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

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 investor conference call to discuss 3 automotive design wins from leading European OEMs. [Operator Instructions] Opening remarks by Valens Semiconductor management will be followed by a question-and-answer session. I will now turn the call over to Michal Ben Ari, Investor Relations for Valens Semiconductor. Please go ahead.

Thank you, and welcome, everyone to Valens Semiconductor Investor conference call to discuss 3 automated design wins from leading European OEMs. With me today are Gideon Ben-Zvi, Chief Executive Officer; and Guy Nathanzon, Chief Financial Officer. Earlier today, we issued a press release that is available on the Investor Relations section of website under investors.valens.com. As a reminder, today's 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 with the SEC on February 28, 2024. 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 reconciliation of these metrics within our earnings release. With that, I will now turn the call over to Gideon.

Thank you, Michal, and hello, everybody. And before I start, I just want to welcome Michal who just joined us, and we are very happy with you joining, Michal. So good morning to those of you in the U.S., and good evening for those of you who are in the Far East and the rest are in Israel. So good afternoon. I will speak not long today. I will describe the deal and what we have, and then we have more time today for questions and answers. And I will start with the statement that Valens is all about resilience and all about resilience, meaning the company is a resilient company that our products are selling resilience to the customers. And I think resilience is more than a buzzword in the case when you're speaking about Valens and also those design wins are all a result of the resilience, and I will elaborate in a few minutes. We mentioned 2 design wins in 2023. It came up as we already have 3 design wins in 2024. We didn't have anyone in 2023. I'm sure that there will be questions about it, it's fine. And we are looking to ramp up over $1 million in annual revenues in a period of 5 and 7 years, and this is the number that are the stocking number. I'm sure that there is a lot of opportunity to grow here. Also a little bit, I will elaborate afterwards. We're starting with a small number of cars, which is 500,000 cars. But as you know, when you're speaking about safety, unlike like luxury, no model in the world will stay with safety only for the rich with the high-end models. Companies from all the different countries and all the different worlds, the safety features like seat belts or air bags will go from the most expensive car to the least expensive car, very fast, and this is something we believe and hope to see as part of our growth. And the products that we are selling is for ADAS. ADAS is a very interesting need. ADAS is a system that, on one hand, there is a computing power that generate results, generates assessment of both the camera on the front and the radar to see on the other side. The radar, the sensors, which are either cameras or radar is connected to the ECU with a link. And this link is very fragile. This link is subject to a lot of distortions and a lot of noises and the most known noise, I guess you heard the name from us more than once is EMC, which is electromagnetic. And electromagnetic influence can create very actual dangerous situation and think about the following [indiscernible] actually connected to each of us. We drive our great new car with the most sophisticated ADAS system and we have the best camera on one hand and the best computing power on the other hand, and we are driving [indiscernible] or above a bridge or near a truck, we don't work what is inside, and each of them exposes electromagnetic influence and the link is broken and we will not see the red light. We would not see the small foot of the child that is 100 meters from us is about to cross the street. We're speaking about taking a very sophisticated ADAS system and make it inefficient and insecure because of the electromagnetic influence and the electromagnetic threat that is not taken care. And this is where we are spoken about resilience at the beginning, the Valens technology is resilient, and we give the solution and we give the immunity against this electromagnetic influence and give those ADAS systems the safety needed for the driver to be safe for himself and for others. And I want to elaborate these design wins are validating the situation. In order for a company in Israel to win design wins of big companies, it's not enough to be a little bit better. We are smaller. We are from Israel, and we are not incumbent in the industry. We can't win in points. We need to win a knockout in order to get the trust of the OEMs. And they need to see that the value that we give is value that is significantly more important and better than others. And I guess that one day when all names are exposed and spoken, this will be outspoken. In some tests, we didn't show it and some of you were guessing our shows and could see that, that we show -- we demonstrated resilience of up to 20x better in how well we comp with electromagnetic influence. Part of this design win also is elaborating relationship with the Tier 1s. In order to have such a deal, there -- the partners, they are the sensor manufacturers, there is the ECU or the ADAS manufacturer that altogether have a system. And today, we have 2 important partners, significant partners in the market that would tell everyone, this works with Valens, Valens is a company which you can trust, and we believe that it will help us in further OEM to grow the market. Yes, indeed, the first 3 design wins took time, more than we wanted and more than some of you wanted. But we believe that the -- every stock is longer and harder and it is a start. And we genuinely believe this is only the beginning, and we will do everything in order to continue and elaborate this opportunity. So this was relatively short to what you are used to in our other earning call. I hope not disappointed by this. And I'm actually now open for questions and answers. So Yoni, please take it from here.

[Operator Instructions] The first question is from Suji Desilva of ROTH Capital.

Congratulations on the win here, everybody. Maybe the calendar year '22 with win contrasting it to the current one. Just kind of give me a sense of '23 was kind of a building phase and then the pipeline from here? I just want to also confirm the second win is a new OEM versus the first win [indiscernible].

Well, of course, we cannot elaborate. Unfortunately, I have to disappoint you and stay vague. We are subject to a lot of constraints in this. But I would say one thing in order to just not leave you with nothing answered. And I would say that all the signs are that there is a scale from these design wins. And -- but unfortunately, I cannot answer the particular question you asked. But I'm happy if you want to maybe ask it in a different way that they can be more open as we know some time and they don't want to disappoint you, Suji.

Fine. I understand the constraints you're under. Maybe the last part of my question was the pipeline from here forward obviously. You're recovering with the second win here. Just what does the pipeline look like? And maybe you can talk about the geographic opportunity here? Is it going to be Europe-centric near term? Or are there U.S. APAC opportunities in the near-term pipeline as well?

Okay. Well, that's a tricky one, but I can try. The first, I want to say that we are very, very thankful to Japan because Japan helped to educate the market about EMC. You know that when we started about the EMC, we heard sentences, especially for Europe, actually which were the first to take us, like, guys, you have a great solution looking for a problem. And we try to say that, guys, it's a real problem and it was quite hard to way to convince but the Japanese and especially JASPAR made this education today, we really seriously do not need to mention it anymore anywhere. The need and the importance of electromagnetic is clear and I'll tell you why, it's not obvious, but when you need -- people need more resolution and they need more resolution to see more particular almost accident case. And in order to have almost accident case, sometimes need to move from 2 gigabits to 4 gigabit to a better camera with small debt. And the instinct is, okay, 2 gigabit to 4 gigabit, it's probably double the EMC exposure. No, it's not linear. It's very exponential, the move from 2 gigabit to 4 gigabit or to 4 from 8 is sometimes 10x more exposure and more risky to the link to be broken. So Japan from educating the market was very helpful. And there are -- now there are some countries which have just mentioned the name, it will disclose who the customer is and who cannot do it. But I can say that a very big part of the industry are in transition in the coming 3 or 4 years that will have a new ADAS system that can cope with small cases of accidents. And so the pipeline -- and the whole world, you're speaking about 12, 13, 14, how many OEMs really big OEMs, they are. I can say we are not unknown to any of them. And to some of them, we are -- we have different level of discussions. And I think it's already said almost a little bit more than a show, and I'll stop it here, Suji.

Appreciate that. Maybe one for Guy or just on the financials. I appreciate the unit numbers here, the 500,000 per year ramp. Just give us a sense maybe the shape of the ramp starting at '26 whether it takes a few years to get up to that or whether it's a relatively quick element. And is ASP really taking that $10 million [indiscernible] the simplest way to think about an ASP framework.

Okay. We answer [indiscernible] 2 answers here. The first 1 is about how the scale looks in automotive and the scale looks in automotive in 2 ways: first inside the same model sometimes the model say we start only with 4 cameras. And the scale inside same model going from 4 to 8 and even here examples of 11 cameras. Adding to this also a surround view in some cases, which makes it a lot of cameras and sensors. Actually, there's also scale within the same model. And of course, there is a scale in the model. So of course, a company would not start only with the high end, as I said, it's not level is that you can be with 4% of your cars. This is something -- when you speak about safety, the safety of people from the most expensive model to the least expensive model in the same company, it's very few years. If you remember, when the ABF started, how long it took from the most expensive cars to the least expensive cars, speaking about our seatbelts or air bags, all of them is flying very fast. And this is our hope that this is going to be the same. At the same time, it's not the same system. In the same automotive, there will be cars, a vehicle, we say 12 cameras and cars with 8 or 10 cameras. And like in air bags there are companies with currently say 10 airbags which protects every single possible angle. And those with 4, but you will not find a car without airbags. And this is very similar to what we expect the growth in the industry. And the second part, Guy will answer.

So typically, I think that from our past experience, as we've seen in the past, ramp-up of anywhere between, let's say, 2 to 3 years until full ramp up. This is what we've seen in the past in the same model. But again, as already explained, this is hopefully be the first and other to come after that on top of it.

Congratulations, everybody.

The next question is from Quinn Bolton of Needham & Company.

Congratulations on the win. I guess I wanted to start getting -- you sort of talked a couple of times about ADAS, not just being at the high end and sort of percolating down to the mainstream vehicles. It's not clear to me whether these design wins today are only at the high end and the opportunity to move more into mainstream vehicles is still ahead of the company? Or do these 3 wins already incorporate mainstream models at these OEMs? And then I've got a follow-up.

Okay. I will answer in the beginning of the general -- first, thank you for the question, and it's the first time we speak, so nice to meet you and the -- and welcome to the -- welcome to our conference call. And second is the -- I will answer the question here. Not all the cars starting with the high-end car is the experimental car. Actually, sometimes the midsize will be the experimental car with them, they start to go into the market. Sometimes it's the very high end and it will never be the low end. But it's not necessarily the most expensive as we had in the past [indiscernible] that started with the S series. So this is a general statement about the answer. In our particular case, and I cannot elaborate a lot, without disclosing too much, I can say that it was somehow tuned to expensive cars, but not necessarily the most expensive car of the company. There are more expensive car, but we'll wait to add the next phase, but it definitely didn't start with the entry level of any of the company. It never happens.

Understood. And then it wasn't clear to me, the design win. Are you going into the camera or radar module, are you going into the ECU or the ADAS sort of central processor, where does your chip go in these designs?

There are 2 chips. The transmitter is located near the sensor and transmits with the sensor scan and service through the link to the receiver, which is always near the ECU, very close to the ECU. So one is near the ECU, the receiver, which is usually a quad receiver, can receive [indiscernible] at the same time. The transmitter will be near the sensor, which is either a radar or camera.

Got it. So it's a chipset solution with transmitters at the sensors and then a receiver or multiple port receiver at the ECU to capture the signals from the multiple sensors communicating back to the ECU?

Yes. And to be particular, a little bit technical, sorry for -- if it's too technical, the transmitter is very small, very power efficient and can be in -- even on the bumper in the more sensitive area of the car. And the receiver is where the calculation and the mathematics, most of them are done and is bigger and takes, of course, more power and is located near the ECU.

Got it. And then in the press release, you mentioned 500,000 units a year or 500,000 vehicles a year to generate $10 million, which I think implies about $20 ASP for the chipset. It sounds like that's for the entire chipset that would include both the receivers or the transmitters and the receiver.

Yes. The numbers are -- it's not exactly dividing one by the other. We are making far more than $20 per car. And -- but again, we're not giving exact numbers of how many dollars we make per car. And of course, the receiver and the transmitter has a different price target. But taking and divide one by the other, that's the result, but sometimes the -- it's taking -- just to make this calculation, it might get the wrong answer, which is the case here, and the number is higher than $20 in the car and significantly.

The next question is from Rick Schafer of Oppenheimer.

This is Wei Mok on the line for Rick, congrats on your announcement. My first question is on the vehicle connectivity market. This is a pretty big market. It's very competitive and has some large incumbents. So I was wondering if you could talk a little bit about the qualification process, how are you able to get these design wins? And is there any feedback you can share on the reason they decided to go with your solution rather than the others?

Thank you, Wei for the question, and hello. The answer is as follows. As I said in the beginning, a company like us does not win in points. We are -- we need to win in a significant advantage. And as a smaller company and not incumbent in the industry, we have to have a blunt win. We cannot have a modest win. And the win today is because more and more companies understand 3 things: first, electromagnetic is a big issue. Second, the ways to solve this issue are either very short cables which is I don't know, either very expensive cable, which is another don't know and less flexibility of how to design the cars because all the others. What Valens enable is to have the longer -- the long cable you want to up till 50 meters, it enables to have cheaper cable in any category, whether it's -- when it's show that you can have a cheaper shield, which is a chip shield that we can have unshielded. In any case, we are saving on the cost of both the cable and the connectors and weight by the way, the more expensive shieds are also more heavy and shielded is more heavy than unshielded. So we had to demonstrate very blunt demonstration, we could not win in points in this case. And no one will -- and furthermore, I believe that it was a small -- it should be something that's on the level of enablers, not enabler. This is the level of requirement that we need to go through.

As for my follow-up, I was wondering if you could comment a little bit about state of the overall automotive industry. So it's been slow in the first half of this year. So I was curious what's changed in the last 3 months? Are you seeing more decisions being made, more design wins and any more activities in this area?

Actually, I think it's a question I should ask you, you're the analyst who knows the macro economy. And I am -- there are some changes in the macro economy. I believe, a little bit more hunger for innovation. We definitely saw that when the market had inclination in automotive say in vehicle numbers that a lot of this -- they decided to sacrifice the innovation, and this was part of the reason it took more time to -- for the design win. We sense some more hunger in the market for innovation. But I feel that I don't have the knowledge to speak macroeconomy about the automotive industry as general industry. And only my impression that there is more knocking on the door than before.

Sure. I appreciate that. Just for my last question, I just wanted to get a sense of the production ramp. It looks like production starts in 2026, and you guys gave some estimates on commercialization rate. So was curious how long does it take to get from start a production to commercialization ramp?

Well, the -- our product is ready. Our products can work now. The -- each automotive company has a lot of different projects that any of them, not necessarily the ADAS can create a decision to postpone in a quarter or 2 quarters or whatever the production of the car, it can be the targets. It can be nothing to do with that. So new model is something which is comprised from a lot of different small projects. We are certain that we are not the bottleneck here for their decision. We are ready and what we supply would -- is working. The ramp-up depends, as I said, on all those things I mentioned before, some of them can make it slower or faster. And you see that even now some cars that we see in the news, they start the shipment and then let's say we slow it down because of this reason. It is very hard to know. Our expectation, given the reputation of the OEM that it will be as they plan, with less surprises. But even the world that OEMs had surprises in the past. So it's -- we are taking a conservative measurement here and not assuming everything works by the book, the opposite. We assume that we need to understand that this is the industry.

[Operator Instructions] The next question is from [ Neil Rotenberg ].

Gideon, it took the company a very long time until it got this design award. How long you think it will take you to get the next one?

Neil, this is a question which I'm very happy being asked, and thank you for asking it. Usually, I would say it's a general answer that the first is the longer and the most complex and so forth. And we believe that the second one, we will not have a lot of the obstacles and a lot of the challenges that we have in the first and also we will have the reputation that we will gain due to being the first. I guess that's the -- and also the -- we are already speaking to many others, of course. It's not that we are in a situation that now we are starting to look for the next one. So I believe that the ramp-up will be regular ramp up, the first takes more time. The second takes less, the third takes less like in any industry, actually, especially in an industry which is so engineering focused. So we are hopefully not going to wait the amount of time we had to wait here. And I do hope that the amount of time we -- and what we went through reward us and that we will not regret took so long time because of the quality of the OEMs.

The next question is how $10 million revenue per year will become hundreds of million per year.

I'll explain. First, in each vehicle, you have many sensors and some of them don't start with all the sensors from us. So in the same car, it grows from 4 to 8 or from 8 to 12. So there is scale inside the same car. Second, there are scale in the model. As I said, no company will have the ADAS only for the rich. The companies will have the high-end products for the high-end car, the most expensive car. And then it goes down to all the cars. And as I mentioned before, if you look at the history of ABS or seatbelts or of airbags, this is safety. It's not luxury, and safety goes from the most expensive model to the least expensive model very fast. Speaking about the market size, and we're actually -- our -- the world we look is the market is the tone of the market. A world of 90 million vehicles, which between 8 to 12 links per car, that's what we see in front of us. How long it take? And this is where we're going after. Of course, we don't expect to be 100% of the market. Furthermore, with MIPI A-PHY, there will be people competing with us on this technology, which will bless them for doing that. But we're looking at the market of more than 1 billion links a year, not tomorrow, but in a few years. And each link has certain amount of dollar per kit costs. And this is the market we're doing and the scale is in the car, more links and more model in the same OEM, and that's a 2 scale and no one is starting with all the models at once. No one in the world. It takes the time. If you look at any OEM, now, like if they have 4, 5 or 6 lines, it will take between 4 and 7 years until they replace all the lines. Sometimes they have what causes the industry face lifting that they are doing in between the change of the line that are changing part of the inside technology, which is, for us, will be a very good news because it will be kind of a fast forward. But these are the elements which are in our favor for how to scale. I hope I answered you, Neil. And I see we have another question.

The next question is from [ Dori Fascel ] of IBI Capital.

Two questions for me. The first is it in the early '26 or late '26? And the second is how many sensors are going to be on those vehicles, how many cameras or radars?

Okay. I'll start with -- thank you very much for the question, and welcome. On the second question I can't answer, of course, because it's part of the reverse engineering information that discloses the information, which I'm not permitted to say. On the first question, it is hard to say. At the moment, speaking about the first half, but automotive industries, automotive industry, it less predictable. We are inside the company, we call it the industry with geological timetable. And we are prepared for it, but it's quite hard to say. And I can say something now that can change. So I'm sorry that you asked 2 questions, and I answered you 0 answers. I hope you don't hold it against me.

There are no further questions at this time. I will now transfer the call to Gideon to make a concluding statement. Gideon, please go ahead.

First, I want to thank you all for such a short notice come and be interested in Valens. We are -- it is an exciting time for us, which is a result of the very hard work and the hard work is just going to continue even more, and we are prepared and happy to do it. We are concentrating the work rather than the celebration, and I believe it's part of the word resilience. And again, thank you for all and hope to meet you all again in further good news in the future. All the best.

Thank you. This concludes the Valens Semiconductor conference call. Thank you for your participation. You may go ahead and disconnect.