Valens Semiconductor Ltd. (VLN) Earnings Call Transcript & Summary

Hello all, and a warm welcome to Valens Third Quarter 2021 Earnings Call. My name is Lydia, and I'm your operator today. [Operator Instructions] If you'd like to ask a question at the end 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.

Thank you, and welcome, everyone, to 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 have joined 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 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 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, subsequent events or changes in strategy. We will be discussing certain non-GAAP measures on 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.

Thanks, Daphna, and welcome to Valens. You definitely came to the right place. Thank you, everyone, for joining our third conference call as a public company. I would 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 30 is an exciting milestone in our corporate journey that will help us continue to push the boundaries of connectivity. Our team remains focused on execution to address the unfolding near and long-term opportunities in the large and growing automotive and audio-video markets 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 supported balance sheet that will support our continued growth. For those who will be new to Valens, I would like to take a few minutes to provide a brief overview of our company and the main reason while we believe we are well positioned to create value for our shareholders. First, and to put it as simply as possible. Valens is a company that excess industry standard for hybrid connectivity. Within in the audio-video market, and we are doing it again in the automotive market. Second, we operate in large and fast-growing addressable markets and set our business model offers a compelling financial model. I'll let to address these in greater detail, starting with our company's ability to set standoff. In our audio-video business, we invented HDBaseT technology, which quickly became behaving industry standard for nonwage high-speed digital connectivity. We are the leader in this market today and enjoying a profitable business with significant growth opportunities across a variety of vertical. Our chipsets are deployed in products manufactured by technology leaders, Crestron, Exxon, Extron, Logitech, AG, Samsung, Panasonic and many other restatement brands. Our audio-video chipsets are embedded in a variety of end products from video contract to home entertainment outdoor TVs, projectors and cameras. We benefit from the video conferencing trends and started well before COVID-19 and significantly accelerated during the pandemic. Videoconferencing and the peripheral audio-video equipment is now expanding way beyond traditional business application and is moving rapidly into the education, medical and the payment industry. I'm sure you would 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 measure of what we call the new hybrid normal. A trend which we believe is here to stay. In our automotive business, we have developed superior solutions for in-vehicle high-speed connectivity. Valens Technology address critical needs for the advanced cars of tomorrow that will demand sales connectivity for a growing number of consoles, cameras and displays. We are proud that our chipsets are already on the road in Daimler [indiscernible] base car, providing best-in-class connectivity for infotainment applications. In what we consider to be one of our automotive business most significant achievements to date, the Valens Technology was selected by the well-known start-up organization MIPI Alliance as the base for its new high-speed in-car video connectivity standard A-PHY. This standout was released by MIPI in September 2020 and shortly after was fully adopted by the prestigious IEEE organization as one of their automotive standouts. Obviously, Valens enjoys a [ sell move ] advantage with MIPI A-PHY. We will begin shipping engineering status of our standard compliant VA7000 chipsets to select prospect customers and partners next month. And we are working closely with leading OEMs, Tier 1 and Tier 2 on deploying our technology into the next-generation car models in the coming years. To address our expected value proposition, I'd like to turn to our large and growing market opportunity. We estimate that our serviceable averment market will grow to more than $9 billion in 2026 across our automotive and audio-video markets. This provides us the potential to drive our revenue growth over the coming years as our next-generation connectivity solutions are widely adopted. Valens established a track record of market leadership with exceptionally set industry standards in both of our businesses and then successfully truncated our innovation into remarkable customer wins. Our digital signal processing based connectivity technology is unmatched in speed, performance, distance and resilience. This uniquely positions us to capture a substantial share of the rapidly growing automotive market as well as to increase our foothold in our audio-video business. First, we have a compelling financial model. In automotive, considering the nature of the business, [ time ] will ensure additional long-term contracts and secured revenues . In audio-video, customers tend to use our solutions for a long period. They like our products because we offer an unmatched combination of best of breed of feature set and cost performance. Our business model is supported by high gross margins, near-term and longer-term revenue visibility. With that, I'll now turn the call over to Dror Heldenberg, our CFO, to review our key business milestones, third quarter financial results and outlook.

Thanks, Gideon. I'll begin with a summary of our key business developments for the third quarter. Then I'll discuss our results and our outlook for the fourth quarter. We are continuing to see the automotive ecosystem unite around the MIPI A-PHY standard ahead of our scheduled shipments of this market's first A-PHY compliant chipset that is expected next month, with a normals 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 module. Sunny Optical is integrating our VA7000 transmitter chipset into their camera modules that enable advanced driver efficient system known an ADAS and surround view application. The partnership also provides us a strong foothold in the vast Asian market. Another example of the growing market interest in A-PHY comes from our new partnership announced 2 days ago with LG Innotek for the supply of system in package modules for MIPI A-PHY compliant chipsets. Clearly, the addition of LG Innotek reflects the continued expansion of the MIPI A-PHY ecosystem as another vendor has declared its intention to provide A-PHY based products. In the audio-video business, our latest edition, the Valens [ slate ] of product family was released to the market earlier this year and has already been embedded by leading industry players. We now have more than 30 customers in stages of product development and integration, and we expect to see multiple products per customer on the market by year-end. Now I'll share some highlights from our third quarter financial results. Our Q3 results demonstrated once again the significant progress we are making to sustain our audio-video and automatic businesses. All comparisons are year-over-year unless otherwise noted. We are very pleased to report record revenue of $19.1 million this quarter, which represents an increase of 48.8% from the third quarter of 2020. Broken down by business, our audio-video revenue 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 still slow, we are starting to see impressive growth in this part of the business as our products are on the road, in mass production and are expected to be deployed in additional car modules 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 increase in automotive revenues, which have 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 projection. We reported robust 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 onetime 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 target adjusted EBITDA, which is a non-GAAP ratio as the net profit order before the following items: Financial income or expenses; income taxes; equity in earnings of net; depreciation and amortization and finally; excluding share-based compensation. Our net loss in the third quarter of 2021 was $8.5 million compared to a loss of $8.8 million last year. And the loss per share was $0.94 better than the loss share of $1.17 in the third quarter of 2020. The loss share in the third quarter of 2021 was affected by several onetime factors. While they will not repeat in the subsequent quarter, that will still impact the calculation of the loss per share for the full year 2021. The non-GAAP loss per share for the third quarter was $0.19. It is calculated at the $8.5 million, excluding the onetime issuance cost of $6 million, resulting in a non-GAAP loss of $2.5 million for -- obviously for the quarter then declined by $13.164 million, which is the weighted average number of shares used in computing the net loss per ordinary share. We ended the third quarter with an extremely strong balance sheet with cash, cash equivalents and short-term deposits of over $205 million and obviously, no debt. This reflects $155 million of gross proceeds before payment of deal expenses from our [indiscernible] transaction and positions us well to accelerate our growth and advance our already leading market position in the older video and automotive markets. We plan to use the profit from the transaction to further amend the development and commercialization of Valens next-generation products, and we expect them to fully fund our business through breakeven. Now I would like to move on to our guidance. For the fourth quarter of '21, we expect revenue in the range of $19.4 million to $20.6 million. This guidance reflects an expected increase of our previous full year 2021 revenue guidance from $69 million to a range of $69.4 million to $70.6 million, which at midpoint represents a 23% year-over-year revenue increase. Gross margin for the fourth quarter are expected to be approximately 70% to 72%. Please note that for modeling purposes, you should have set around 98 million shares for the fourth quarter. To wrap up, our achievements in the third quarter of 2021 coupled with the bit of momentum we see as we enter the fourth quarter support our confidence in Valens continued success. I'm now turning the call back to Gideon Ben-Zvi for his closing remarks before opening the call for Q&A.

Thank you, Dror. To start up, Valens will operate 2 growing businesses with considerable opportunities to scale up in the future. The new market verticals we serve, the backlog at the end of the third quarter and the momentum reflected in the pace of bookings, all provided strong visibility with respect to our business. We look forward to continue executing 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 270 employees around the world for ratification and execution. Operator.

[Operator Instructions] And when preparing to speak, please ensure first question today comes from Suji Desilva of ROTH Capital Partners.

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 -- maybe on historical numbers compared 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?

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' commitments and deliveries despite the global supply chain shortage. Now in terms of the impact of the supply shortage of Valens, I would say that being part of the semiconductor industry, Valens is affected like all other companies. And I would say that the influence is mainly in the foreign area. One, we see extended lead times that require the 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 then third, another factor is the fact is that everyone is seeing price increase in our industry. And therefore, we queue 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.

Okay. That's very helpful there. And then the standard adoption A-PHY, MIPI and then IEEE adopting it. Can you talk about maybe getting 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.

So I guess, actually, you're asking about the MIPI A-PHY and the trend revenue for A-PHY. And actually, I would like to highlight several factors about this and the potential momentum it creates for us. First, I am happy to say that more than 15 leading OEMs, Tier 1s, Tier 2s are in different stages and easier to start testing of our solution. The second, that the recently announced partnership with both the Sunny Optical, I guess, most of you know, it's a leading vendor of automotive camera from the Far East and very strong in the Asian market. As to already existing partnership that all of you are aware, SONY and Mobileye. And the third, we explained it was 2 or 3 days ago when we announced that the LG Innotek developed a system in package what's called SIP that will the number of A-PHY sources in the market. So actually, you see the trend is expanding. -- people accepting it as a solution. And if you look, like intellectually on technology, you see it's really a superiority and may I say, a very easy demonstratable advantage.

Okay. Now it seems 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 '22, '23, how Daimler ramps and when is it 7000 start contributing to revenue?

So first, thanks for the question. I would say that at least in the next -- in the next 2 years, the one share of the revenues will still come from our projects with Daimler, 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 in 2023, which means for us that we will start to see initial revenues already at the end. 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 this VA7000 would be the first product in the market that is compliant with the MIPI A-PHY standards. So we anticipate that they will start to evaluate this product as part of their integration process in their platforms. And if everything goes well, we believe to start seeing this product in mass production somewhere around the beginning of 2025.

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

So obviously, we're going to see that the fourth quarter will not have the onetime issuance cost that, as you remember, in the third quarter, we 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 are always observed in the fourth quarter. But I would say that we don't see a significant increase compared to the third quarter.

Okay. Congratulations again.

Thank you.

Thank you. [Operator Instructions]. Our next question today comes from Rick Schafer of Oppenheimer.

Congrats on solid results because they're 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.

Sure, Rick, and thanks for the question. So as of today, I would say that in average, you can find between 3 to 4 chips in every Daimler car that leave the manufacturing line, which means for us, revenue per car, that is a 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 car. But if we take as an average, something like 8 to 10 different links, high-speed video links in the car, I would say that our content or revenue per car can reach to $70 to $80. So in cars where you will find our solution for entertainment combined with our distributions for ADAS, the budget per car, the revenue per car can easily reach to $90 to $100 per car.

That's great color. 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 and SERDES, but sort of a legacy connectivity. 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?

So first of all, let's distinguish between the HDBaseT and the A-PHY, okay? With respect to the HDBaseT, which is we -- it's mainly serves in the audio-video market. I'm not sure that we're going to see a lot 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 by a standard, the BPA 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 the other solution. And the fact that we are starting to see the initial partners. And given -- and we mentioned in the earlier calls, we mentioned Sunny Optical. We mentioned SONY. We mentioned LG Innotek, the just -- the deal that we just announced 2 days ago. The fact that 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 1s. But you know with the fact that we are stand behind these standards, we believe that we are well positioned to lead this camp and to capture a significant premium that we will see in this market.

If I could sneak one more in. back 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. I'm just trying to -- and then maybe even within that, if we could give sort of a sense of how much of that backlog is AV versus automotive?

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 allocation between the fourth quarter and next year backlog, I would say that we are very, very confident with our ability to meet our revenue target for the fourth quarter and I assume that you understand between the lines that we are well positioned here. And the remaining balance of the backlog supposed 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.

Thanks guys, congrats.

Thank you.

[Operator Instructions] As we have no further questions in the queue. So I will turn the call back to Gideon Ben-Zvi for closing remarks.

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