Good morning. My name is Yonie, and I will be your conference operator today. At this time, I would like to welcome everyone to Valens Semiconductor's First Quarter 2023 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 Valence Semiconductor. Please go ahead.

Thank you, and welcome, everyone, to Valens Semiconductor's First Quarter 2023 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 with the SEC on March 1, 2023, 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 Tel Aviv and in London for investor conferences and meetings. If you are 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 all for joining our Q1 2023 call. In Q1 2023, Valens Semiconductor's revenues reached a record of $23.9 million. We also achieved better-than-anticipated profitability metrics. We believe Valens Semiconductor is well-positioned for long-term growth in the market that we serve for several reasons. We benefit from being an industry standard leader in both audio-video and automotive and leverage our disruptive connectivity offerings across both our business segments. This includes our continued investment in new products to enhance our disruptive offerings for both markets. Starting with the audio-video segment. We continue to invest in expanding our offerings for audio-video verticals. Most recently, in Q1 2023, we taped out the VS-6320 chipset, a key milestone for market readiness of this product, which is aimed at long-reach extension of USB 3.2. The increasing demand for higher bandwidth for USB peripherals is driving the adoption of the USB 3.2 standard globally across verticals, and Valens VS6320 is ideal for connecting the many remote USB 3.2 peripherals required in videoconferencing, industrial, and medical applications. The VS6320 is extremely differentiated compared to other alternatives. It's a highly integrated single chip, hence dramatically smaller, less than half the power consumption, and yet still at a better cost. In corporate, videoconferencing is broadly used in all sorts of making rooms ranging from huddle rooms to small and large conference rooms. Today, there are tens of millions of meeting rooms that still need high-speed audio-video equipment to support the hybrid working world and drive productivity within organizations. The global video conferencing equipment market is projected to essentially double from about $7 billion in 2022 to more than $14 billion in 2029 or at an 11% to 12% CAGR according to research firm Fortune Business Insights. The industrial market represents another reported vertical for Valens…

Thank you, Gideon. I'll start with our first-quarter results and then provide our outlook for the second quarter and full year 2023. Starting with our first quarter 2023 results. We achieved record quarterly revenues of $23.9 million, an increase of $2.3 million or 10.5% from the first quarter of 2022 and an increase of 1.7% from Q4 2022. Product mix drove an overall higher-than-expected gross profit and gross margin. First quarter 2023 gross profit was $15.8 million, slightly up from $15.4 million in Q1 2022. The first quarter 2023 gross margin exceeded our expectations and reached 66.1% compared to 71.4% in Q1 2022. Non-GAAP gross margin reached 67.2% compared to 72.1% in Q1 2022. The change compared to Q1 last year reflects a higher share of revenue coming from our automotive business, which incurs a lower gross margin than our audio-video business. Operating expenses in Q1 2023 totaled $22.9 million compared to $22.6 million in Q1 2022. Research and development accounted for 61% of the Q1 2023 OpEx coming in at $14 million, similar to the $14.1 million in Q1 2022. Q1 2023 and 2022 R&D investments included expenses attributed to tape-outs of new audio-video products. Last year, it was the tape-out of the VS3000. And this year, it is the tape-out of our new chipset, the VS6320. SG&A expenses were $8.9 million compared to $8.5 million in Q1 2022. Turning to net loss and adjusted EBITDA. Q1 2023 GAAP net loss was $5.4 million versus the $5.1 million net loss recorded in Q1 2022, and adjusted EBITDA in Q1 2023 was a loss of $2.9 million, better than the $4.1 million loss in Q1 2022. This substantially better than guided adjusted EBITDA loss in Q1 2023 was mainly due to a combination of several factors. The better-than-anticipated gross margin,…

Thank you, Dror. In Q1 2023, we again accomplished notable progress, and we believe we will continue this progress into another successful quarter in Q2. Looking at the remainder of 2023, we expect to secure new design wins, including our initial awards for the VA7000 by automotive OEM. As the level of uncertainty at this time is higher than what we have seen through the past couple of quarters, we remain focused on those elements in our control. Valens Semiconductor will continue to innovate, leverage our core technology across our business segments in audio-video and automotive, and deliver new disruptive products to address market needs. We will continue to focus on executing our long-term growth strategy while driving financial discipline and operational excellence and are exercising opportunities that we believe will deliver value to all stakeholders. Finally, before opening the call for questions, I want to thank all our stakeholders, including our incredible and talented team of employees around the world for their dedication and execution towards Valens continued success. Operator, I would now like to open the call for questions.

[Operator Instructions] The first question is from Rick Schafer of Oppenheimer. Please go ahead.

Thank you, guys and congrats on a solid quarter in this bouncing environment out there. If I could, you guys, I heard you very clearly, you guys held your '23 outlook unchanged. And I'm guessing I guess my question is really just at a high level, how do you reconcile sort of what you guys are seeing and your ability to hold your outlook for the full year versus TSMC, for instance, and some of your peers talking about a weaker second half in auto. I mean, is it as simple as Valens share and content gains or enough to offset? Or are there some other moving parts in there?

Hi Rick, and thank you for the question. You asked many questions in one question, but let's start with the fact that today, we provide our guidance for Q2 and for the full year 2023. But since we assume that the Q3 revenues will be lower than the Q2 numbers, we share this projection today with you guys. Today, we see the market dynamics, and companies are more cautious with respect to their inventory levels. And this is the reason why we mentioned again and again that we see slower than anticipated inventory digestion. We also see that, and we recently received some requests for pushouts from Q3. That's the reason why we provide this indication to you today. I think that you asked about TSMC, it's really changed between the different markets. And we also indicated this in our prepared remarks, we mentioned that in automotive, we still stay resilient that the market is resilient. The numbers are strong as anticipated. And the softness that we see today is more on the audio-video side that is more correlated to macroeconomics. All in all, at this point in time, we reiterate our 2023 full-year guidance. And I think, and that would be my last sentence. I think that it's also fair to say that 2023 would not be or is not a representative or typical year and definitely not the behavior quarter-to-quarter and the growth patterns between the quarters. So again, I think that if we look on the general trends that we see in Valens for the mid and the longer term, I think that they remain intact. And in the long run, we will not be affected from what we see in the market today.

And if I could ask a follow-up to just on the Pro AV. Can you give any more specifics on how channel inventory compares with normal? Or maybe give us a sense of how much your undershipping consumption at the moment. Do you have a sense on that?

So it's something that we are trying to monitor all the time. And obviously, the behavior of the inventory across the channels is something that is different from one geography to the other. There are some geographies where we see much faster consumption and much faster inventory digestion. In other geographies, it's a bit more problematic or slower than anticipated. I think that to date, the indication that we received from the market is that they are not going to see the same pace of consumption like we've seen in the past in 2022. But they tell us that it's a temporary issue. They see it in Q3. They believe that in Q4, they will be back to normal.

Okay. Thanks for all the color.

The next question is from Suji Desilva of ROTH MKM. Please go ahead.

Hi. Good evening. Dror, congratulations on the broad reach there in the tough environment. Can you talk about what the revenues for the quarter were AV versus auto? And if you can't provide that detail, can you talk about the AV revenue in particular, if that is mostly USB today or other standards, and trying to understand the opportunity for the USB 32, is that ramp?

Okay. So the first thing is I think that you know that we provide detailed P&L by segments once a year. But to refer to your question, if you remember our March guidance for the full year 2023, at that point, we indicated that we expect automotive to contribute between 27% to 29%. And if I look now on the rest of the year, Q1, and the rest of the year, I think that we are on track to meet this target. So that's with respect to the first question that you had. With respect to the automotive revenues, today, it's all based on the VA6000, which is the symmetric solution or first-generation product automotive, the symmetric solution. And as you probably remember, most of the lion’s share of the revenue that we have today from the VA6000 is coming from Valens's best project.

Okay. Great. And then for the VA7000 evaluations, the OEMs doubling, congrats on that. Are you seeing any impact to the customer's schedule and plans tracking versus what you expected based on macro uncertainty at this point? Or are those unimpacted relative to what you're seeing with inventories and so forth?

Hi Suji. Thanks for the question. We don't see a significant impact on new models and new developments of the companies. Yes, of course, from the market is the macro economy impacts everyone, but not in the sense of how eager they are to have new models, have new technology, and we don't see the impact on their R&D development at the moment.

Okay. Great. Thanks guys.

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

Hi. good morning. Thanks for taking my question. So what are your automotive OEM partners telling you that they're seeing for, call it, the back half of this year and perhaps a little bit longer term in terms of sensor adoption and putting new sensors on cars? Does that outlook changed at all since we spoke about it last?

So, thanks for your question. Let's distinguish between the business that we have today with the VA6000 and the business and the outlook for the VA7000, this is the new device that we have for the ADAS applications. So when we talk about the VA6000, as mentioned before, today, we are deployed in most of Mercedes Benz cars, including their EV cars. And in a way, the growth pattern, the growth rate of the VA6000 is driven by the growth rates of Mercedes Benz cars and I think that based on what we heard recently from Mercedes Benz in their earnings call, they don't see any change between the first quarter and the rest of the year. So more or less, it's going to be flat sales, which means for us, we understand the pattern of consumption with respect to this product. Talking about the VA7000, so I certainly remember that at this point in time, we are engaged in several bids by some OEMs. Today, I can tell you that these bids progressed according to plan, and we are on track to announce our initial design wins this year as we communicated in the past.

Great. 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. I want to thank everyone for joining today. Have a great day. I hope you enjoyed your holidays, and have a good rest of the day. Bye-bye.

Thank you. This concludes the Valens Semiconductor first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.