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 Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. [Operator Instructions] 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 Fourth Quarter and Full Year 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 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 will be in California and in Europe for investor conferences and meetings. If you're interested in meeting with us, please e-mail 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. 2022 was a year of many successes for Valens Semiconductor. In 2022, Valens semiconductor continued to strengthen its leadership position in the audio-video market and focused on increasing its share also in the automotive space. A record number of Valens Semiconductor audio-video and automotive chipsets were sold for use in diversified business activities that support people’s daily lives. We accomplished record revenues of $90.7 million, driven mainly by greater-than-expected revenues in audio-video and we doubled our annual automotive sales. We also achieved better-than-anticipated gross margin and adjusted EBITDA and are well on the way to achieve an important milestone of adjusted EBITDA breakeven by the end of this year 2023. Looking at the most recent quarter Q4 2022, the trend of growth continued, and our revenues reached a record of $23.5 million, up 13% from Q4 2021. We also achieved better-than-anticipated profitability metrics. We believe Valens Semiconductor is well positioned to address the near and long-term opportunities in the markets that we serve for four reasons. First, we benefit from being an industry standard leader in both audio-video and automotive, which are two large and growing markets. Second, we leverage our distractive connectivity offerings across both of our business segments. This is expected to help us to enrich our product offering and accelerate the ROI on new products. Third, we are expanding the ecosystem towards mass production of our automotive VA7000 A-PHY compliance chipsets. Fourth, our continued investment in new products to augment our disruptive offerings for both markets. Turning to our segments, starting with audio-video. In 2022, we continued to expand our footprint in the audio-video market into new applications and verticals such as education, corporate, medical and industrial. In education, we are very proud that the largest public…

Thank you Gideon. I'll start with our fourth quarter and full year results and then provide our outlook for the first quarter and full year 2023. Starting with our fourth quarter 2022 results. We achieved record quarterly revenues of $23.5 million, an increase of $2.7 million or 13.2% from the fourth quarter of 2021 and 1.4% from Q3 2022. The higher than anticipated revenue led by audio-video also contributed to an overall higher than expected gross profit and gross margin. Fourth quarter 2022 gross profit was $16 million, up from $14.8 million in Q4 2021. Fourth quarter 2022 gross margin exceeded our expectations and reached 68.3% compared to last year's 71.2%. Non-GAAP gross margin reached 69.2% compared to 71.5% in Q4 2021. The change compared to Q4 last year reflects a higher share of revenue coming from our automotive business, which incurs a lower gross margin than audio-video. Operating expenses in Q4 totaled $24.1 million compared to $23.4 million in Q4 2021. Research and development accounted for approximately 2/3 of the Q4 2022 OpEx coming in at $16.5 million and included expenses attributed to the successful completion of our automotive VA7000 family chipset tape out as we prepare for mass production by our potential customers. SG&A expenses were $7.7 million, 9.8% lower than the $8.5 million in Q4 2021. In Q4 2022, we benefited from renewal of the D&O insurance at a significantly reduced premium. Turning to net loss and adjusted EBITDA. Q4 2022 GAAP net loss was $7.3 million, better than the $8 million loss recorded in Q4 2021 and adjusted EBITDA in Q4 2022 was a loss of $4.6 million, better than the $7 million loss in Q4 2021. The substantially better than guided adjusted EBITDA loss in Q4 2022 was due to a combination of several factors.…

Thank you Dror. We are proud of Valens Semiconductor's performance in the fourth quarter and full year 2022 as we once again achieved notable progress in both audio-video and automotive. Looking into 2023, the level of uncertainty is currently higher than what we have seen through the past couple of quarters, and we remain focused on those elements in our control. We're expecting to secure new design wins in audio-video and our initial wins for the VA700 in automotive. Valens Semiconductor will continue to innovate, leverage our core technology across both of our business segments and deliver new disruptive products to address market needs. We will continue to focus on the best opportunities, which we believe will drive sustainable growth and profitability for the company. Finally, before opening the call for questions, I want to thank all our stakeholders, including of course, our employees for their ongoing commitment to the company's success. Operator, I would now like to open the call for questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Suji Desilva of Roth Capital. Please go ahead.

Hi Gideon, hi Dror. Congratulations on the strong '22 and the strong finish '22. Looking ahead, you guided gross margin lower on automotive, I guess increasing in the mix. Would it significantly increase in 1Q versus 4Q '22? I know the full year, it will be up strong to the lower 62% gross margin. But is that going to start in the first quarter? I guess -- and related to that, what is the timing of VA7000 design announcement? Would it be more second half ‘22 or ‘23 or could we see them in the first half as well?

So let’s start with the — first of all, thank you Suji. Let’s start with the gross margin. You are absolutely correct. In the first quarter of 2023, we’re going to see higher revenue than Q4 2022 as we guided you. Indeed, given the fact that automotive is going — the automotive contribution revenue contribution is going to be a bit higher, we are going to see that the gross margin is going to be a bit lower in the first quarter of 2023. Going forward, as we anticipate a portion of all audio-video probably in the second half of the year, we expect this gross margin to be again—gave you the guidance for the gross margin for... What was the question? The second half of 2023. Sure. So we continue to work and progress with the work that we are now ending with potential automotive customers. Obviously, the focus at the moment is to achieve design win in 2023. As Gideon mentioned in his prepared remark, we are already involved in several bids with automotive OEMs, and we believe that we’ll be able to secure our first design wins this year. If it’s going to be in the first half or the second half, I still not know, but high probability, as we say today, that we’re going to achieve these design wins in 2023.

Yes. I would like to add, hi Suji and thanks for the question that, of course, we don't have full control about the date of design win. But regardless where the design win will be a certain date in 2023, our ready for production, which is actually when the revenues start to step in, is not related to when the design win days is achieved because we are doing the preparation to do so. So actually, the -- although the day of the celebration is variable, we are giving ourselves low flexibility in readiness for RTP.

Okay. Great. Two more questions. First of all, on VA7000, will that give you an ASP uplift from the current VA6000 that you're ramping just to understand the contribution to revenue?

So it's an interesting question. As of today, if you remember, we mentioned that just as a reference, if you remember, we mentioned that today Mercedes-Benz car, we deploy about three chips per car and the average revenue per car is a big nose to $25. And that's supposed to give you the order of magnitude of the ASP for the VA6000. When we look at the $7,000 VA7000 revenue contribution, I would say that per chip, the ASP is going to be a bit lower because if you remember our analysis, we assume an ASP between $4 to $5 per side, which means that the ASP per link or the revenue per link supposed to range between $8 to $10. I think the nice thing about the VA7000 is the difference in volume because while in the case of the VA6000, the content per car is something like 3 to 4 chips. In the case of the VA7000, we can reach easily to 10 and even nose to 10 chips per car.

Thank you for a very detailed information. And last question for me and I'll go. Audio-video, it sounds like the nontraditional segments are coming up. Can they be a meaningful percent of the revenues in '23? I mean the medical, the industrial education? Thanks.

So again, thanks Suji. First, I think that what we announced we are seeing now, it's a nice mix of revenue coming from different verticals. This is what we see already. During 2022, and especially towards the end of 2022, we started to see the new product, the newer product, the USB and power extender and of course, the VS3000 getting in new verticals. Just to give you a few examples. We just announced the Florida bid that we won. This is based on the VA6000 by the way, that was originally designed for automotive. And if we talk about the VS3000, so Crestron just announced that they have a list of dozens of different products powered with the VS3000. And by the way, just in the recent exhibition, the ISC 2023, we saw almost 80 different products powered with the VS3000, so it gives you the power of this device. Said that, there is a time gap between the design win or the selection of our customers in this device until we see the volume in the market, the ramp-up. There is this period time window where they design and qualify their product and only then we start to see the volumes, the ramp up. So I believe that in -- towards the end of 2023, we will see a more significant contribution from the VS3000 over time, in the longer term, definitely VS3000 is going to take the lead from the first and second generation of our products.

Okay, thanks.

The next question is from Vivek Arya of Bank of America. Please go ahead.

Hi, this Vivek from the Bank of America, thanks for taking my questions. Just wanted to look more into the inventory corrections. I was curious if you can quantify the impact of the Q1 guide. And I can mostly on the audio-video side, but curious about the potential for the second half over your visibility into that?

Okay. Thanks Vivek and good to talk again. Let's talk about the inventory correction. So first of all, I think that towards the end of the year, it was -- it became clearer to everyone what are the level of inventories that were accrued along the supply chain or customer supply chain. And then we realized that probably our customers are going to consume this inventory and correct the level of their inventory in the first quarter of 2023 maybe into 2020, the second quarter of 2023. And that's by the way, the reason why we mentioned that we think that the revenue growth in the first half is going to be a bit more moderate compared to the steeper growth that we anticipate to see in audio-video in the second part of the year. Said that, we need to remember that with respect to our inventory in general, in our inventory balance towards the end of 2022 increased. And I think that in the prepared remarks, we mentioned the factors or the reason for that. We mentioned the inflation environment. We mentioned the fact that we had to place longerterm purchase order in order to secure capacity from our supply chain vendors, we also mentioned the fact that we had to increase the inventory preparing for the increased demand mainly in automotive in 2023. And more important is the fact that I think that if you look in the semiconductor industry today, the main bottleneck today is not on the foundry side. It's mainly on the fast rate manufactured. It's mainly the fast rate. So in order to streamline our production, we purchased in advanced substrates, and that element, this raw material has a significant portion in the increase of our total inventory at the end of the year.

Great. And then quickly, just as a follow-up on just looking at OpEx in the near term, what kind of just some macro headwinds that I now understand you have to invest in future products. I'm just kind of curious how we should think about OpEx going through the year. Thanks.

So we mentioned that towards the end of 2023, we're going to see -- and we are going to reach adjusted EBITDA breakeven. That's supposed to be the outcome of, one, the fact that we're going to increase our 2023 revenues compared to 2021. Despite the fact that we are going to report lower gross margin, given the fact that the automotive products contribution is going to be a bit higher, still the gross profit is going to be higher. And then from the OpEx point of view, I think that in the first quarter, we are going to see more or less the high end of the number of the OpEx expected for 2023 because during the first quarter, we're going to see different or various stages of development of three different products. It's all happening in the first quarter. We are preparing the VA7000 for mass production. In parallel, we are getting prepared for the tape-out of the VS63-20 in audio-video. And as we mentioned in the prepared remarks, we just kick off the next generation of our automotive product, which is the VA7100. So again, all these three projects are happening in the first and the second quarter. Over time, I think that OpEx will be more balanced, and this will allow us together with the increase in revenue, this will allow us to achieve the breakeven point that we mentioned towards the end of the year.

Thank you very much.

The next question is from Brian Dobson of Chardan Capital Markets. Please go ahead.

Hi, good morning. So the implementation of your technology for the school system is pretty exciting. Now that that's been won and approved by Florida, do you think there are other opportunities for similar contracts elsewhere in the United States?

Thank you very much for the question and for joining us this morning. We have just recently completed the first phase of development, and we are now moving to the next phase. We believe that the benefits this project will provide with the school students, teachers and others trigger many additional similar projects.

Very good. Thanks. And then turning to automotive. You gave some very positive commentary about growth this year, particularly as you described gross margin enhancement in the automotive segment. As you're working toward, call it, EBITDA breakeven rather EBITDA breakeven run rate, what level of margin enhancement do you contemplate within your automotive segment? And where do you think that ultimately goes?

So as you know, we don't provide our guidance per segment. We just report the historical numbers per segment. I'll just tell you that in 2023, obviously, the automotive revenue is supposed to be based on the VA6000, similar to what we have seen in 2022. I would assume that more or less the gross margins that you can see in our reports. And by the way, our financial reports that are part of the annual report on Form 20-F that we just filed with the SEC, includes the P&L by segment. So you can see the breakdown there. So I think more or less the gross margin that we reported for automotive that was approximately 30% in 2022. These are the same gross margins that we're going to see going forward. It's the same product. With respect to adjusted EBITDA, just to make sure that I understand your question, you asked specifically about automotive or in general with the company?

I asked about automotive, but in general with the company will be helpful as well.

Okay. So with respect to the company in general, I think as I referred to that point, I think the combination of the fact that we expect to see slightly steeper revenue growth in the second half of the year and the fact that in the second half of the year, the portion of the audio-video revenue is expected to be a bit higher as we expect customers, the audio-video customers to consume their inventory that we just discussed, I think that this should have a positive impact on the gross profit in the second half of 2023. And together with the fact that we will have a balanced OpEx, this should contribute or help us to get to the target of adjusted EBITDA towards the end of 2023. Specifically, with respect to automotive, it's in our control. We can decide to show profitability for automotive tomorrow morning if we decide to slow down the pace of investment in new product development. At this point in time, given the opportunities that we see ahead of us in automotive, it's our decision, it's our selection to continue and invest in order to enhance our product offering to automotive. We see lots of opportunities. And that's the reason why we think that at this point, despite the fact that we continue to spend money, the spending is higher than the gross profit in automotive. Over time, that's the right decision.

Again Brian, if I may add a bit just to reiterate what Dror said earlier, what we said also in the prepared remarks and everything, that taking all of that into account, we remain committed to reaching adjusted EBITDA towards the end of -- breakeven towards the end of this year.

Excellent. Thank you. And it was great seeing our team at CES and looking at some of your technology first and particularly in the backup camera technology. Do you think you can give us a little bit of an update on what kind of market feedback you're seeing more?

Yes. I assume that you refer to the project, the joint project that we run that we have with Stoneridge. So first, thank you and for the -- and we've shared the same appreciation to this great product. I think that it's a great innovation, and it's going to have a significant role in saving lives in this industry. As Gideon mentioned in his prepared remarks, we just recently completed the joint development of this rearview camera solution. The next phase is mainly for Stoneridge to promote the solution to their customers that manage fleets. We know that they expanded their go-to-market strategy. They engage with other companies just in the last week, there was another announcement of additional collaboration that Stoneridge that supposed to help them to promote this solution into the market. And as previously projected, 2023 is the year of initial introduction of this solution into the market, and we're completely confident that revenue ramp-up from this great device will start in 2024.

Excellent. Thank you very much.

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

Yes. Thank you. I would like to thank you all for joining us today for our Q4 and full year 2022 call and for your continued support and interest in Valens Semiconductor. Have a great rest of the day.

Thank you. This concludes the Valens Semiconductor Fourth Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.