Valens Semiconductor Ltd.
Q3 2021 Earnings Call Transcript

Published: 14 Nov 2021

[Operator:]

Hello all and a warm welcome to Valens Third Quarter 2021 Earnings Call. My name is Lydia and I'm your operator today. It's my pleasure to now hand you over to our host Daphna Golden, Vice President of Investor Relations. Please go ahead when you're ready.

[Daphna Golden:]

Thank you and welcome everyone to the Valens third quarter 2021 earnings call. With me today are Gideon Ben-Zvi, Chief Executive Officer; and Dror Heldenberg, Chief Financial Officer. On a personal note, I'm excited to join Valens earlier this week, and I'm looking forward to working with the team and communicating with the investment community, investors and analysts. Earlier today, we issued a press release that is available on the Investor Relations section of our website under investor.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 registration statement on Form F-1 filed on October 20 with the SEC 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, subsequence 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. With that, I will now turn the call over to Gideon.

[Gideon Ben-Zvi:]

Thanks Daphna and welcome to Valens. You definitely came to the right place. Thank you everyone for joining our first conference call as a public company. I'd like to welcome our new shareholders and research analysts. Becoming a public company, following the completion of our business combination with PTK Acquisition Corporation and the PIPE investment and listing on the New York Stock Exchange on September 30th is an exciting milestone in our corporate journey, that would help us continue to push the boundaries of productivity. Our team remains focused on execution to address the unfolding near and long-term opportunities in the large growing automotive and audio-video market that we serve. To that end, we delivered strong results in the third quarter, which demonstrate solid execution and the continued momentum we are seeing across our business. We reported record revenues of more than $19 million. Record bookings and ended the quarter with record backlog and with a fortress balance sheet, it will support our continued growth. For those who may be new to Valens, I'd let you take a few minutes to provide a brief overview of our company and the main reason why we believe we are winning position to create value for our shareholders. First, and to put it as simply as possible, Valens is a company that sets industry standards for high-speed connectivity, within the audio-video market, and we're doing it again in the automotive market. Second, we operate in large and fast-growing addressable market. And third, our business model offers a compelling financial model. I'd like to address these three in greater detail, starting with our company's ability to set standards. In our audio-video business, we invented HDBaseT technology, which quickly became the leading industry standard for long-reach, high-speed digital connectivity. We are the leader in this market to date and enjoy a profitable business with significant growth opportunities across the variety of verticals. Our chipsets are deployed in products manufactured by technology leaders Crestron, Extron, Logitech, LG, Samsung, Panasonic and many other reputable brands. Our audio-video chipsets are embedded in a variety of end products from video conference to home entertainment, outdoor TVs, projectiles and cameras. We benefit from the video-conferencing trends and started way before COVID-19 and significantly accelerated during the pandemic. Video-conferencing and the preferred audio-video equipment is now expanding way beyond traditional business application. And it’s moving rapidly into the education, medical and infotainment industries. I'm sure you will all agree that video-conferencing is now touching many more aspects of our daily lives. Valens' ability to extend high-quality audio-video and USB with zero latency makes us a key enabler of what we call the new hybrid normal, a trend we believe is here to stay. In our automotive business, we have developed superior solutions for in-vehicle high-speed connectivity. Valens technology address the critical need for the advanced cars of tomorrow that would demand seamless connectivity for a growing number of sensors, cameras and displays. We are proud that camera chipsets are already on the road in Daimler Mercedes-Benz cars, providing best-in-class connectivity for infotainment application. And what is considered to be one of our automotive business most significant achievements to date, Valens technology was selected by the well-known standard organization MIPI Alliance as the base for its new smooth high-speed in-car video connectivity standard A-PHY. This standard was released by MIPI in September 2020, and shortly after was fully adopted by the prestigious IEEE organization in one of their automotive standard. Obviously, Valens enjoys the first mover advantage with MIPI A-PHY. We will begin shipping engineering standards of our standard compliant VA7000 chipset to select prospect customers and partners next month. And we are working closely with leading OEM, Tier 1 and Tier 2s on deploying our technology into the next-generation car model in the coming years. To address our second value proposition, I'd like to turn to a large and growing market opportunity. We estimate that our serviceable addressable market we grow it to more than $9 billion in 2026 across our automotive and audio-video market. This provides us the potential to drive our revenue growth over the coming years as our next-generation connectivity solutions are widely adopted. Valens has established a track record of market leadership with exceptionally set industry standard in both of our businesses and then successfully completed our innovation into remarkable customer wins. Our digital Signal Processing base connectivity technology is unmatched in speed, performance, distance and resilience. This uniquely positioned us to capture a substantial share of the rapidly growing automotive market, as well as to increase our foothold in our audio-video business. Third, we have a compelling financial model. In automotive, considering the nature of the business, new design wins within short additional long-term contract and secured revenues. In audio-video, costumers can use our solutions for a long period. They like our products because we offer an unmatched combination of best of breed, feature set and cost performance. Our business model is supported by high gross margin, near term and longer term revenue visibility. With that, I will now turn the call over to Dror Heldenberg, our CFO, to review our key business milestones, third quarter financial results and outlook.

[Dror Heldenberg:]

Thanks, Gideon. I'll begin with a summary of our key business development for the third quarter. Then, I'll discuss our results and our outlook for the fourth quarter. We're continuing to see the automotive ecosystem unite around the MIPI A-PHY standard ahead of our scheduled shipment of this market first A-PHY compliant shipment which is expected next month. We've been on the list of more than 15 prospect customers and partners, including OEM and Tier 1 eagerly waiting for our VA7000 chip for evaluation and integration into their platform. I'd like to talk about the most recent indication of the growing interest in the MIPI A-PHY standard and the anticipation for our compliant chipsets in the industry. In September, we announced the partnership with Sunny Optical, a leading manufacturer of automotive camera modules. Sunny Optical is integrating our VA7000 transmitter chipset into their camera modules that enable advance driver assistance systems, known as ADAS, and surround view applications. The partnership also provides us a strong foothold in the vast Asian market. Another example of the growing market interest in A-PHY, transform our new partnership announced two days ago with LG Innotek for the supply of system-in-package modules for MIPI A-PHY compliant shipment. Clearly, the addition of LG Innotek, reflects the continued expansion of the MIPI A-PHY ecosystem is another measure as declared its intention to provide A-PHY based products. In the audio-video business, our latest addition the Valens sale of product family was released to the market earlier this year, and it's already been embedded by leading industry player. We now have more than 30 customers in stages of product development and integration, and we expect to see multiple products to customer on the market by year-end. I will share some highlights from our third quarter financial results. Our Q3 results demonstrated once again the significant progress we are making to scale our audio-video and automotive businesses. All comparisons are year-over-year unless otherwise noted. We are very pleased to report record revenues of $19.1 million this quarter, which represent an increase of 48.8% from the third quarter of 2020. Broken down for business units, our audio-video revenues increased 38.5% to $17.1 million. Our automotive business contributed $2 million in the third quarter, an increase of over 300% from the year ago quarter and representing more than 10% of our total revenue in the third quarter. While the automotive revenue numbers are since grown, we are starting to see impressive growth in this part of the business as our products, our on the road in mass production and are expected to be deployed in additional car models in the short-term. Our gross profit increased from $9.5 million in the third quarter of 2020 to $13.8 million and the gross margin was 72.4% compared to 74.4% last year, primarily due to the increasing automotive revenues, which has lower gross margin than our audio-video products. We achieved record bookings of $36 million during the third quarter, and our strong bookings translated into a book-to-bill ratio of 1.88 for the quarter, supporting our growth projections. We reported robot backlog, which reached a record of $73.4 million as of the end of September 2021. Operating expenses were $22 million, 18% higher than last year, mainly due to one-time issuance costs related to the business combination with PTK totaling $5.5 million. Our third quarter adjusted EBITDA totaled a loss of $2.7 million, improving from the loss of $7.2 million in the third quarter of 2020. We targeted adjusted EBITDA, which is a non-GAAP ratio as a net profit or loss before the following items

[Gideon Ben-Zvi:]

Thank you, Dror. To sum up, at Valens we operate two growing businesses with considerable opportunity to scale up in the future. The new market vertical we serve, the backlog at the end of the third quarter and the momentum reflected in the pace of bookings, all provide us strong visibility with respect to our business. We look forward to continue to working on our strategy and business model to create value for all our stakeholders. I would also like to take this opportunity to thank our incredible team of more than 278 employees around the world for their dedication and execution. Operator?

[Operator:]

Thank you. Our first question today comes from Suji Desilva of ROTH Capital Partners. Your line is open.

[Suji Desilva:]

Hello, Gideon and hello Dror. Congratulations on the first quarter and the record results here. So, I wanted to ask you about the visibility, you have the backlog. It seems very strong. We don't have the historical numbers compare it to, but can you talk about the supply constraints in the industry and how those might be impacting that visibility now versus maybe a typical environment?

[Dror Heldenberg:]

Sure. Suji. So, first, I want to mention that we are very proud with the fact that during the third quarter, we were able to meet all our customers' commitment and delivered it, despite the global supply chain shortage. Now, in terms of the impact of the supply shortage on Valens, I would say that being part of the semiconductor industry, Valens is effected like all other companies, and I would say the influence is mainly in the following area. One, we see extended lead times that require Valens to increase the lead time to customers. The second impact is that the supply chain vendors expect us to secure capacity by placing long-term binding purchase orders. And third -- another factor is the fact that everyone is seeing price increase in our industry and therefore, we do have to update our prices to customers. I would just end by saying that with respect to the fourth quarter, we are very confident with our ability to fulfill all the demand that we see from our customers. So, supply should not be an issue for the fourth quarter.

[Suji Desilva:]

Okay. Thank you, Dror. Very helpful there. And then, the standard adoption of A-PHY, MIPI and then IEEE adopting it. Can you talk about -- maybe Gideon, the competitive landscape for standards here, maybe Ethernet and others. And it sounds like you guys have a fairly dominant position, but I wanted to just get some clarity from you on that.

[Gideon Ben-Zvi:]

So, I guess, that you are asking about MIPI A-PHY and the trend to meet the A-PHY. And then, actually I would like highlight some other factors about this and the potential momentum it create for us. First, I am happy to say there is more than 50 million OEMs, Tier 1s, Tier 2s are in different stages and eager to start testing our first solution. The second that the recently announced partnership with both the Sunny Optical -- I guess, most of you know is the leading vendor of automotive camera from the far east and very strong in the Asian markets and as to where already existing partnerships that all of you aware is Sony and Mobileye. And the third, I think it was two or three days ago where we announced that the LG Innotek developed the system in package, that’s called SiP, that will expand the number of A-PHY sources in the market. So, actually you see the trend is expanding, people accepting as a solution. And if you look like intellectually on the technology, you see it’s really superiority and may I say a very easy demonstrable advantage.

[Suji Desilva:]

Okay. No, it sounds like a very strong position there. And then maybe lastly, on automotive, as it starts to grow in the mix here, can you give us some sense of what it might look at as a part of the mix in 2022, 2023? How Daimler ramps and when is the 7000 start contributing to revenue?

[Dror Heldenberg:]

So, first thanks for the question. I would say that relative to the mix, in the next two years, the lion's share of the revenues would still come from our project in standard, okay? As we mentioned in the past, we are in very good shape with the project that we have with the truck company. And we anticipate mass production already with early 2023, which means for us that we will start to see initial revenues already at the end of 2022. With respect to the 7000, so as we already mentioned, we intend to ship next month. We intend to ship our samples to select customers and partners. And by the way, just to remind you that these 7000 would be the first product in the market that is compliant with the MIPI A-PHY standard. So, we anticipate that they would start to evaluate this product as part of their integration process in their platforms and servicing those as well, we believe to start seeing these products in mass production somewhere around the beginning of 2025.

[Suji Desilva:]

Okay. Thank you for that color. And then one last quick question, Dror, perhaps, the OpEx, what trend do you expect for fourth quarter into the next year from the OpEx you reported in the third quarter?

[Dror Heldenberg:]

So, obviously, we're going to see that the fourth quarter will not have the one-time issuance costs that -- as you remember, the third quarter included $6 million. But obviously running as a public company means that we're going to see some increase in the operating expenses. We estimate it to be about $2 million a quarter. And on top of that, there are always these expenses that you measure on an annual basis, that's always absorbed in the fourth quarter. But I would say that we don't see a significant increase compared to the third quarter.

[Suji Desilva:]

Okay. Thank you so much. Congratulations again.

[Dror Heldenberg:]

Thank you.

[Operator:]

Thank you. Next question today comes from Rick Schafer of Oppenheimer. Rick, your line is open. Please go ahead.

[Rick Schafer:]

Thanks and congrats on solid results. You guys are off to a good start. If I could, maybe a question on auto, would you guys be able to kind of provide a level set where your average dollar content is today in a vehicle or with Daimler and what that looks like compared to when A-PHY is adopted and starts to ramp.

[Dror Heldenberg:]

Sure. Rick. And thanks for the question. So, as of today, I would say that the average you can find between three to four chips in every Daimler's car that leaves the manufacturing line, which means for us, revenue per car that is bit close to $20, okay? And we believe that this trend will continue in the coming years. With respect to the deployment of the second generation of our products, what we call the VA7000, this is the ADAS product. So, once we get in, the number of chips that will be deployed in average in a car, are really depends on the number of sensors that will be deployed in the call. But if we take as an average, something like eight to 10 different links, high-speed video links in the car, I would say that our content, our revenue per car can reach to $70 to $80. So, in cars where you will find our solution for infotainment combined with our distribution for ADAS, the budget per car, the revenue per car can easily reach to $90 to $100 per car.

[Rick Schafer:]

That's great color. Thanks Dror. So maybe as a follow-up on, since we're talking about A-PHY, I'm just curious since it's based on HDBaseT, have you guys ever given a sense of -- sort of what that means in terms of time to market advantage versus anybody else, that's going to try to develop A-PHY and compete with you? I mean, I understand today you compete with Ethernet uncertainties, but a sort of a legacy conductivity, but in terms of just time to market advantage versus anybody else that's going to do A-PHY, what do you estimate that is for you guys?

[Dror Heldenberg:]

So, first of all, let's distinguish between the HDBaseT and the A-PHY, okay? With respect to the HDBaseT, which is -- it’s mainly serve in the audio-video market. I'm not sure that we're going to see lots of competition in the coming years in this area. But let's focus in a second on the A-PHY. The A-PHY is a technology that is now backed standard, the MIPI of standard. And one of our missions is to increase the ecosystem of this of the players in this area, which means that we are more than welcome other semiconductor companies to join to this A-PHY camp and to introduce their solution and the fact that we are starting to see the initial partners and given -- and we mentioned in the earlier part we mentioned Sunny Optical. We mentioned Sony. We mentioned LG Innotek, the deal that we just announced two days ago, the focus we are starting to see more players joining into this A-PHY camp, it's a good news for all the OEMs and the Tier 1. And -- but with the fact that we stand behind these standard, we believe that we are well-positioned to lead this camp and to capture a significant premium that we will see in this market.

[Rick Schafer:]

Thanks Dror. And if I could sneak one more in. Not on backlog for a second. I mean, I think it's basically $75 million now. I think that's up around $20 million or so from just last quarter. So, correct me if I'm wrong, but it seems like there's some pretty good momentum there. I didn't know if you could comment or give us any color on how much of that is shippable over sort of the next year. And just try to -- and then maybe even within that, if we could get sort of a sense of how much of that backlog is AV versus automotive. Thanks. Thanks a lot.

[Dror Heldenberg:]

So thanks Rick. With your permission, I will not refer to the second part of the question. But with respect to your first question about the location between the fourth quarter and next year backlog, I would say that we're very, very confident with our ability to meet our revenue target for the fourth quarter. And I assumed that you understand between the lines that we are well-positioned here. And the remaining balance of the backlog suppose to support us to meet our revenue projections for next year. And that's the reason why we are so confident with our ability to meet these targets.

[Rick Schafer:]

Great. Thanks guys. Congrats.

[Operator:]

Thank you. We have no further questions in the queue. So, I will turn the call back to Gideon Ben-Zvi for closing remarks.

[Gideon Ben-Zvi:]

Thank you very much for attending and for listening to us. And I would like to thank for joining the first and our Q3 2021 call and for your continued support and interest in Valens and see you next time. Thank you.

[Operator:]

This concludes today's call. Thank you for joining. You may now disconnect.