Valens Semiconductor Ltd.
Q1 2022 Earnings Call Transcript

Published: 11 May 2022

[Presentation:]

[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 First 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 Industrial Relations for Valens Semiconductor. Please go ahead.

[Daphna Golden:]

Thank you, and welcome everyone to Valens Semiconductor's first 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. We will be in Boston, New York, Tel Aviv, San Francisco and London later this month and in June for investor conferences and meetings. If you're interested in meeting with us, please email me at [e-mail]. With that, I will now turn the call over to Gideon.

[Gideon Ben-Zvi:]

Thanks, Daphna, and thank you everyone for joining our call today. Q1 was a record quarter for Valens Semiconductor and a very strong start to 2022. Revenue and profitability exceeded our guidance with sales driven by continued solid demand for our core Audio-Video solutions, as well as exceptionally strong demand for our emerging automotive products. We reported the company's highest ever quarterly revenues of $21.6 million, 62% higher from Q1 2021. I am proud to say if you continue to successfully meet customer demand even in today's challenging supply chain environment, and will continue to do so taking proactive measures working closely with our customers and suppliers. As a result of the better than anticipated start to the year, and our outlook for the rest of 2022, we are raising our full year guidance. Most of these revenue increase attributed to Audio-Video, while also essentially doubling the automotive revenue from the full year 2021. Dror will elaborate in our guidance in his remarks. Valens is well positioned to benefit from significant growth trends in both the automotive and Audio-Video markets. Starting with Audio-Video, the demand for our Audio-Video solutions continues to build across all geographic regions and is expanding into new applications within multiple verticals

[Dror Heldenberg:]

Thank you, Gideon. I'll start with our first quarter 2022 results and then provide our outlook for the second quarter and updated full year 2022 guidance. Beginning with our first quarter 2022 results, we topped our revenue guidance, achieving record total revenues of $21.6 million, an increase of 61.8% from the first quarter of 2021. Q1 2022 gross profit grew to a record of $15.4 million from $9.5 million in Q1 2021 an increase of 62%. First quarter 2022 gross margin was 71.4% similar to last year 71.3%. Non-GAAP gross margin increased to 72.1%, up from 71.8% in Q1 2021. The better than anticipated gross margins were driven by a favorable product mix in audio- video, as well as the increase in automotive gross margins from prior quarters as this business begins to scale. In addition, in Q1, we enjoyed the benefits from sales based on today’s higher ASPs, while a portion of the cost of goods was still based on previous lower pricing. Operating expenses in Q1, 2022 were $22.6 million, up from $15.7 million in Q1 last year. The $6.9 million increase was mainly due to an additional $3.7 million in research and development expenses, representing 54% of the total year-over-year increase in OpEx. This demonstrates our continued investment in expanding our product offerings to address the business opportunities ahead of us. Sales and marketing expenses increased $1.1 million dollars, due to higher levels of promotion of our new audio-video an automotive products, and G&A expenses were up by $2.1 million, primarily due to public company expenses such as costs related to D&O insurance and professional services. We also exceeded our adjusted EBITDA guidance, with our first quarter 2022 adjusted EBITDA loss coming in at $4.1 million, compared to the loss of $4.3 million in the first quarter of 2021. Our Q1 2022 adjusted EBITDA was $6.1 million better than the midpoint of our guidance of a $10.2 million loss due to our higher than expected revenues and gross margins, as well as the fact that most of the better than internally projected operating expenses were related to certain R&D expenses that were deferred from Q1 into subsequent quarters in 2022. Loss per share for Q1, 2022 was $0.05, 91.6% lower than Q1 2021, which was $0.93 per share. Q1 2022 is calculated as a net loss of $5.1 million, which includes an income of $2.6 million related to fair value of our forfeiture shares, divided by 97.2 million shares. Q1, 2021 is calculated as a loss of $10.1 million divided by 10.8 million shares. The non-GAAP loss per share for Q1 2022 was $0.02 based on the net loss excluding $3.1 million of stock-based compensation and depreciation expenses divided by the 97.2 million shares. The higher number of shares outstanding 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 exercise into shares during the period. Turning to the balance sheet, we ended up Q1 2022 with a strong balance sheet with cash, cash equivalents and short-term deposits of $166 million and no debt. As we stated in the past, we intend to use our strong balance sheet to fund the development and commercialization of Valens' next generation products. As a reminder for new products, the time from design initiation and manufacturing until we generate revenue can be lengthy typically, within three years in the audio-video market and up to five years in the automotive space. Inventory increased by $3 million from the end of 2021, driven by two main factors. First, the anticipated increase in the number of chipsets we intend to sell this year and second the constrained supply chain environment resulted in higher cost raw materials and services from our supply chain, as well as the need to place longer term purchase orders and accrue more inventory to settle our customer's needs on a timely basis. Considering our strong backlog, we believe that $12.5 million in inventory will be consumed during 2022. Now I would like to provide our guidance. For the second quarter of 2022, we expect revenues in the range of $21.6 million to $22 million. We expect gross margins to be in the range of 66.3% to 67.3% and adjusted EBITDA to be a loss in the range of $9.8 million to $8.8 million. For modeling purposes, please note that as of today we have 97.2 million outstanding shares. As Gideon said earlier, we are raising our guidance for the full year 2022. We now expect revenues to range between $86.5 million and $88 million, up from $83 million to $85 million provided in March. Further increase in demand in audio-video and the continued expansion of our automotive revenues, which we expect to essentially double from 2021 drove our higher 2022 projections. We expect gross margins to be in the range of 66% to 67.3%. This new gross margin range is up from the previously guided range of 65.5% to 67.2%. We are also improving our projected adjusted EBITDA loss to be between $37.2 million and $35.5 million, up from a range of $38.4 million to $37.8 million. We will continue to invest in enhancing our current product offering and developing and commercializing Valens' next generation products. In summary, Q1 was a strong start to the year positioning us for a better than anticipated 2022. As we look further out, we are seeing growing demand and adoption of our next generation connectivity solutions in multiple industries. Together with our robust balance sheet, this should fund our business through breakeven and beyond. 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. Our continued success demonstrates once again why we believe Valens is well positioned to create value for our stakeholders. Valens operates in two large and fast growing addressable markets, automotive and audio-video. Second Valens enjoys a first mover advantage for its wired high-speed connectivity solutions over simple and low cost infrastructure by setting industry standards. We first did it audio-video market having established our leadership position in audio- video and we are now replicating the success in the automotive market. Third, our business model offers compelling financial metrics as we started semi-conductor company we're driving environmentally responsible growth. I would also like to take this opportunity to thank our incredible and talented team of employees around the world for their exceptional education and execution. They made a very impressive start of 2022 possible and I'm confident that they will drive Valens continued success. Operator, I would now like to open the call for questions. [Operator Instructions] The first question is from Atif Malik of Citi. Please go ahead.

[Atif Malik:]

Hi, thank you for taking my questions and good job in raising the full view guidance. And I have two questions for Dror. Dror that $2 million the $3 million increase incrementally for the annual guidance. Can you break that out between audio-video, and autos? Great. And then you commented that the gross margins on the auto side are benefiting from higher ASPs and I want understand what is the assumption you're making on the pricing for the full year as you continue to hear foundries raising pricing even into next year, so what is the - how you thinking about - in the full year guidance? Okay, so it's a question that involves both the price adjustments or the price increase that we see from our supply chain vendors, and the price adjustment that we made shortly after to our customers. So, you know, let's start with the supply chain of price adjustment or price increase. I would say that unlike what we have seen last year in 2021, and primarily in Q-to-Q in the third quarter of 2021. Today, we see more kind of an end of price increases from our supply chain vendors. It's not in the same order of magnitude that we've seen last year. If you remember, starting from this year, January 1, this year, we implemented the price adjustments to the price increase to our customers to compensate on what we've seen with respect to our supply chain. And part of this price increase also referred to the automotive customers. I must admit that in the current circumstances, we don't believe that the price will go down in the foreseeable future. It doesn't seem like that. So, I believe that we reach to some kind of status quo that I believe that will be give us at least through the end of 2022.

[Atif Malik:]

Yes, and one last one to Gideon. Gideon, some of your auto peers have talked about an inflection in second half in auto per ADAS as doing video or call comments. Understand you guys have you have an incubation time for Europe for your chip. How are you looking with auto market? Do you also see some type of inflection happening in second half into next year? Well, can you please elaborate the question? I'm not sure, I did understand the question. Yes, I'm just trying to understand the trajectory of your auto sales. Are you seeing second half meaningfully higher for auto sales over first pass into next year? Actually, yes. We -- let me spell it perfect for the questions, I think it's very important to elaborate here, we see the deep lensed solution for this market is something that doesn't matter whether it's in video or others that they will need to transfer data from sensors to the ECU. So, whatever the ecosystem you mentioned, will be the one who wins, we believe that most of them would need us to complete the solution. Now, there is in our -- as you know, in our market, the times are not fast, it's an automotive, it's slower than the Audio- Video. And the time takes between the design wins, to when you see the, not the big numbers, the ramp up is longer. So, if you're looking at whether in the second half of 2023, we will see ramp up from those numbers, then the answer from the [indiscernible] the answer is no. If looking for whether we are going to continue with the rough with existing, we think the answer is, yes. I hope, I answered you. Got it. Thank you. Maybe just to add to what Gideon said, if we take 2022 as the reference here. So, you know, I just mentioned that we do believe that we're going to double the revenues from automotive in 2022 compared to 2021. In this year, by the way 2022, still most or I would say all of the revenues that we anticipate will come mainly from the business that we have with Mercedes Benz, we continue to see the deployment of our chipsets in more and more models within this OEM. And as we mentioned in the past, we also have the project that will run together with the tracking company called Stoneridge. We mentioned that we anticipate the production ramp-up at the beginning of next year. So, I can say that everything is progressing according to the plan, it seems on track with respect to the -- to be mass production. And currently these are the two main projects that contribute our 2022 for automotive revenues. The next question is from Rick Schafer of Oppenheimer. Please go ahead. And I'll add my congratulations. My first question if I could, [indiscernible] congratulations on the OMNIVISION partnership you highlighted on the call. And I believe you only began sampling their last quarter in 1Q. But I could be wrong. Beside a longer standing relationship, or is this an indication of how fast future A-PHY design winds could happen? Well, I think the answer is both. We know those competence for a while, but the time it takes once they see the chip, and once they see that it's working, then it was really, really fast. And the -- I will say the convincing stage looks shorter and shorter. And people, when they see the concrete of how these chips solve the real problem [indiscernible] and solve their future problem of how to deliver data from their sensors to the computer, the convincing time looks is shrinking from a customer-to-customer, as you know that it's not the first one who are committed to us a -- on MIPI A-PHY. And definitely the only vision was very encouraging and we're very happy about it. Well, thank you, thanks for that color. And maybe for Dror, I believe you came into this year with the 78 million or so in backlog. I'm curious if you could kind of update us on where backlog is now maybe give a sense of how that splits between AV and Auto and how much that I don't know if you see how much you can share. But how much of that would be would be shippable, let's say this year? So, I would say that we continue to see strong bookings and backlogs that are better than our internal projections. I would say that our backlog remains robust, contributing to our increased forecast for this year 2022. This is part of the reason that we raised the guidance today. We see the progress in the booking and the backlog in both Audio- Video and Automotive. It's very encouraging, and it's very positive trend. And I will just say that we're already starting to see backlog that is scheduled for shipping in 2023. That further increase our confidence in our revenue growth trends. So, we feel very confident with respect to 2022. And we start to see more and more activities for the first half of 2023. Thanks, Dror. And if I could sneak one more, you know, and I'll revisit the gross margin question particularly as it pertains specifically to auto. I know you talked about that improving the scale. And I know you also mentioned that you think prices are pretty stable here pretty firm. So, does this change your long term target for auto for gross margin, you know, for that segment over time? Thanks. So, I would say that, in a way it changed a bit the revenue projections that we see are part of it is reflected in the code and the guidance that we provided today. And we are now trying to understand and analyzing what will be the long term impact of this increase in prices. With respect to gross margin, you know, I think that what we see today in automotive and we see some improvement in the automotive gross margin as well. It's also part of the fact that we see ramp-up in the volume. And we see that the businesses scale and that one of the outcome of this increasing volume is the improvement of gross margin in semiconductor business. Having said that, if you remember the basic of our business, you know, you'll remember that we are dealing with Audio-Video and Automotive both of them are growing very fast. But still we anticipate that automotive business will grow faster than the Audio- Video. And given the fact that our gross margins in Audio-Video are higher than the Automotive, I would say that I already started to say that the weighted average gross margin that we anticipate going forward is expected to decline a bit as automotive will contribute more to our top line. Having said that, I think that in overall the steady state gross margin of the company will still be above the number that we traditionally convey to you which will be north of 60%. The next question is from Suji Desilva of ROTH Capital. Please go ahead. Hi, Gideon. Hi, Dror. Congratulations on the progress here. So, the revenue question for any impact on the -- from the supply chain in terms of under shipping the demand in the first quarter or second quarter guide, or is that not an issue? So, thanks for the question, not specific -- right to talk again. I would say that, despite a very challenging supply chain environment, we still managed to fulfil on a timely basis, all our customer demand. And we're very proud about it. So we have not seen any negative impact of the current circumstances in the semi business on our business. We do not, by the way, see any negative impacts on our second quarter and to be honest, we believe that we'll also be able to fulfil the guidance, the revenue guidance that we provided to you today, I think that we navigate successfully with our vendors. So we managed our inventory levels in the right way. Having said that, it comes with some issues that we've mentioned in the past. Today, we see longer or extended lead times from our supply chain vendors. We obviously we add to extend our lead time to customers. And right now we don't see any improvement in the space. We talked about the price adjustments or the price increases that we received from our vendors that we passed on to our customers. And more than this, you know, you see that we had to increase our inventory level, we just reported that we increase the inventory by $3 million compared to the end of last year. Part of it is obviously the fact that we intend to sell more this year. But part of it is because our vendors or suppliers are telling us that they don't see any recovery in the lead time. Therefore the recommend that we will place longer purchase order and will commit to capacity. And again, it's part of the penalties that we pay today. It may be your centers. Thank you, Dror. And I would like to add here a sentence. This also created a kind of an opportunity, because in order to be on time and order that our customers would not suffer from what happens in the world. We had to tighten the relationship in the sense of discipline of giving the forecast and even giving the orders. And at the end of the day, we'll see you know, you have to see some benefits even in things and actually, we did and I think this also created some - I would say increase in the intimacy between the companies, the supplier, as a supplier and then as a customer. Okay, well, that sounds like really good execution through a tough environment. On the AV business, can you talk about what the content opportunities for you in a system pre and post COVID? I'd imagine the hybrid systems that are coming out post COVID have many more peripherals attached displays might so forth, maybe you can give us some order of magnitude of how much the content per system is increased in the designs that are coming out post COVID. As we're intently getting one of the – seem great question and thank you for the question, I want to actually give you the opportunity to elaborate a little bit. The COVID created new phenomenon, the some of them will not expire after the COVID. I believe for instance, that working from home would not expire, the hybrid education is just increasing after the COVID. The phenomena of what's called a harder room that creates for us great opportunities for us extension and other extension. All of them are post COVID phenomenon that create also some new -- some newer product and some of those products require new chips from us that were not in our plan. I would -- actually we did give some information in the past about future development of future products. And we see especially in extension actually all of them require extension and another thing which happened after post COVID is that we see more and more security for automotive Jeeps to find the way to the Audio-Video world, and some of the extensions that would be needed. The automotive solution are very suitable to give solution for Audio-Video world. So yes, the post COVID has effects of something that started in the COVID and that will not expire and something which gave me new thinking. Everything I believe will never change back. I hope I answered you.

[Gideon Ben-Zvi:]

Yes. Thank you.