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 Second Quarter 2022 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode. Opening remarks by Valens Semiconductor management will be followed by a question-and-answer session. I will now turn the call over to Daphna Golden, Vice President of Investor Relations for Valens Semiconductor. Please go ahead.

Thank you, and welcome everyone to Valens Semiconductor's second 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. In the coming weeks, we’ll be in Chicago, Las Vegas and New York for investor conferences and meetings. If you're interested in meeting with us, please email me at investors@valens.com. With that, I will now turn the call over to Gideon.

Thanks, Daphna. And thank you everyone for joining our call. Earlier today, we reported quarterly results that exceeded our guidance. Our Q2 revenues reached a record high as we continued to meet the growing demand from our customers for audio-video automotive solutions. Q2 2022 quarterly revenues were a record of $22.5 million up 28% compared with Q2 2021. We also achieved better than anticipated gross margin and adjusted EBITDA. Taking into account our better than anticipated first half of the year and visibility into the second half of 2022, we are increasing our full year revenue guidance and substantially improving our adjusted EBITDA guidance for the year. I'm also pleased to share with you that we are now expecting to reach adjusted EBITDA breakeven towards the end of next year 2023. We will discuss this in more detail throughout the call. Now, I will turn to a review of our two business segments. Starting with audio-video, as organizations continue to invest in enhancing and optimizing content distribution, the main trends we are seeing are the tradition to high resolution and growing demand for high bandwidth video connectivity and camera imaging extensions. Corporations worldwide are focused on improving flexible hybrid workspaces, as part of the next normal trend, education systems aim to enhance participation and provide the same experience for in classroom and remote students, in both the corporate world and in education devices enabled by our technology, foster equity by allowing all participants in a hybrid environment to participate and collaborate with other from wherever they are. In healthcare, there is an increased focus on safe, uncompressed zero latency, high bandwidth, video connectivity and camera imaging extensions. This enables healthcare staff to properly diagnose and ensure patients and healthcare professionals safety. Lastly, command-and-control centers require real-time, uncompressed content delivery to…

Thank you, Gideon. I'll start with our second quarter 2022 results and then provide our outlook for the third quarter. Our updated full year 2022 guidance and our plan to reach adjusted EBITDA breakeven towards the end of next year. Beginning with our second quarter 2022 results. We came in above the top end of our revenue guidance, achieving record revenues of $22.5 million an increase of 28.4% from the second quarter of 2021. The higher than anticipated revenues driven primarily by Audio-Video also contributed to an overall higher than expected gross margin. Second quarter 2022 gross margin was 70.2% compared to last year's 71.2%. Non- GAAP gross margin was 71% similar to 71.1% in Q2 2021. Operating expenses were $23.7 million in Q2, 2022, compared to $16.5 million in Q2 last year. Research and development expenses grew by $3.9 million representing 55% of the $7.2 million year- over-year increase in OpEx. This reflects our investment in expanded product offering to address the new business opportunities ahead of us in both automotive and audio- video. SG&A expenses were up by $3.2 million due to continued investment in product promotion, as well as expenses related to being a public company. Turning to adjusted EBITDA. We exceeded our guidance, reporting second quarter 2022 adjusted EBITDA loss of $4.5 million, compared to the midpoint of our guidance range, which was $9.3 million. These better than expected results reflect a combination of higher than expected revenues and gross profit. The rescheduling of certain automotive R&D expenses from Q2 to later this year, and the strengths of the U.S. dollar, which positively impacted expenses paid in Israeli shekels, mainly for compensation to employees based in Israel. Q2 GAAP net loss was $10 million and included $3.6 million of financial expenses mainly related to the valuation…

Thank you, Dror. We are proud of our results for the second quarter and the significant progress we have made in executing against our business plans and strategy since going public almost one year ago. We are well-positioned for sustained growth and success and to create value for our stakeholders. We serve two large, fast growing markets audio-video and automotive. We have the first mover advantage for wired, high speed connectivity solutions, a compelling business model and a clear path to cash flow breakeven. I would like to take this opportunity to mention that, on September 7, we will be hosting a webinar with OMNIVISION to demonstrate our MIPI A-PHY-Compliant Camera Solution for ADAS. The demonstration will highlight the joint solutions, smaller camera design, reduced power consumption, lower camera cost and interoperability with the wider A-PHY ecosystem. As the A-PHY ecosystem continues to evolve, Valens Semiconductor stands to benefit from the growing awareness of the innovative MIPI A-PHY productivity solution, which mainly is one of the key technologies to enable ADAS and autonomous driving vehicles. I would like to thank our team around the world for their ongoing commitment and execution. I'm confident that they will continue to drive Valens Semiconductor’s continued success. Operator, I would now like to open the call for questions.

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

Congratulations on the progress here. A nice update. So I hope you can elaborate on the OPEX. You're pushing out to improve the adjusted EBITDA forecast. What the product kind of strategy shift is if you could elaborate there would be helpful? Why you're emphasizing sensor to ECU connections versus what was pushed out? Thanks.

Okay. Thank you very much for your question, and thank you for the compliment to start with. We're definitely very happy as well. So our current R&D budget for 2022 is lower than the original plan, primarily driven by actually two reasons. First, a portion related to rescheduling of certain investment from 2022 to 2023. For example, even two weeks push out of a tape out can translate into millions of dollars moving from one year to the next. And the second is our refined focus on sensor to ECU connectivity solution, that match our prospective customers and partners roadmaps. We hear it from them as well. As we discuss in our prepared remarks, this is actually the focus and being more accurate on the market. And this allows us to reduce our originally planned investments in R&D and slow the pace of hiring. I hope this answers to your question.

Yes. I think so. And then maybe looking ahead a bit to calendar year ‘24, where you'll have positive EBITDA. Do you have any rough assumption of what the mix of auto versus AV would be, and at that point, would auto gross margins still have upside, would they, or would it be fully scaled at that point?

You referred to 2024?

When you have positive EBITDA. I'm trying to figure out how much auto you're assuming to kind of get to that point?

So, Suji, first good to talk again. It's too early to talk about 2024 at this point in time. I can just tell you that in light of the desire, our indication that we're going to be reach adjusted EBITDA breakeven, exiting 2023, we are going to be cash flow profitable during 2024. At this point, I think that it's too early to say what will be the mix between audio-video and automotive, but definitely as we scale up, as we ramp the volume of automotive, we're going to improve the gross margins of this segment of the business.

Okay. That's helpful Dror. And then maybe lastly, you provide some end market data for auto for ‘25, ‘26. Does that need L4 to begin or is that L2 plus L3 automotive? That color would help be helpful as well.

So Suji, I think that – and we discussed it in the past. I think that right now, all our projections and all our market analysis is based on the fact that in the coming years, we're going to see mainly L2 L3, or L2 plus cars. I think that it will take some time for L4 L5 cars to be on road, therefore, all the analysis and the projections that we're making is based on the lower level of the autonomous cars, the L2 L3 cars.

The next question is from Vivek Arya of Bank of America.

This is Blake Friedman on for Vivek. I was curious if you guys could comment on your visibility into 2023. I know you kind of mentioned you have strong visibility into the back half of the year, but any comments about next year would be very useful. And if you could break that out by the different end markets you serve, that would be great.

So I would say that, as you know, we serve two large and fast growing markets. We play in the Audio-Video and we play in automotive. If we break it, we are in close contact with our current Audio-Video customers. And we see strong demand from them, especially given the fact that we are expanding into new verticals that we mentioned, education and industrial and medical, et cetera. And in addition, we continue to see the expansion of the VS3000 and we expect more contribution for this device. On the automotive side, obviously, we're going to see more Mercedes Benz models on the road that where we will find our chips inside, deployed in this car. And in addition, as you remember, we expect to see some revenues coming from the project that we have with the truck company with Stoneridge. So, despite the fact that we're not going to provide any guidance at this point for 2023, I can tell you that we expect to continue the growth trend of our revenues continues in 2023 as well.

And then secondly, just across the tech supply chain, there have been concerns regarding inventory buildup. So if you can provide any commentary on maybe what you're seeing at your customers regarding that issue, that would be -- that'd be great.

So, first, if it's -- if you watch the if you review the PR that we released in the morning, you noticed that our inventory balance increased by something like $5 million compared to the end of Q1 2022. We'd mention a few reasons for this increase. The first one is the fact that obviously we need to increase the inventory because we anticipate more units, that we intend to sell in the coming 12 months. The second reason is the fact that the refreshment of inventory today costs us more given all the price increases that we see in the industry. And in addition, if you remember in the past, I mentioned that in order to secure production capacity, we had to commit to all supply chain vendors with longer-term purchase orders. And now this is exactly what we see. We see the increase in our inventory. We are not concerned about this inventory because I believe that we're going to consume it in the next 12 months. So I believe that in this respect, we are okay. We continue to monitor the inventory level with our customers on a regular basis. And I would say that in most cases, we do not see any change in their normal inventory balances. Having said that, in some cases, we see some customers facing a shortage in certain components from other suppliers to complete their work in process inventory (their WIP), which means for us that, they may resume first of all is that, we see some stocking on their side. And it means for us that, they may resume purchasing of these certain products only after they sell their existing inventory. So this is regarding the Audio-Video. In Automotive, the purchasing pattern, I would say, remains intact as the Tier 1s are purchasing according to their 12 months rolling forecast.

[Operator Instructions]. There are no further questions at this time. Mr. Ben-Zvi, would you like to make your concluding statement?

Yes, thank you very much for everyone. And I want to thank you all for joining us today. And have a great rest of the day, and we’ll meet you again in the next quarter. Thank you.

Thank you. This concludes the Valens Semiconductor second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.