando. At InfoComm China in April, we were honoured with the Best of Show Editor's Choice Award in the best technology application category for a VS6320 chip. At Infocomm International in June, we were honoured with the best offshore reward of our VA7000 chip, recognised for its innovation, feature-set and industry impact. Our technology was at the heart of our AI-powered 360° immersive experience. With an 8-camera setup along the HD-based TA lines boost perimeter, we enabled real-time gesture recognition and dynamic camera angle control, which could be used in applications such as retail and in-person entertainment. This demonstration was created in collaboration with this re-embedded look sensing technology and enabled by NVIDIA. Staying within the cross-industry business unit, I would like to discuss another industry, machine vision. This is another example of go-to-market strategy. target the market with the premium offering and let the market catch up. Valence A5 offering attracted strong interest across a couple of events, automating Detroit and ISS in Japan. This was thanks to our chipset's robust EMI performance, long reach capabilities, and suitability for compact, high bandwidth camera systems. Our presence helps strengthen relationships with key players, positioning AFI as a leading candidate for next-gen factory automation and inspection systems. In July, we were proud to announce that our VA7000 chipset is enabling the market's first comprehensive camera-to-processor MIPI AFI platform offered by D3 Embedded. The platform brings to market the first product-ready solution for implementing this standard in embedded vision systems offering this risk customer a series of unique benefits. These include unparalleled EMI resilience, longer link distances, and the ability to operate over simple low-cost cabling. The chipset also features built-in advanced diagnostic for continuous link monitoring and preventive maintenance. This directly addresses one of the major challenges in factory flow machine vision. ensuring round-the-clock system reliability as equipment ages and operating conditions evolve. The platform includes some additional components from other leading companies, a processor from NVIDIA, the Jackson Orin XO Nano, and sensors from Sony. In addition, D3 Embedded is offering six A5 DesignCore Discovery Series SKUs. On the significance of this partnership, D3 Embedded CEO's Scott Redon remarked, quote, AFI ability to deliver high speed data over long distance with exceptional electromagnetic compatibility is a game changer for the industry. Investing in this technology was crucial because it addresses the key challenges our customers face. Reliable connectivity in harsh environments and simplified system design, including the industry's first-ever use of unshaded twisted spare channels for multi-gig use cases. By building this platform around MIPI AFI and partnering with Valen Semiconductor, we are giving developers a powerful, flexible toolset to accelerate innovation in embedded vision. In order, we continue to support our customers in bringing solutions to the market based on our VL7000 and DS6S320 chipsets. We expect machine vision to become an increasingly meaningful part of our revenue mix in the coming quarters, with initial revenue anticipated by the end of 2026 and strong growth potential in the years that follow. I would like to close out the discussion of our cross-industry business unit with the update on the notable progress we're making in medical endoscopies. We have the two road tools in Europe and Japan, where we showcase our VA7000 chipsets and their ability to support a new generation of reliable, high-quality endoscopic procedures. While I can't disclose specific names, we have received initial feedback from some of the largest players in the industry. We came away more confident than ever that Valen's value proposition is essential in moving the market forward. As a reminder, this is still a small part of our business, but one with significant long-term potential. Unlocking this potential starts with validation of our offering from the industry's leading players, and in Q2, we began to see that validation taking shape. Now I'd like to turn to the automotive industry. As a reminder, our opportunity in automotive is dominated by the VA7000, the same chipset that drives our offering in the machine vision and medical industries. The V7000 extends an interface CSI2 that is used commonly across a number of industries, offering high bandwidth and best-in-class EMI immunity. It is the first chipset on the market to comply with the MIPI AFI standard for high-speed sensor connectivity. Late last year, we announced redesigns with leading European OEMs for this solution, gaining a strong foothold for the AFI within the OEM community. Building on the momentum, in Q2 we brought the VS7000 and the broader AFI ecosystem to the global stage. At Auto Shanghai, we unveiled a number of demonstrations showing AFI connectivity with products from major industry players. First, we had Qualcomm's Snapdragon Ride 4 evaluation platform with AFI connectivity. Second, we had Chinese T1 supplier Desai SV with an AFI surround view system. Third, we had Horizon Robotics journey platform with AFI. And finally, an ADAS reference design with Sigma Star based on AFI. I'd like to make note of one event that really made waves within the industry, the MIPI Alliance's annual meeting that took place in Warsaw towards the end of June, which brought together 117 representatives from 36 companies from around the world. The keynote address at the opening plenary was given by a senior vice president at Mobileye. I remind you that in Q1, we announced that Mobileye is the Tier 1 involved in our three AFI design wins. In his address, the executive stated that Mobileye anticipates a significant expansion of the AFI ecosystem with active participation from all sensors and camera sensor vendors. In addition, he provides certain feedback about the Valence VN7000 ease of integration highlighting performance, design flexibility, and fast time to market. In that same meeting, a representative of leading automotive OEM shared with the audience why his company chose Valence A5 compliance chipset for their ADAS platforms. His endorsement of our technology was exceptionally strong from highlighting its superior noise immunity to its support for smaller, more cost-effective cameras, and more. He summed it up best when he said, quote, AFI has much better performance than the incumbent solutions. A word about the momentum of MIPI AFI in Asia. Earlier this year, we announced interoperability testing with seven different AFI silicon vendors in China, a testament of the vast market opportunity that exists there for this standardized connectivity solution. In addition, we announced special partnerships with the local company ESWin Computing, which will allow us to streamline our sales into the Asian markets. This kind of localization activity places us in a stronger competitive position as we advertise our chips to the many global OEMs based out of China. As an example, our chipsets are currently undergoing advanced testing by a leading Chinese OEM which wants to use our solution with a low-cost harness for its next-generation ATA system. It's clear that momentum around A5 is building all around the world. We continue to participate in several evaluation processes at various stages with multiple OEMs. Now, before I turn the call to Guy, I want to take a moment to acknowledge the leadership transition we announced in May. I will be stepping down as CEO of Alen Semiconductor by the end of 2025. It's been an honor leading this exceptional team for over five and a half years through major milestones. From listing on the New York Stock Exchange to securing three design wins for the MIPI AFI compliant VA7000 chipset, to expanding into new verticals like machine vision and medical. This planned transition is designed to ensure continuity and preserve momentum moving forward. Needless to say, if additional time is required, I'll extend my stay until a successor is in place. I plan to remain actively involved as a board member and as a shareholder thereafter. With that, guys, please go ahead and discuss our financial performance in more detail.

Thank you, Gideon. I'll start with our second quarter results and then provide our outlook for the third quarter of 2025. We generated quarterly revenue of $17.1 million, which exceeded our guidance of between $16.5 million to $16.8 million. This compares to revenue of $16.8 million in Q1 2025. and $13.6 million in Q2 2024. The cross-industry business or CIB accounted for $12.8 million or approximately 75% of the total revenue, while automotive contributed $4.3 million or approximately 25% of total revenue this quarter. This compares to Q1 2025 revenue of $11.7 million from CIB and $5.1 million from automotive, which represented 70% and 30% of total revenue, respectively. In Q2 2024, revenue from CIB were $8.1 million and $5.5 million were from automotive, representing 60% and 40% of total revenue, respectively. Q2 2025 gross profit was $10.8 million compared to $10.6 million in the first quarter of 2025 and compared to $8.3 million in the second quarter of 2024. Q2 2025 gross margin was 63.5% compared to our guidance of between 63% and 64%. This compares to a Q1 2025 gross margin of 62.9% and 61.4% in Q2 2024. On a segment basis, Q2 2025 gross margin for the CIB was 67.8% and gross margin for automotive was 50.5%. This compares to a Q1 2025 gross margin of 69.1% and 48.4%, respectively, and a Q2 2024 gross margin of 75.4% and 40.9%, respectively. The decrease in the gross margin of the CAB compared to Q2 2024 was due to a change in product mix. The increase in Q2 2025 in automotive gross margin compared to Q1 2025 was due to an optimization of our product cost. Non-GAAP growth margin in Q2 was strong at 67.2%, which compares to 66.7% in Q1 2025 and 64.5% in Q2 2024. Operating expenses in Q2 2025 totaled $18.2 million, compared to $20 million in the end of Q1 2025 and $17.8 million in Q2 2024. The decrease compared to Q1 2025 is mainly due to the change in handout liability. Research and development expenses in Q2 totaled $10.2 million compared to $10.6 million in Q1 2025 and $10 million in Q2 2024. FG&A expenses in Q2 were $8.9 million compared to $9.3 million in Q1 2025 and $7.8 million in Q2 2024. GAAP net loss in Q2 was $7.2 million compared to a net loss of $8.3 million in Q1 2025 and a net loss of $8.9 million in Q2 2024. Adjusted EBITDA in Q2 was a loss of $4 million, better than the guidance range of loss between $4.9 million and $4.4 million. This compares to an adjusted EBITDA loss of $4.3 million in Q1 2025 and an adjusted EBITDA loss of $5.2 million in Q2 2024. Gap loss per share for Q2 was $0.07 compared to a gap loss per share of $0.08 in Q1 2025 and a gap loss per share of $0.08 for Q2 2024. Non-gap loss per share in Q2 2025 was $0.04 compared to a loss per share of $0.03 in Q1 2025 and a loss per share of $0.04 in Q2 2024. The difference between GAAP and non-GAAP loss per share was mainly due to a stock-based compensation, change in earner liability, and depreciation and amortization expenses. Now, turning to our balance sheet. We ended Q2 with cash, cash equivalent, and short-term deposits totaling $102.7 million and no debt. This compares to $112.5 million at the end of Q1 2025 and $130.6 million at the end of Q2 2024. In November 2024, we launched our initial share purchase program of up to $10 million, followed by a second plan in February 2025, increasing our commitment by an additional $15 million. While the first plan was completed during Q1 2025, during Q2 we invested $10.2 million from the second plan, demonstrating our ongoing dedication to returning value to our shareholders. During July 2025, we have completed the share repurchase program under the second plan. Our working capital at the end of Q2 was $106 million, compared to $119.8 million at the end of Q1 2025 and $142.3 million at the end of Q2 2024. Our inventory as of June 30, 2025 was $11.5 million, a slight increase from $10.9 million on March 31, 2025 and down from $14.1 million on June 30, 2024. Now, I would like to provide our guidance for the third quarter of 2025. As Gideon mentioned, the uncertainty surrounding tariffs has led some customers to reduce their forecast. Therefore, we expect Q3 revenue to be in the range of $15.1 to $15.6 million. For 2025, we expect revenues to be in the range of $66 million to $71 million. We expect gross margin for Q3 to be in the range of 58% to 60%. And we expect adjusted EBITDA loss in Q3 to be in the range of $7.4 to $6.8 million loss. Although we have adjusted our full year guidance due to the unpredictable impact of tariffs, our confidence in the company's long-term strategy and market opportunity remains unchanged. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.

Thank you, Guy. We believe that Valen Semiconductor is well-positioned to return to growth across our target markets, supported by our industry-leading technology and robust balance sheets. Our focus remains in executing our long-term strategy to drive sustainable growth and profitability. I would also like to extend a heartfelt thank you to our employees who are true to the spirit of Valence, and much like our technology, demonstrate remarkable resilience and determination. With that, I'll now open the call to answer 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 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 Quinn Bolton of Needham & Company. Please go ahead.

Hey, this is Neil Young. I'm for Quinn Bolton. Thanks for taking my questions. So you mentioned that the downward revision to both the 3Q and full-year revenue guide is primarily tied to tariffs. Could you help us understand how that pressure is distributed across the two segments? Specifically, is one segment, CIB or automotive, seeing a more pronounced impact in 3Q? Thanks.

Thank you. Thank you for the question. And I'll be pleased to answer. We are selling semiconductor to electronic and automotive industries. They are the ones who are and infected by tariffs because their products are produced in countries which are tariffs exposed and this is the reason we are exposed it's not that our chips are under tariffs it's our customers who integrate our chips are those who are under tariffs and this is valid both for automotive and for audio video okay great thanks so in

First quarter and second quarter, you talked about the optimization of product costs within automotive. Do you foresee that repeating in 3Q and boosting auto gross margin? I guess, if possible, could you just discuss what you expect from gross margin across the two segments in 3Q and maybe throughout the rest of the year? Thanks.

So we provided the guidance for the third quarter on the gross margin, and we typically do not provide allocation between the different segments.

for Q3 in terms of the gross margin. Quinn, are you done?

I am, thank you.

Okay, thank you. The next question is from Rick Schaefer of Oppenheimer. Please go ahead.

Hi, this is a way mark on the line. Thanks for taking the question. Um, with the three Q outlook and a revised full year guidance floor to 66 million to 71 million, it looks like three Q should be the bottom. And with some of the tariff policies starting to take shape, are you seeing any improvements in orders and bookings compared to 30 days ago? Um, which business do you see that rebound, um, accelerate in four Q?

I'm sorry, can you please repeat? I'm not sure I did understand the question.

Yeah, sure. Yeah, so you provided the 3Q outlook. It looks like it's going to be declining around 10% for 3Q, but then with the full-year guidance, it looks like it's going to be recovering 25% in 4Q. So which business do you see that accelerating in 4Q?

So again, we do not provide a location between the different segments, not in terms of revenue as well as other parameters. We provide the numbers for the overall company. I would say that in both segments, we see kind of a temporary weakness for the third quarter and kind of a better visibility for the fourth quarter and altogether for the year.

we we reduced the guidance as already indicated okay great that's all for me thanks the next question is from suji de silva of ross capital please go ahead yeah hi um gideon hi uh guy any uh color on the auto 3oem design wins what the next milestones are that we should be watching for

Hi Suji, thank you for your question. Yeah, I can provide some information and yet I can't tell the names, but I can say it's very prestigious companies and it creates a positive noise in the industry that such respective companies selected us purely on quality and our capability to do more than others and the uniqueness of our solution. And we hope that we know, not we hope, we know that we will generate more attention, and we do, with other OEMs. Of course, we cannot disclose anything which is in the process only after we have something formally, but we're working with it and leveraging the success of these three OEMs. Okay.

All right. Thanks, Gideon. Thanks, guys.

The next question is from Robert Lynch of StoneGate. Please go ahead.

Hi, Guy. Hi, Gideon. Good morning. Thank you for taking my questions. I'm on for Dave's story today. I just wanted to ask a question around customer acquisition in industrial machine vision. There appear to be some strong tailwinds in machine vision following the D3 platform. Could you speak to the customer acquisition trends within that segment and how the pipeline is shaping up moving forward?

Yeah. Thanks for the question, and I will answer as follows. First, the machine vision is we have a very good product market fit. It is both AI, it's both cameras that need to be remoted with very low error rate, with very high bandwidth and with no compression. So it's exactly what we know to provide and very unique. This market is a market that is growing and we are speaking with the leading customers in this industry and already have design wins. and we'll hopefully have a lot more design wins to discuss in the future and it's mainly with our VA7000 and also a lot of interest with the VS6320. The machine vision looks as very natural progress and very natural development of our products, both from automotive and audio video, that find their way to this industry. And this is the source of where we see the demand.

Right. I really appreciate the color there. guess moving forward and one more left um what what momentum are you seeing um across uh and markets like logistics um and pro av are you are you seeing any acceleration and customer activity across those verticals or anything else uh there yeah thanks again for this question and the answer divided to two in the um regular market the regional market we have we see a a recovery it's not very fast recovery but there is recovery definitely the tariff

made it less facet that it could, but there is recovery in the traditional audio-video market. And there is a new developing market, which is the conference rooms, where we have, again, a very good product market fit for the future conference room. Conference room is a growing market. You can see the cameras in a lot more rooms that are complementary. The whole video experience, the whole video conferencing experience, and this is market which we're growing into in this audio video. And I would call it a derivative of the segment. I think this is the best definition of the growth. So we have the recovery of the traditional and this additional new segment as well.

Great. Thank you very much for the color there. I'll hop back in the queue. Really appreciate it, and congratulations on Q2. Thank you.

The next question is from Quinn Bolton of Needham & Company. Please go ahead.

Hey, you guys. Thanks for taking my question. I just wanted to ask, you know, obviously tariff uncertainty has caused customers to reduce near-term forecasts, but have you seen any change in their product development plans, you know, anything that might affect your longer-term opportunity in the machine vision market?

Thanks again for the question. We don't see particular change in what the companies are looking to develop. Even the opposite, we see that they're very stick to the plans and the development of the market, the same development. Maybe the speed changes, maybe the tariffs have some influence, but the companies are Looking ahead, I believe with the same focus and the same product roadmap and going to the same customers of their customers.

Great, thank you for that. And then in the prepared script, Gideon, you mentioned the Snapdragon Write platform, and I wasn't sure, could you just expand on what you're doing with that platform? Are you part of that reference design? Was it just a demo to show interoperability? Any other information you could provide would be helpful. Thank you.

Yeah, we show, and it's very important for us to show, not only that our chips have an advantage, we show how simple it is for the customers to integrate. And some of the advantages for Valence is that integrating the VA7000 to both to customers is very fast and creates stability also very fast. So this is the reason we are making ourselves compatible to chips like the Qualcomm and the Nvidia and others in the industry. And yes, It works well and it shows interoperability very fast.

Got it. Okay. Thank you.

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

Yes, thank you. I would like to thank you all for joining us today for our second Quota 2025 Earning Call and for your continued support and interest in Valence Semiconductor. And we hope to meet you again in our next Earning Call. Thank you and goodbye.

Thank you. This concludes the Valence Semiconductor Results Conference Call. Thank you for your participation. You may go ahead and disconnect.