Valens Semiconductor Ltd (NYSE:VLN) Q3 2022 Results Conference Call November 9, 2022 8:30 AM ET
Company Participants
Daphna Golden – VP of IR
Gideon Ben-Zvi – CEO
Dror Heldenberg – CFO
Conference Call Participants
Rick Schafer – Oppenheimer
Suji Desilva – Roth Capital
Brian Dobson – Chardan Capital Markets
Operator
Good morning. My name is Lenny, and I will be your conference operator today.
At this time, I would like to welcome everyone to Valens Semiconductor’s Third 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 Valence Semiconductor. Please go ahead.
Daphna Golden
Thank you, and welcome, everyone, to Valens Semiconductor’s Third 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 filed 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 will be in New York, Scottsdale, Arizona, and London for investor conferences and meetings. If you are interested in meeting with us, please e-mail 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. Q3 quarterly results exceeded our guidance. Q3 2022 revenues were a record of $23.1 million, up 21% compared with Q3 2021. We also achieved better-than-anticipated gross margin and adjusted EBITDA. We are increasing our full year revenue guidance and improving our adjusted EBITDA guidance for the year. Our high-speed connectivity technology is used in diversified business activities that support people’s daily lives and industries in two business segments. [Technical Difficulty] Demand for our high-speed uncompressed multimedia distribution solutions was strong, and our audio-video business continued expanding into new applications and verticals from corporate, education, government, industrial, to medical and more.
Starting with education. The trend of educational entities using hybrid models to enable students and staff to switch between on-site and remote learning is here to stay, and we are seeing more and more classrooms around the world equipped with video collaboration systems. Hybrid learning enables the continuity of teaching and learning. It increases equitability by giving students access to additional education opportunities that meet their academic means. In this way, our technology democratizes opportunity and contributes to equity.
In the corporate sector, the opportunity across industries and geographies is substantial for audio-video connectivity technology, such as ours and video conferencing technology is increasingly essential for the office space, video meeting and remote work.
In command and control, the use of our technology is growing. Many entities across the globe need to visualize their operations, enhance their efficiency, and better safeguard communities. A recent use case in the corporate sector is multinational electric utility company where security is of paramount importance. The company needed to isolate a certain departments operations from the rest of the IT network while still providing uncompressed long-distance [multimedia] expansion. Our wired audiovisual distribution products allowed them to meet this goal.
I’m also proud to share that earlier this year, Valens Semiconductor chip set embedding Panasonic 4K HD Suite for video products were used to enhance the experience of athletes and spectators from around the world at the [Beijing Olympic and Peak] winter games. They all experienced breathtaking immersive visuals in [Indiscernible] in the different sporting events.
All in all, our audio-video business grew on the top line and generated strong margins with a healthy mix of customers, industries, and geographies. In Q3, we also continued to sell our automotive VA6000 chip set in [Indiscernible] applications for audio-video use. I believe that going forward, we will see additional revenue contribution in the audio-video business by repurposing our automotive products. This leads me to our automotive business.
Valens Semiconductor offers a unique set of in-vehicle wired symmetric and non-symmetric high-speed connectivity required by the automotive industry. Our VA6000 chip set family provides symmetrical connectivity and enables data flow for infotainment and telematics. Mercedes-Benz started using our chips in the [S class model] in Q4 2020. And today, you can find our chips in the S, C and E class models, including in the electric vehicle known as EV [models]. The VA7000 chip set family, our non-symmetric product was the first in the industry to comply with MIPI A-PHY standard. It addresses the growing need for high-speed video productivity for automotive applications, such as Advanced Driver Assistance Systems known as ADAS, which is projected to run towards an $8 billion to $10 billion market in the coming years.
The MIPI A-PHY standard that was released in Q4 2020 is the industry standard for in-vehicle-long-reach video productivity. It will be required initially for high-speed connectivity between the sensors to the computer unit for automotive applications such as [Indiscernible] and autonomous driving. Valens Semiconductor’s nonsymmetric DSP-based connectivity technology is the foundation for the MIPI A-PHY standard, which aims to replace the legacy analog solution existing to date in car. Valens, the VA7000 product family features outstanding resilience to electromagnetic interference known as EMI, making it an ideal connectivity solution for [high-valued] high-resolution sensors that significantly improved object detection and classification.
Our API compliance chips greatly simplified integration of camera, LiDAR, and RADAR. It also enables flexible integration of these sensors into a sensor cluster that is connected over a single link. This is known as sensor fusion. Sensor fusion opens the door to more accurate centralized computing and is key element for ADAS Level 3.
Speaking on [RADAR] specifically, it is becoming clear that in addition to camera sensors, radar are essential to meet our automotive OEM and Tier 1 ADAS requirements. Our connectivity products are currently being evaluated by leading radar companies that are considering the yield of VA7000 with their sensors. In our previous calls, we communicated of our expectations regarding the pace of adoption of our VA7000 solutions. I am pleased to share with you, we have already received initial RFIs from potential customers for our MIPI A-PHY-compliant VA7000 chip sets. We are on track for [Indiscernible] next year with mass production expected to start in 2025.
In line with our strategic plan, the growing MIPI A-PHY ecosystem continues to gain a submission and is well-positioned for large-scale implementation by automotive OEMs around the world. An important pillar is solidifying the ecosystem [Indiscernible], which shares [MIPI A-PHY aligned] Board of Directors and determined that MIPI A-PHY is the most cutting-edge high-speed connectivity technology in the automotive industry. In Q3, we announced a collaboration with Intel foundry services to support the development of MIPI A-PHY compliance offering for their automotive customers. We believe our top partnership with Intel Foundry will encourage our automotive chip manufacturers to join the growing MIPI A-PHY ecosystem as automotive OEMs require multiple production sources. The interoperability between systems from a number of vendors is the requirement for sectors of any industry standard.
In the third quarter, we announced the successful completion of the industry’s first joint interoperability test between a Valens Semiconductor VA7000 chip on the receiver side and Sony Semiconductor Solutions prototypes of integrated sensor and transmitter chip set on the other side. Sony Semiconductor Solutions has stated the importance of introducing this cutting-edge technology into their image sensors. We also expect that the MIPI A-PHY transmister integration will provide significant cost and performance benefits to the global base of automotive customers.
Last month, we conducted the webinar with Sony Semiconductor Solutions in [Indiscernible] in association of Japanese automotive OEMs and Tier 1s such as Toyota, Nissan, Honda, Mazda, Suzuki, and Denso on how automotive companies can advance ADAS in autonomous driving with MIPI A-PHY. Hundreds of participants from the Japanese automotive industry joined the webinar to hear speakers from [Jasper] Toyota next-generation high-speed network group, Sony Semiconductor Solutions automotive development and Valens Semiconductor discuss the progress of MIPI A-PHY and growing importance of electromagnetic compatibility known as EMC in cars.
[The] car company’s integrated sensor requiring higher bandwidth at EMC into next-generation ADAS and autonomous systems interoperability among multiple vendors’ components will be crucial. To address this need, test equipment vendors are beginning to create off-the-shelf testing solutions. [Indiscernible] Technologies, which delivered advanced design and validation solution is addressing the growing market demand for high-speed digital interfaces for next-generation in-vehicle networks.
In September, they announced their partnership with several companies, including Valens Semiconductor to develop a MIPI A-PHY-compliance tech solution that ensures data transmission quality and broad scale interoperability. Before turning to our financials. This call marks the first anniversary of Valens Semiconductor as a public company. Since going public, we have made significant progress executing against our business plan and growth strategy, which is supported by our solid balance sheet. So far, during 2022, we have successfully operated in a turbulent geopolitical and economic environment. In the near term, we will continue to monitor the macro environment and in particular, items that could impact our business during 2023 such as lead times, [older] partner, and demand levels across industries. We are focused on creating long-term value to all our stakeholders. We believe that we have sufficient resources and capabilities to continue to invest in and expand our competitive advantages, enhance our product portfolio and market presence. We will continue to focus on our best opportunities, which we believe will drive sustainable growth and profitability for the company.
I’ll now turn it over to Dror Heldenberg, our CFO, to review our Q3 2022 financial results and provide our financial outlook. Thank you, Gillian. I’ll start with our third quarter 2022 results and then provide our outlook for the fourth quarter and our updated full year 2022 guidance.
Beginning with our third quarter 2022 results. We exceeded the high end of our revenue, gross margin, and adjusted EBITDA guidance. We achieved record quarterly revenues of $23.1 million, an increase of 21.3% from the third quarter of 2021. The [other than] anticipated revenue driven primarily by audio video also contributed to an overall other-than-expected gross margin. Third quarter 2022 gross margin came in at 69.7% compared to last year’s 72.4%, reflecting another portion of revenue coming from our automotive business, which carries lower gross margins [in earlier] video.
Non-GAAP gross margin was 70.5% compared to 72.7% in Q3 2021. Operating expenses were $21.3 million in Q3 2022, down 3.4% from $22 million in Q3 last year. Research and development expenses grew by $2.1 million from Q3 of 2021. This reflects our continued investment in developing product offerings to address the new business opportunities ahead of us in both automotive and audio video while taking into account our realigned and optimized automotive R&D efforts, which match our prospective customers and partners road map. SG&A expenses were $20.6 million compared to $11.4 million in Q3 2021. Last year’s SG&A included one-time expenses in the amount of $5.4 million related to our going public in September 2021. Q3 2022 SG&A was similar to the past three quarters as a public company.
Turning to net loss and adjusted EBITDA. Q3 GAAP net loss was $5.3 million compared to $8.5 million loss in Q3 of 2021, and we exceeded our guidance for adjusted EBITDA, reporting an adjusted EBITDA loss of $1.7 million. The better-than-expected adjusted EBITDA reflects a combination of other-than-expected revenues and gross profit. The rescheduling of certain R&D expenses from Q3 to later this year and early 2023 and the strength of the U.S. dollar, which positively impacted expenses paid in Israeli [Indiscernible] mainly for compensation to employees based in Israel. GAAP loss per share for Q3 2022 was $0.05, calculated as the net loss divided by 98.1 million shares. This compares to Q3 2021 GAAP loss per share of $0.94, which is calculated as a net loss of $8.5 million and accrued dividend related to preferred shares in the amount of $3.9 million, totaling $12.3 million divided by 13.2 million shares.
The non-GAAP loss per share for Q3 2022 was $0.02, which is calculated as a non-GAAP net loss of $1.5 million, divided by the 98.1 million shares. This compares to Q3 2021 non-GAAP loss per share of $0.23, which is calculated as a net loss of $3 million divided by the 13.2 million shares.
Turning to our balance sheet. We ended Q3 2022 with a strong balance sheet. Cash, cash equivalents and short-term deposits totaled $152.9 million, and we had no debt. This compares to $156.8 million at the end of Q2 2022. Furthermore, looking at working capital, — we ended the third quarter with a balance of $166.6 million compared to $168.3 million at the end of Q2 2022. This difference of $1.7 million is mainly due to the loss during Q3 2022 after reconciling the non cash expenses such as equity-based compensation, depreciation, and adjustment of the fair market value of the future shares. Our inventory as of September 30, 2022, was $21.9 million, an increase of $4.6 million from the end of Q2 2020.
There are two primary reasons for this increase. First, we lead in an inflation environment and the value of new inventory is higher.
Second, as we have discussed in previous calls, in order to secure production capacity with vendors in [pro] constrained supply environment, we place longer-term purchase orders. Goods from these purchase orders continue to arise in the third quarter. This level of inventory is needed to meet the demand from customers we see ahead of us in the next 12 months, especially in automotive, where we intend to double our revenues from 2022 to 2023. I’d like to point out that the inventory orders under the longer-term purchase orders will enable us to mitigate the impact on our gross margins from the expected [Indiscernible] product costs in the first half of 2023. Although we continue to face cost increases from some of our supply chain vendors, we expect supply constraints to start easing and lead time to start normalizing in the second half of 2023.
Now I would like to provide our guidance. For the fourth quarter of 2022, we expect revenues in the range of $23.1 million to $23.2 million. We expect gross margins to be in the range of 66.1% to 66.5%. In the fourth quarter, we are planning [tape-outs] of our automotive VA7000 family chip sets. To be able to deliver to our potential customers, reach a feature set and better performance in line with market expectations. This is another crucial step towards our customers’ future mass production. At the same time, in alignment with our current road map, we are [Technical Difficulty] adjusted EBITDA loss is expected to be in the range of $9.7 million to $9 million as we record [tape-out] costs in our income statement as they occur.
As of September 30, 2022, shares outstanding totaled $98.4 million. We are raising our guidance for the full year 2022, largely due to the fact that we exceeded the high end of our revenue, gross margin, and adjusted EBITDA guidance for Q3 2020. We now expect revenues to range between 90.3 and $90.4 million, up from 89.1 and $89.8 million provided in August. Given the ongoing expansion of our automotive revenues, we continue to expect to essentially double this part of the business in 2022 compared to 2021. We anticipate 2022 gross margins will be in the range of 69.3% to 69.4%. This new gross margin range is up from the previously guided range of 68% to 68.5%. We are also substantially improving our projected adjusted EBITDA loss to now be between 20 and $19.3 million for the full year, significantly better than the prior range of $25.7 million to $24.3 million. This improvement in adjusted EBITDA is driven mainly by aligning our product road map to our customers’ needs, also supported by the expected benefit from the strong U.S. dollar on our [Israeli-shaken] based expenses.
We remain on track to reach adjusted EBITDA break even 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. Thank you, Dror. We are pleased with our results for the third quarter which once again exceeded expectations. We made notable progress in many aspects of our business. Further, our automotive business continues to evolve, and we expect revenues from the first-generation products, the VA6000 to grow further, and this will be used in more car models.
Second, we are receiving positive feedback from prospective customers and partners that are evaluating the VA7000. The initial RFIs that we received are an important milestone towards adoption of A5 products by automotive OEMs, [as] we continue to see new opportunities in various verticals for our high-margin and diversified audio video business in corporate, education, medical, and [Technical Difficulty] industrial among others.
Fourth, even in today’s challenging economics and the constrained supply environment, we successfully managed to meet all our customers’ demand in a timely manner. I want to thank our employees once again for their commitment and ongoing dedication to the company’s success.
Finally, during the past quarter, we released our fresh sustainability report, less than a year after being listed as a public company. At Valens, we constantly strive for excellence and innovative ways to ensure our products and solutions meet the highest standard of our customers and provide society the connectivity required in an ever-evolving environment.
Operator, I would now like to open the call for questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Rick Schafer of Oppenheimer.
Rick Schafer
Congrats, I know it’s tough out there right now. [Indiscernible] for almost everyone, I feel like it seems balanced growth. So I was curious if you could talk about any shifts that you are seeing in your order patterns positive or negative, just anything that you’re seeing there in terms of any push outs, whether it’s in pro AV or in auto or any significant change to leadx? Just sort of any sense of what you’re sort of seeing in terms of your order book?
Unidentified Company Representative
It is good to talk to you again. Obviously, at this point in time, we will not be providing our guidance for 2023. However, if we analyze our business, and let’s start with the automotive, I think that what we’re seeing today, we’re starting to see indications that our automotive business is expected to double its revenue in 2023 from 2022. So in that respect, we feel that the automotive business is quite resilient.
With respect to the [audio-video] business, so I would say that the audio-video business is probably more correlated to some of the global macro trends that we see today. So we assume that at least during the first part of ’23, customers will mainly consume inventories that they accrued in the challenging supply demand environment.
Having said that, — when we analyze the audio-video segment in 2023, we still see the following opportunities. Obviously, we continue to see the expansion of the VA3000 just to refresh your memory. This is the most recent member of our audio-video product family. And we see this product in designs of many industry-leading companies, and we expect to see more revenue contribution from these chip sets in next year in 2023.
In addition, our other solutions are now being evaluated, as Gideon mentioned in his prepared remarks, for new applications, and we assume that at least some of them will mature into mass-production products during ’23. So I would say maybe to summarize, while we anticipate a more moderate growth rate for this part of the business compared to the projected 2022 year-over-year growth rate — we still believe that we will continue to see an annual growth in audio-video.
With respect to the last part of your question about some cancellations or push outs, I would say that these are tough days for our customers as well. And obviously, their planning is becoming more challenging for them as well. I can tell you that recently, we got some precious request at least from [some of our] customers. However, those push outs were offset by [pooling] requests by other customers, and this resulted in the improved guidance that we shared with you today in this call.
Rick Schafer
That’s great color. And then maybe as a follow-up to that. Gross margin was a lot higher than you guided higher — much higher than I had modeled. So I was just hoping that you could maybe provide a little color on what’s driving that and where we should expect gross margin to stabilize now? I think you’ve talked in the past about sort of the low mid-60s, but I didn’t know if there was any update on sort of gross margin, I guess.
Gideon Ben-Zvi
Yes. Sure. So the better-than-expected gross margin is mainly driven by the revenue mix between audio-video and automotive. We just mentioned that the growth in revenue was mainly triggered by the audio-video business that comes with higher gross margins. So that was the first reason. The second reason is that in the third quarter, we still consumed some inventory that was produced in lower costs. Obviously, as we refreshed the inventory — in this environment — inflation environment, it comes with higher costs. So I assume that we’ll see the implication going forward.
In terms of our gross margin going forward, again, today, we provide you the gross margin we anticipate for Q4 and the full year. I think that we are going to meet this target.
Operator
The next question is from Suji Desilva of Roth Capital.
Suji Desilva
Congratulations on the progress here. So maybe we can talk about audio-video first and just what drove the upside? Is that potential [Indiscernible] each quarter? Is there kind of some secular trend that is helping you guys a tailwind in of environment?
Gideon Ben-Zvi
Suji, and thanks for the question. I think that nothing dramatic to report here. I think that one thing that helped us in the earlier period is the fact that this part of the business is very diversified. And this is a very strong business. It’s a strong point for us. And every quarter, we see the strength in other areas of the business. Again, we continue to see this, as I mentioned before to Rick, we continue to see the expansion of the VA3000. It’s a very encouraging sign for us with respect to the penetration of this new product, which, by the way, comes with higher ASP to customers. It’s a good sign. And again, nothing special. It’s just the nature of the business and the growth that we expect from this business.
Dror Heldenberg
I would like to add [Indiscernible] thank you for the question. And I would like to add that some of the verticals in some of those markets in the audio video are less infected by the atmosphere in the world. Like you know that Valens is not exposed to some of the very sensitive markets today, and we’re exposed more to a market [sectors of] hybrid education and hybrid learning and conference rooms, which are left to even zero impacted from the atmosphere, — of course, not everything is exact, but this is one of the reasons that we keep seeing the growth in the company and — the growth in the company, and this is one of the reasons for the heads up for next year.
Suji Desilva
Okay. So switching over to auto perhaps, I’m wondering beyond the lead customer when perhaps Stoneridge and the trucking relationship would contribute to revenue materially if it maybe already is? Just [little] curious of that, the timing when that would help kind of layer in with the lead customer?
Dror Heldenberg
So I think that as we indicated in the past, the project with Stoneridge continues to progress, and we are not changing our previous guidance that we anticipate mass production and ramp up of this business next year in 2023. In that respect, everything is on track, okay? No change to the Stoneridge project, to the truck project.
Suji Desilva
Okay. If I can sneak in one last quick one Dror, can you just elaborate on the R&D rescheduling. What was behind that? Just to understand the dynamic there.
Dror Heldenberg
Sure, Suji. So I think that this is something that we’ve already mentioned last time, we mentioned that after we started to ship the first samples of the A-PHY product, the VA7000 engineering samples to customers, obviously, we worked with our prospective customers very closely to better understand their road map and their schedule. And based on all these close relationships and joint work with the OEMs and some of the Tier 1s, we realize that we need to realign a bit and adjust our product road map development. It’s mainly related to the next generation that we originally planned. And now based on the input that we receive from customers, what is more important to them, what is less important and when they need more new devices, we realize that we need to adjust our road map. I think that the focus today of customers is to make sure that the VA7000 can reach to mass production according to their schedule, they are — I think that the next generation can wait a bit. Definitely, some other derivatives that we plan.
I think that today, the customers are very focused on the benefits that the VA7000 brings. Just to name few them, it’s the better EMC, it’s the bandwidth, the total system cost — it’s the — it’s a set of advantages that I think that they recognize. Obviously, the ability to work with [Indiscernible]. It’s a set of benefits, and we need to make sure that we help them to get to much production as soon as they can.
Operator
The next question is from Brian Dobson of Chardan Capital Markets.
Brian Dobson
I guess shifting gears a little bit. Could you speak to some of your key partnerships and collaborations, perhaps specifically with leading players within the space? And how you see those driving standard adoption moving forward?
Gideon Ben-Zvi
Okay. I will take you. Thank you very much for the question, and nice to hear from you. I will start with the collaboration with Sony. And one of the strengths of the MIPI A-PHY is that the transmitter can be embedded as part of the silicon of the AA sensor. And [this works solidly]. And actually, this is, I would say, almost the mastermind of the transmitting a part of the MIPI A-PHY and the collaboration with Sony gives several advantages. First of all Sony has a very, very strong, almost 50% was market share in sensors and growing market share sensors for automotive. And once they embedded the transmitter as part of their [whole] sensor, they give them advantage both in the price, in the quality, in the simplicity, in the space on the board, in power, like it’s an all-win game. And this is a kind of collaboration, which we are very proud of and very proud to be a partner with respectful companies like Sony Semiconductors.
The Intel Foundry is a very important collaboration and they would boost the automotive MIPI A-PHY implementations by allowing companies actually to compete with us, but we are very happy with this because this is what will drive the market. And we are happy that a company like Intel recognized and chose MIPI A-PHY as the technology that they want to encourage silicon players to integrate and to manufacture in the future. So these are two of the collaborations. Of course, there are more. I think these are the most interesting to share now at this time.
Dror Heldenberg
Maybe just to add to what Gideon mentioned, it’s the press release and the collaboration that we have with Keysight. Now it’s a good sign for mature — for market maturity. We are starting to see companies that develop test equipment only when they realize and they estimate that they are talking about a market that is going to grow, a market that is going to be matured very fast. And the fact that the company, an established company like Keysight understands that they need to develop — already develop test equipment that is going, obviously, to serve not just Valens but other players in this market. It’s another indication for the developed ecosystem and the fact that they anticipate that they’re going to see business, significant business for companies that will develop [hybrid] solutions.
Brian Dobson
Yes, excellent.
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. I would like to thank you all for joining us today for our Q3 2022 call and for your continued support and interest in Valens Semiconductor. Have a great rest of the day.
Operator
This concludes the Valens Semiconductor Third Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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