Valens Semiconductor Ltd.

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 Semiconductors' third quarter 2025 earnings call. With me today are Gideon Bensvi, 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 investors.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-F, 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'll 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. With that, I will now turn the call over to Gideon.

Thank you, Michal. Hello, everyone, and thank you for joining us. Before we begin with the rundown of our Q3 highlights, I would like to take a moment to acknowledge our leadership transition. As you know, this will be my last earning call. As of tomorrow, Yoram Salinger will assume the role of Chief Executive Officer of Valen Semiconductor. Yoram brings over 25 years of leadership experience in global high-tech companies and a track record of driving growth, innovation, and successful exits. As I step down from the CEO position, I will continue to be a board member of the company. And now, let's discuss the business highlights. We are pleased to report a strong third quarter well above our initial expectations. We delivered revenues of $17.3 million significantly above our guidance range of $15.1 to $15.6 million as customer demand exceeded expectations in the ProAV market, marking the sixth consecutive quarter of growth for our company. Looking ahead to Q4 2025, we expect revenue to be in the range of $18.2 to $18.9 million, setting us up for a seventh straight quarter of growth. For the full year of 2025, we expect revenue to be in the range of $69.4 to $70.1 million. Gap growth margin for Q3 2025 came in at 63%, better than the guidance and adjusted EBITDA loss was $4.3 million above the guidance range. I'll begin our quarterly discussion with a review of our cross-industry business unit, which covers industrial machine vision, medical, and the traditional professional audio-video, where our customers have reported better than expected demands. In ProEV, we are succeeding with our strategy of first targeting high-end products and allowing the rest of the market to follow. Adoption of the VS-3000 chipset continues to grow, underscoring the demand for longer distribution of uncompressed 4K video. The VS-3000 remains the only solution available that delivers HDMI 2.0, high fidelity audio, Ethernet, USB 2.0, control signals, and power over single category cables at distances up to 100 meters. One notable trend in Q3 was the growing adoption of matrix solutions. These are increasingly being used to deliver high-resolution video in command and control centers, museums, and live events. Several market leaders have launched state-of-the-art matrix products powered by the VS-3000, including Extron's DTP3, Crosspoint, Kramer's MTX3, and a PLONAS 4K HDR switcher. We also had exciting news from the field regarding our USB 3 extension solution, the VS6320. A major player that had previously been designing with a competing technology has now engaged us in four new designs based on the VS6320. We expect continued strong interest in this product moving forward. Staying with the cross-industry business unit, let's turn to industrial machine vision. In July, we announced that our VA7000 chipset, the series originally developed for automotive, is powering the market's first end-to-end camera-to-processor MIPI AFI platform from D3 Embedded. This solution provides the industry's first product ready pass to implementing the standard in AI-based embedded vision systems. We are observing strong momentum for MIPI AFI from within the ecosystem where companies are impressed by AFI's superior performance. Next quarter, we're excited to showcase the AFI offering alongside customers and partners at ITE in Yokohama, Japan, an important region for industrial vision systems. We continue to expect industrial 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 conclude this discussion of our cross-industry business unit with an update on the notable progress we are making in medical endoscopies. You have heard us speaking about disposable endoscopies several times. It is time to be explicit. Recently, we announced some exciting news. Three OEMs will launch the first VA7000-based endoscopies on the market, including the first disposable colonoscopy with 4K video resolution. As a reminder, the VA7000 chipset is the first on the market with built-in electrosurgical noise cancellation. To explain how important this innovation is, I would like to cite the international standard governing safety and performance requirements for medical endoscopies. Quote, the short interruption of illumination or image display shall not be considered unacceptable degradation for endoscopy equipment. That is to say, the official standard governing safety in endoscopy procedures allows for video loss. And the reason is simple. Until now, there have not been endoscopies that could flawlessly handle electromagnetic interference while supporting the highest resolution sensors. Valence technology offers a solution for endoscopies vendors that provides seamless video experience. And that's the main reason why we're seeing such strong market fit, both for single-use and reusable medical endoscopies. In the medical world, there are two major trends. reducing the use of invasive surgeries, and shifting toward single-use medical devices. Valen's solution addresses both of these emerging needs by enabling high-resolution video transmission and allowing for surgical procedures to be performed without electromagnetic interference. We will be showcasing the medical offering next week at the Medica trade show taking place in Düsseldorf, Germany, and we anticipate considerable interest driven by the growing momentum this solution is generating across the market. Our goal over the next year is to secure additional design wins and continue supporting existing ones, always with the aim of ramping into mass production starting in 2027 to 2028. This market is representing a long-term growth opportunity. It's known for its high barrier to entry, but stickiness tends to be strong once you're in. Now, I would like to turn to the automotive industry. As a reminder, our opportunity in automotive is dominated by the VA7000, which offers high bandwidth and best-in-class EMI immunity. It is the first chipset on the market to comply with the MIPI-A5 standard for high-speed sensor connectivity. Late last year, we announced three design wins with leading European OEMs for the solution, gaining a strong foothold for AFI within the global OEM community. To drive AFI forward and ensure it is the key connectivity standard in the automotive industry, we collaborate with multiple silicon vendors, validating interoperability as their AFI solutions come to market. The impact was clear in Q3 as another AFI provider announced the standard 4 design wing. This makes AFI the first automotive standard to secure design wings across more than one silicon vendor. Another important milestone for MIPI AFI came from Sony Semiconductor Solutions, which announced the upcoming release of the IMX828 the automotive industry's first image sensor with a built-in MIPI AFI interface. According to Sony, the camera brings a number of benefits to OEMs and T1s, including reduced cost, compact ball size, suppressed heat generation, reduced camera module power consumption, and improved resistance to error due to external noise. Having an integrated product is a pivotal milestone for any standard, And this is why Valence partnered with Sony from the early stages of this product development, ensuring that the camera met the AFI specification and was interoperable with our VA7000 chipset. When Sony markets this chip to its customers and partners, it is highly likely that the Valence VA7000 will be involved on the receive side. AFI also receives another major endorsement by the leading player in the automotive industry. Samsung Electronics. We were proud to announce last quarter that Samsung is supporting the MIPI AFI standard, reflecting strong market interest from global OEMs. In addition, we will fabricate our new generation of AFI solution at Samsung Foundry. Here is what Samsung Corporate VP Foundry Technology Planning stated about AFI. OEMs are demanding a next-generation connectivity solution that can ferry them to higher level of ADAS and autonomous driving, and AFI offers the key technical breakthroughs necessary to achieve this. It's clear that the momentum around AFI is building all around the world. We continue to be engaged in several evaluation processes with multiple OEMs, each at different stages of development. This sustained activity highlights the growing strengths of the MIPI AFI ecosystem and its acceptance as an emerging industry standard. We remain confident in our leadership position in AFI, supported by three design wins with leading European OEMs and a strong partnership with Mobileye. With that, Guy, please go ahead and discuss our financial performance in more detail.

Thank you, Gideon. I'll start with our third quarter results and then provide our outlook for the fourth quarter and full year of 2025. We generated quarterly revenue of $17.3 million, which exceeded our guidance range of $15.1 to $15.6 million. This compares to revenues of $17.1 million in Q2 2025 and $16 million in Q3 2024. The cross industry business, or CIB, accounted for $13.2 million, or approximately 75% of total revenues, while automotive contributed $4.1 million, or approximately 25% of total revenues this quarter. This compares to Q2 2025 revenues of $12.8 million from CIB, and $4.3 million from automotive, which represented 75% and 25% of total revenues, respectively. In Q3 2024, revenues from CIB were $9.4 million and $6.6 million were from automotive, or approximately 60% and 40% of total revenues, respectively. Q3 2025 gross profit was $10.9 million compared to $10.8 million in the second quarter of 2025 and compared to $9 million in the third quarter of 2024. Q3 2025 gross margin was 63% compared to our guidance range of 58% to 60%. This compares to a Q2 2025 gross margin of 63.5% and 56.4% in Q3 2024. On a segment basis, Q3 2025 gross margin for the CAB was 69.1% and gross margin from automotive was 43.2%. This compares to Q2 2025 gross margin of 67.8% and 50.5% respectively, and for Q3 2024, gross margin of 70.3% and 36.8% respectively. The increase in gross margin of the CIB compared to Q2 2025 was due to change in product mix. The decrease in Q3 2025 in automotive gross margin compared to Q2 2025 was due to product versions mix and certain operational expenses related to manufacturing line transition. Non-GAAP gross margin in Q3 was strong at 66.7%, which compares to 67.2% in Q2 2025 and 60.7% in Q3 2024. Operating expenses in Q3 2025 totaled $19 million compared to $18.2 million in Q2 2025 and $21.3 million in Q3 2024. Research and development expenses in Q3 totaled $10.8 million compared to $10.2 million in Q2 2025 and $10.3 million in Q3 2024. FGN expenses in Q3 were $7.4 million compared to $8.9 million in Q2 2025 and $10.7 million in Q3 2024. The decrease compared to Q2 2025 is mainly due to income from certain batch production incident in the amount of $1.5 million recognized for insurance claim payments. Change in annual payability in Q3 was an expense of $0.7 million compared to an income of $0.8 million in Q2 2025 and an expense of $0.3 million in Q3 2024. The change compared to Q2 2025 is mainly due to reassessment of the annual amount to be paid to the acronyms shareholders. GAAP net loss in Q3 2025 was $7.3 million compared to a net loss of $7.2 million in Q2 2025 and a net loss of $10.4 million in Q3 2024. Adjusted EBITDA in Q3 2025 was a loss of $4.3 million, better than the guidance range of a loss between $7.4 million to $6.8 million. compared to an adjusted EBITDA loss of $4 million in Q2 2025 and an adjusted EBITDA loss of $5.1 million in Q3 2024. Gap loss per share for Q3 was $0.07 compared to a gap loss per share of $0.07 for Q2 2025 and a gap loss per share of $0.10 for Q3 2024. Non-gap loss per share in Q3 2025 was $0.04 compared to a loss per share of $0.04 in Q2 2025 and a loss per share of $0.03 in Q3 2024. The difference between gap and non-gap loss per share was mainly due to a stock-based compensation, change in earn-out liability, depreciation and amortization expenses, and certain batch production incident income. Turning to the balance sheet. We ended Q3 2025 with cash, cash equivalent, and short-term deposits totaling $93.5 million and no debt. This compares to $102.7 million at the end of Q2 2025 and $131 million at the end of 2024. During Q3 2025, the company allocated $3.6 million for shares repurchase program. and total of $23.4 million between January 1, 2025 and September 30, 2025. Currently, there is no active share repurchase program. Our working capital at the end of Q3 2025 was $98.9 million, compared to $106 million at the end of Q2 2025 and $133.6 million at the end of Our inventory as of September 30, 2025 was $11 million, a slight decrease from $11.5 million on June 30, 2025, and down from $11.2 million on December 31, 2024. Now, I would like to provide our guidance for the fourth quarter and full year of 2025. We expect Q4 2025 revenues to be in the range of $18.2 million to $18.9 million, meaning seven consecutive quarters of growth in revenues. We expect gross margins for Q4 2025 to be in the range of 58% and 60%, and we expect adjusted EBITDA loss in Q4 2025 to be in the range of $4.6 to $4.2 million loss. For the full year 2025, we expect revenue to be in the range of $69.4 to $70.1 million. The midpoint reflects growth of approximately 20% compared to the annual revenue of 2024. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.

Thank you, Guy. Across each of our target markets, Valen Semiconductor's is well positioned for growth, supported by our cutting-edge technology and robust balance sheets. We remain focused on executing our long-term strategy and advancing on our path towards profitability. On a personal note, I would like to say that it has been a privilege to lead the Valence team over the last five and a half years. I'm confident that in his position as the next CEO of Valence, Euron will accelerate valence growth and strengthen its position as a leader in high-performance connectivity across industries. With that, I will now open the call to answer to 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.

First question is from . Please go ahead.

Hey, it's Neil Young on for Quinn Bolton. Thanks for letting me ask a question. So I wanted to ask about the gross margin across the two businesses, specifically within automotive, which dropped sequentially. So last quarter, you talked about the optimization of product costs within automotive. This quarter, it looks like the sequential drop was due to product versions mix and certain operational expenses related to manufacturing line transitions. I was wondering if you could give a little more detail on what that is You know, is this a one-time event? Should we expect this to carry over into future quarters? And then, you know, maybe for 4Q, just kind of walk us through the puts and takes and gross margin for the guide. You know, it seems like it came in a little bit softer than I would have thought. Thanks.

Sure. Hi, Quinn. So we truly believe that this was like a kind of a one-time event related to the mix of different versions of the product during the quarter and related to a one-time event expenses related to a transition of certain manufacturing line and we believe that in the next quarter that should be improved again okay so it should maybe return to what it was in 2Q with an auto or a smaller step up We still, I'll be a little bit cautious here, and I will try to avoid from providing an exact answer, but it should be, again, it should be improved. It's still early to say what would be the pace of the improvement.

Okay, thanks. That's really helpful. And then the profit industry business revenue came in definitely above what I would have expected. I know earlier in the year or last quarter when you guys were talking about your guide, there were some concerns around the impact of tariffs. You know, was that not as bad as previously feared? Sort of what's driving the strength in CIB or more specifically in pro AV? And, you know, should we expect it to grow at a higher rate sequentially than auto and 4Q? Thanks.

Hi. Thank you, Quentin. Thank you for the question. We see that the tariff influence becomes milder. And this is the reason that companies are less reluctant from making new orders and they know that they can ship what they buy. It's not yet a situation that the market is clear and the atmosphere is clear. It's improving. And as we all read the same press, it's changing daily. But the whole atmosphere around Etarch is far more relaxed, not relaxed to the level before it all started.

Great, thank you.

The next question is from Suji De Silva from Roth Capital.

Hi, Gideon, Guy. Gideon, best of luck in the transition, and Joran, best of luck in the new role. So, team, the ProAV upside in the quarter, can you give some color on where that was coming from and how sustainable that is? Thanks.

Sure. Proiby is a very big part of the CIB. And Proiby is mainly, you know, the matrixes and the conference rooms and projectors. It's all one mix. and it comes from all of them. It doesn't come particularly from one. I might say that one niche which is starting and become bigger is the conference room camera. If there is a sub-segment that might have an entry, it's this one. But other than that, it's the stuff we know for years and the market is getting back to what it used to, and this is the pro-AVA recovery. I don't think I have a lot more color to put other than that, but I believe that this covers where the prohibition is back to.

Okay. All right. Thanks, Gideon. And then my other question is maybe a bigger picture question. Can you talk about the factors that are pacing or gating broader MIPI-AFI adoption, you know, maybe across non-auto and auto, just to understand, you know, what you think is kind of left in 25 and 26 to... to help kind of accelerate that adoption.

MIPI AFI, as I repeatedly say, a company like Valence cannot win in points. We can win in knockouts. MIPI AFI, where it gives the advantages, the advantages are very blunt. This is correct for automotive and for medical and for industrial and where people have serious influence of electromagnetic and when electromagnetic is strong and changes the whole ecosystem this is where we are and this is we part of what the new world the new world has more cameras that have more resolution more bits per pixel more and and they require more bandwidth and this bandwidth makes makes the whole system to be more fragile And when it's more fragile, MIPA is the solution. And that's exactly where we are. And this is the reason for those with, I am not sure I did answer exactly your question. So if it's not, please don't hesitate to elaborate.

No, Gideon, that was the color I was looking for. I mean, there is sort of opportunity. It sounds like bandwidth and higher resolution video is one of the catalysts that's happening secularly in the market. I just understand. Great. All right. Thanks, guys. Thank you.

The next question is from Dave Storms of Storm's Gate. Please go ahead.

Good morning, and thank you for taking my questions. Just wanted to start with the gross profit margin guide in Q4. Year-to-date gross profit margin is tracking around 63%, and you're obviously guiding between 58 to 60. Is this an expectation that the mix is going to change? Is this typical seasonalities? Is this being judicious in the face of the macro environment? Any color here would be great.

Sure. So in the beginning of the quarter, we're trying to estimate the next quarter results based on product mix and the combination of the revenue drivers. And the result is what we've provided as the guidance.

Understood. Appreciate that. And I just wanted to turn to the medical segment. Great to see they had the three product launches. Curious as to what the pacing may be around for further product launches and what the logistics look like for expansion there.

Okay, I believe both of us are not medical doctors, but I tried to get us both to the same point of view of a medical doctor. There are stages when the doctor penetrate with the camera in order to see what is in. And then he started to solder or to burn or to do anything. At this time, all the frames are lost and he's blind. And he uses the memory he had before to see that he does correctly. And the reason for that is because there is no any resistance of electromagnetic. There is no EMC. The EMI is celebrating. The influence is very high. What we do enable that's the continuity of the surgery without loose frames. And this is one of the reasons that it is adopted in the industry. And the other reason is the pressure to move to a single-use endoscopy. This reason is originated by the tendency that, say, minimal invasive surgery responsible for maybe more than 50% of the infections in hospitals. And both the try to move from single-use endoscopy on one hand and to have more resilient system on the other hand. And there is a third reason which I'll mention in a second, drive to look for solutions that have immunity against electromagnetic so the doctor would not have lost frames and the cost will be cheaper and enable single-use endoscopy. The third is a little bit more abstract. I'll try to explain it over the phone. It's the distance between the lens and the sensor. When they are remote, the surgery sees what's inside our body like through a straw. When they are connected, it opens up so we can see larger picture. And this is a third motivation for why to move from traditional endoscopy to this new endoscopy that enables both bigger picture, both cheaper and electromagnetic resilience, so the doctor can do whatever he wants without losing frames.

That's a great call there. Thank you.

I repeat, if you have a question, please press star 1. There are no further questions at this time. Mr. Bentzvi, would you like to make your concluding statement?

Yes, thank you. I would like to thank you all for joining us today for our third quarter of 2025 Earnings Call and for your continued support and interest in Valen Semiconductor. We hope to meet you again in our next Earnings Call. Goodbye.

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