Valens Semiconductor Ltd. (NYSE:VLN) Q2 2022 Results Conference Call August 10, 2022 8:30 AM ET
Company Participants
Daphna Golden – VP, IR
Gideon Ben-Zvi – CEO
Dror Heldenberg – CFO
Conference Call Participants
Suji Desilva – ROTH Capital
Blake Friedman – Bank of America
Operator
Good morning. My name is Yoni, and I will be your conference operator today. At this time, I would like to welcome everyone to Valens Semiconductor’s Second Quarter 2022 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode. Opening remarks by Valens 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 Valens Semiconductor. Please go ahead.
Daphna Golden
Thank you, and welcome everyone to Valens Semiconductor’s second quarter 2022 earnings call. With me today are Gideon Ben-Zvi, Chief Executive Officer; and Dror Heldenberg, Chief Financial Officer.
Earlier today, we issued a press release that is available on the Investor Relations section of our website under investors.valens.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 today with the SEC on March 2, 2022, 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. In the coming weeks, we’ll be in Chicago, Las Vegas and New York for investor conferences and meetings. If you’re interested in meeting with us, please email me at investors@valens.com.
With that, I will now turn the call over to Gideon.
Gideon Ben-Zvi
Thanks, Daphna. And thank you everyone for joining our call. Earlier today, we reported quarterly results that exceeded our guidance. Our Q2 revenues reached a record high as we continued to meet the growing demand from our customers for audio-video automotive solutions. Q2 2022 quarterly revenues were a record of $22.5 million up 28% compared with Q2 2021. We also achieved better than anticipated gross margin and adjusted EBITDA.
Taking into account our better than anticipated first half of the year and visibility into the second half of 2022, we are increasing our full year revenue guidance and substantially improving our adjusted EBITDA guidance for the year. I’m also pleased to share with you that we are now expecting to reach adjusted EBITDA breakeven towards the end of next year 2023. We will discuss this in more detail throughout the call.
Now, I will turn to a review of our two business segments. Starting with audio-video, as organization continue to invest in enhancing and optimizing content distribution, the main trends we are seeing are the tradition to high resolution and growing demand for high bandwidth video connectivity and camera imaging extensions. Corporations worldwide are focused on improving flexible hybrid workspace, as part of the next normal trend, education systems aim to enhance participation and provide the same experience for in classroom and remote students, in both the corporate world and in education devices enabled by our technology, foster equity by allowing all participants in a hybrid environment to participate and collaborate with other from wherever they are.
In healthcare, there is an increased focus on safe and compressed zero latency, high bandwidth, video connectivity and camera imaging extensions. This enables healthcare staff to properly diagnose and ensure patients and healthcare professionals safety. Lastly, command-and-control centers require realtime, uncompressed content delivery to increase public safety and to enhance passenger experience. Valens Semiconductor benefits from these trends as there is growing demands for our solutions.
Our HDBaseT connectivity technology enables better performance through seamless and convers distribution of multiple streams of data and video over a single low-cost start-up category cable simplifying and lowering installation and maintenance costs. Many leading manufacturers in the Audio-Video industry, such as Crestron, EPSON, Extron, LG Electronics, Logitech, NEC, Panasonic, Samsung, Siemens, Sony and other user technology immediates of devices today.
Based on our conversation with customers and prospects, it’s clear that our Audio-Video distribution technology will continue to play an important role in things such as corporate, education, medical government and others. Overall, in Q2, we saw substantial demands from Tier 1 customers across many geographies for the VS3000, the newest member of our Audio-Video product family. Revenues from these products more than doubled from Q1 2022. This is one of the main reasons our revenue is figure our original expectations. In Q2, we announced the latest development in our longstanding collaboration with Crestron, the global leader in workspace and smart home technology.
Crestron has based this suite of more than 24 next generation professional Audio-Video products on the VS3000. These new products bring to the industry a truly uncompressed HDMI 2.0 extending 4K resolution, 60 frame per second video, 1 gigabit ethernet, USB, and other data formats all over a single simple of the shelf startup category cable. We also continue our work in the logic collaboration program to develop a solution, embedding our technology in Logitech, video conferencing product suite, primarily for using educational and corporate environments.
A cutting-edge example of how our technology is being used in education is Panasonic’s deployment at Southwestern Oklahoma State, Esports Arena. Colleges, universities, and others had started providing dedicated Esports programs to develop skilled professionals. Valens products were selected to elevate the visual experience, which is also livestreamed, so students can participate regardless of their location.
As we have mentioned previously, we continue to see more and more opportunities in the medical space for data extension capabilities. For example, we recently announced a new joint solution with Würth Elektronik, a leading German manufacturer of electronic and electronic [indiscernible] components. This solution will deliver the highest level of safety with zero latency, high bandwidth uncompressed video connectivity required by medical imaging devices, such as MRIs, CTs, X-rays, robotic surgery and endoscopy solutions. Another example of the demand for our technology is [medical agile], first business innovation center, focused on medical. The center demonstrates Valens solution for training and educational purposes in medical environments.
Moving on to command-and-control centers. Federal and state governments, and municipalities worldwide are upgrading their command-and-control rooms to provide accurate and continuous visual to monitor crisis situation and to manage critical ongoing activities such as air traffic control. Valens Semiconductor’s Audio-Video connectivity technology is perfectly suited for video world in such control centers. An example is recently renovated terminal in the Orlando International Airport over 1200 4K resolution digital signage displays have been deployed so far and tens of millions of passengers are now informed 24x7x365 reliant on Valens Semiconductor Solutions.
We are proud of the role our product play in keeping citizens safe and travel flowing around the world. Finally, our VA7000 originally developed a high-speed camera connectivity solution for automotive, using current resilient interface, CSI, is also gaining traction in non-automotive applications. In addition to the opportunities for the VA7000 in the medical industry, I discussed last quarter, we are starting to see interest in the VA7000 portal for multi camera video conferencing in corporations and industrial applications, such as machine vision for automated inspection and robotic operations.
Turning now to automotive. Our technology delivers today’s infotainment and telemarket connectivity in cars in mass production. It will also enable tomorrow’s advanced driving assistance systems, known as ADAS and autonomous medical applications that our technology can be used to meet growing demand for ADAS features of parking assistance, collision avoidance systems, lane departure volume, traction control, electronic stability control and telematics, which is constantly growing.
Looking at a TAM for ADAS video connectivity, as S&P stated in report from April 2022, approximately 100 million cars are expected to be manufacture in 2025 and 2016. At that point in time, each car is expected to have 8 to 15, video productivity sensors for ADAS and surround view applications. For simplicity’s sake, let’s assume an average of ten sensors per car. With two connectivity chips per sensor to compute [indiscernible] for the transmitter we see will predict a total of two billion chips. With each chip expected to cost between $4 and $5, this translates into an $8 billion to $10 billion addressable market for ADAS connectivity. The Safety segment is projected to be the fastest growing segment in the global automotive semiconductor industry and Valens is well positioned to capitalize on this trend. ADAS and autonomous driving will require inputs from various high resolution sensor types, cameras, radars and LiDARs are what we call sensor fusion.
Sensor fusion requires a high bandwidth connectivity solution and the centralized compute unit to aggregate the raw data for real time processing and decision making. Our technology enabled sensor acuity and centralized processing high bandwidth with almost no latency. It provides the electromagnetic interference, EMI, and the electromagnetic compatibility, EMC, protection necessary for optimizing the vehicle video and data transmission to ensure near zero error rates. It also provides car makers with greater flexibility, enables them to implement advanced electronic architecture without limiting themselves due to the link, length or EMI issues. Today, more than 30 automotive OEMs, Tier 1s and Tier 2s are evaluating our VA7000 chipsets and many are investing engineering resources in the assessment process.
I would like to reiterate that we believe that we are on-track to receive RFI and RFQ from potential customers towards the beginning of next year. This should lead to design wins by immediate 2023 and mass production starting in 2025. Through conversations with potential customers and partners, we have learned more about the current and acceleration product roadmaps. To match the roadmaps, we will focus over the next two years on developing product supporting sensor to ECU connectivity.
With respect to our engagement with Mercedes Benz, I’m clear to report that in the second quarter we reached in milestone of selling more than 2 million VA6000 ships to date. We are also advancing with our joint rear view camera project with Stoneridge, which is incorporating our VA6000 ships into a safety connectivity solution that will remove truckers’ blind spots. We remain on track to rent revenues from this collaboration in 2023 and beyond. The trucking industry, which produces more than 2 million new trucks every year invests in upgrading and retrofitting throughout a truck approximate 10 year life cycle, giving the long life cycle of trucks, our joint solution also target the aftermarket, presenting improved safety opportunity for millions of drivers and pedestrians and a robust business opportunity for Valens Semiconductor.
I now turn it over to Dror Heldenberg, our CFO to review our Q2 2022 financial results and provide our financial outlook.
Dror Heldenberg
Thank you, Gideon. I’ll start with our second quarter 2022 results and then provide our outlook for the third quarter. Our updated full year 2022 guidance and our plan to reach adjusted EBITDA breakeven towards the end of next year. Beginning with our second quarter 2022 results. We came in above the top end of our revenue guidance, achieving record revenues of $22.5 million an increase of 28.4% from the second quarter of 2021. The higher than anticipated revenues driven primarily by Audio-Video also contributed to an overall higher than expected gross margin.
Second quarter 2022 gross margin was 70.2% compared to last year’s 71.2%. Non-GAAP gross margin was 71% similar to 71.1% in Q2 2021. Operating expenses were $23.7 million in Q2, 2022, compared to $16.5 million in Q2 last year. Research and development expenses grew by $3.9 million representing 55% of the $7.2 million year-over-year increase in OpEx. This reflects our investment in expanded product offering to address the new business opportunities ahead of us in both automotive and audio-video. SG&A expenses were up by $3.2 million due to continued investment in product promotion, as well as expenses related to being a public company.
Turning to adjusted EBITDA. We exceeded our guidance reporting second quarter 2022 adjusted EBITDA loss of $4.5 million, compared to the midpoint of our guidance range, which was $9.3 million. These [burdened] and expected results reflect a combination of other than expected revenues and gross profit. The risk scheduling of certain automotive R&D expenses from Q2 to later this year, and the strengths of the U.S. dollar, which positively impacted expenses paid in Israeli shekels, mainly for compensation to employees based in Israel.
Q2 GAAP net loss was $10 million and included $3.6 million of financial expenses mainly related to the valuation of Israeli shekel based cash and short term deposit compared to U.S. dollar, offset by $1.5 million of income related to the valuation of differed value of the full feature shares included in our balance sheet. GAAP loss per share for Q2 2022 was $0.10, calculated as the net loss divided by 97.4 million shares. This compares to Q2 2021 GAAP loss per share of $0.68, which is calculated as a net loss of $3.7 million divided by 11 million shares. The greater number of shares outstanding in Q2 2022 is the result of the conversion of our preferred shares into ordinary shares. The shares issued as part of the transactions related to our listing and options exercised into shares during this period. The non-GAAP loss per share for Q2 2022 was $0.08, which is calculated as a non-GAAP net loss of $8.1 million divided by the 97.4 million shares. We arrived at the $8.1 million by excluding from the GAAP net loss $3.5 million related to stock based compensation and depreciation expenses offset by the $1.5 million from the change in fair value of the full feature shares.
Turning to our balance sheet. We ended Q2 2022 with a strong balance sheet with working capital of $168.3 million compared to $176.5 million at the end of Q1 2022. This difference of $8.1 million is comprised of the adjusted EBITDA loss of $4.5 million and net financial expenses of $3.6 million, primarily from devaluation of Israeli shekel related cash balance. Our cash, cash equivalents and shor term deposits totaled $156.8 million and we add no debt. This compares to $165.5 million at the end of Q1, 2022. The change in our total cash balance is the result of the loss in the second quarter, that’s also included the currency exchange rate impact and the increase of our inventory balance.
We ended Q2 2022 with an inventory balance of $17.3 million, an increase of $4.9 million from the end of Q1 2022. There were three reasons for this change. First, the increase in the number of chipsets we intend to sell over the next 12 months. Second, as you know, the cost of chip sets has increased, and third to secure production capacity given the continued constraint supply environment, we placed longer-term purchase orders for goods. We intend to shift these goods in the next 12 month meeting our customers’ needs on a timely basis.
Now, I would like to provide our guidance. For the third quarter of 2022, we expect revenues in the range of $22.5 million to $22.8 million. We expect growth margins to be in the range of 65.4% to 66.1%, and adjusted EBITDA loss to be in the range of $6.2 million to $5.6 million. As of June 30, 2022 shares outstanding totaled 97.7 million. As Gideon said earlier, based on the better-than-expected results, for the first half of the year and the other than anticipated demand for our Audio-Video solutions we are expecting in the second half, we are raising our guidance for the full year 2022. We now expect revenues to range between $89.1 million and $89.8 million, up from $86.5 million and $88 million provided in May. Given the ongoing expansion of our automotive revenues, we continue to expect to essentially double this part of the business from 2021.
We anticipate 2022 gross margins will be in a range of 68% to 68.5%. This new gross margin range is up from the previously guided range of 66% to 67.3%. We are also improving our projected adjusted EBITDA loss to be between $25.7 million and $24.3 million, significantly better than the prior range of $37.2 million to $35.5 million.
Multiple reasons are driving the 2022 improved adjusted EBITDA guidance. First, the increase in revenues. Second, the improved gross margin. Third, the assumption that the foreign exchange impact of the strong U.S. dollar on our Israeli shekel based expenses continues. And fourth, as Gideon mentioned earlier, our decision to focus our automotive R&D for the next two years on products, supporting sensor to ECU connectivity will allow us to slow the pace of new employee hiring, and reduce our investment in R&D compared with our original plan for 2022 without impacting revenue opportunities or changing our longer-term technology roadmap. I also would like to note that we believe that our current headcount support our 2022 and 2023 business plan and product development roadmap.
We do anticipate a modest increase in 2023 R&D expenses from the lower 2022 level, which in combination with the anticipated year-over-year revenue growth we believe will allow us to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2024, we believe the company should reach cash flow profitability.
I’ll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.
Gideon Ben-Zvi
Thank you, Dror. We are proud of our results for the second quarter and the significant progress we have made in executing against our business plans and strategies since going public almost one year ago. We are well-positioned for sustain growth and success and to create value for our stakeholders. We serve two large, fast growing markets audio-video and automotive. Where the first mover advantage for wired, high speed connectivity solutions, a compelling business model and a clear path to cash flow breakeven.
I would like to take this opportunity to mention that, on September 7, we will be hosting a webinar with OMNIVISION to demonstrate our MIPI A-PHY-Compliant Camera Solution for ADAS. The demonstration will highlight the joint solutions, smaller camera design, reduced power consumption, lower camera cost and interoperability with the wider A-PHY ecosystem.
As the A-PHY ecosystem continue to evolve, Valens Semiconductor stands to benefit from the growing awareness of the innovative MIPI A-PHY productivity solution, which mainly is one of the key technologies to enable ADAS and autonomous driving vehicles.
I would like to thank our team around the world for their ongoing commitment and execution. I’m confident that they will continue to drive Valens Semiconductor’s continued success.
Operator, I would now like to open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Suji Desilva of ROTH Capital.
Suji Desilva
Congratulations on the progress here. A nice update. So I hope you can elaborate on the OPEX. You’re pushing out to improve the adjusted EBITDA forecast. What the product kind of strategy shift is if you could elaborate there would be helpful? Why you’re emphasizing sensor to ECU connections versus what was pushed out? Thanks.
Gideon Ben-Zvi
Okay. Thank you very much for your question, and thank you for the compliment to start with. We’re definitely very happy as well. So our current R&D budget for 2022 is lower than the original plan, primarily driven by actually two reasons. First, a portion related to rescheduling of certain investment from 2022 to 2023. For example, even two weeks push out of a takeout can translate into millions of dollars moving from one year to the next.
And the second is our refined focus on sensor to ECU connectivity solution, that match our prospective customers and partners roadmaps. We hear it from them as well. As we discuss in our prepared remarks, this is actually the focus and being more accurate on the market. And this allows us to reduce our originally planned investments in R&D and load the pace of hiring. I hope this answer to your question.
Suji Desilva
Yes. I think so. And then maybe looking ahead a bit to calendar year ‘24, where you’ll have positive EBITDA. Do you have any rough assumption of what the mix of auto versus AV would be, and at that point, would auto gross margins still have upside, would they, or would it be fully scaled at that point?
Gideon Ben-Zvi
You are referred to 2024?
Suji Desilva
When you have positive EBITDA. I’m trying to figure out how much auto you’re assuming to kind of get to that point?
Dror Heldenberg
So, Suji, felt good to talk again. It’s still early to talk about 2024 at this point in time. I can just tell you that in light of the desire, our indication that we’re going to be reach adjusted EBITDA breakeven, exiting 2023. We are going to be cash flow profitable during 2024. At this point, I think that it’s to early to say what will be the mix between audio-video and automotive, but definitely as we scale up, as we rent the volume of automotive, we’re going to improve the gross margins of this segment of the business.
Suji Desilva
Okay. That’s helpful Dror. And then maybe lastly, you provide some end market data for auto for ‘25, ‘26. Does that need L4 to begin or is that L2 plus L3 automotive? That color would help be helpful as well.
Gideon Ben-Zvi
So Suji, I think that – and we discussed it in the past. I think that right now, all our projections and all our market analysis is based on the fact that in the coming years, we’re going to see mainly L2 L3, or L2 plus cars. I think that it will take some time for L4 L5 cars to be on road, therefore, all the analysis and the projections that we’re making is based on the lower level of the autonomous cars, the L2 L3 CAR.
Operator
The next question is from Vivek Arya of Bank of America.
Blake Friedman
This is Blake Friedman on for Vivek. I was curious if you guys could comment on your visibility into 2023. I know you kind of mentioned you have strong visibility into the back half of the year, but any comments about next year would be very useful. And if you could break that out by the different end markets you serve, that would be great.
Gideon Ben-Zvi
So I would say that, as you know, we serve two large and fast growing markets. We plan the Audio-Video and we play in automotive. If we break it, we are in close contact with our current Audio-Video customers. And we see strong demand from them, especially given the fact that we are expanding into new verticals that we mention, education and industrial and medical, et cetera. And in addition, we continue to see the expansion of the VS3000 and we expect more contribution for this device.
On the automotive side, obviously, we’re going to see more message Ben models on the road that where we will find our chips inside deployed in this car. And in addition, as you remember, we expect to see some revenues coming from the project that we have with the truck company with –. So, despite the fact that we’re not going to provide any guidance at this point for 2023, I continue that we expect to continue the gross trend of our revenues continues in 2023 as well.
Blake Friedman
And then secondly, just across the tech supply chain, there have been concerns regarding inventory buildup. So if you can provide any commentary on maybe what you’re seeing at your customers regarding that issue, that would be — that’d be great.
Gideon Ben-Zvi
So, first, if it’s — if you watch the if you review the PR that we released in the morning, you noticed that our inventory bylines increased by something like $5 million compared to the end of Q1 2022. We’d mentioned a few reasons for this increase. The first one is the fact that obviously we need to increase the inventory because we anticipate more units, we intend to sell in the coming 12 months. The second reason is the fact that the refreshment of inventory today cost a small given all the price increases that we see in the industry.
And in addition, if you remember in the past, I mentioned that in order to secure production capacity, we add to commit to all supply chain vendors with longer-term purchase orders. And now this is exactly what we see. We see the increase in our inventory. We are not concerned about this inventory because I believe that we’re going to consume it in the next 12 months. So I believe that in this respect, we are okay. We continue to monitor the inventory level with our customers on a regular basis. And I would say that in most cases, we do not see any change in the normal inventory balances. Having said that, in some cases, we see some customers facing a shortage in certain components from other suppliers to complete their work in process inventory they are with, which means for us that, they may resume first of all is that, we see some stocking on their side. And it means for us that, they may resume purchasing of these certain products only after they sell their existing inventory. So this is regarding the Audio-Video.
In Automotive, the purchasing quadrant, I would say, remains intact as the Tier 1s are purchasing according to their 12 months following forecast.
Operator
[Operator Instructions]. There are no further questions at this time. Mr. Ben-Zvi, would you like to make your concluding statement?
Gideon Ben-Zvi
Yes, thank you very much for everyone. And I want to thank you all for joining us today. And have a great rest of the day, and we’ll meet you again in the next quarter. Thank you.
Operator
Thank you. This concludes the Valens Semiconductor second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
Earlier today, we issued a press release that is available on the Investor Relations section of our
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