Valens Semiconductor Ltd. (VLN) Q2 2025 Earnings Report, Transcript and 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's Second Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Valens 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's Second Quarter 2025 Earnings Call. 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 our website under investor.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 February 26, 2025, 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. With that, I will now turn the call over to Gideon.

Thank you, Michal. Hello, everyone, and thank you for joining us. We are pleased with our performance in Q2, where we exceeded our guidance and delivered revenues of $17.1 million. This marks the fifth consecutive quarter of growth for our company. GAAP gross margin came in at 63.5% in the midrange of the guidance and adjusted EBITDA loss was $4.0 million above the guidance range. Nevertheless, like many in our industry, we haven't been immune to the impact of global tariffs. This has prompted some customers to lower their forecast for the second half of the year, which we expect will affect our revenue outlook. Therefore, we are updating our full year 2025 revenue guidance to be in the range of $66 million to $71 million. Still, the momentum continues and the new guidance range reflects a 14% to 23% increase compared to 2024, which is in line with the long-term plan we presented. Before we dive into the activities in Q2, I would like to remind you of our go-to-market strategy at Valens, which begins by targeting integration into high-end products. Our chips have always been known across industries for offering the best connectivity available, the highest bandwidth, the simplest wiring infrastructure, the most resilient interferences. For this reason, when we enter a new market, we expect penetration to take time. Companies start with extensive evaluation of the chip, then integrate it into high-end models. After that, months or sometimes even years later, we see the market catching up. What starts out as a high-end only requirement becomes the new normal and the volumes increase accordingly. We call it expectation inflation. And when this happens, our chips go from being a niche connectivity solutions for premium products to must for flagship product lines. I'm bringing this up now because in Q2, we saw the latest examples of how this strategy bear fruit with our VS3000 chip. So that where I'm going to begin our quarterly discussion, I'll start with our cross-industry business unit, which covers professional audio- video, industrial machine vision and medical. In the first half of 2025, we experienced growing demand from our customers, mainly in the Pro AV market and especially for the VS3000. This chip remains the only solution on the market for the long-range distribution of uncompressed HDMI 2.0, delivering high-fidelity audio Ethernet USB 2.0 controls and power over a simple category cable up to 100 meters. What we saw during the course of Q2 was a surge of new products based on this chip going from around 100 at the end of 2024 to more than 150 today. This is a reflection of a market catching up, so to speak. Where customers may have in the past been okay with low-resolution video conferencing setup or suboptimal office layout, expectations inflation has guided our customers to solve these issues with the VS3000 chipset. Here are a few notable examples of customers who have already launched products built on our VS3000 chip. Market leader, Crestron based its DM Essentials line on this technology. INOGENI has introduced a 3-horse switcher for USB and HDMI. CREM Electronics brought to market an all-in-one hybrid presentation matrix and AVPro has released 18 gigabit 4x4 and 8x8 matrix switches. We expect momentum for this chip to continue as we carry forward into the end of 2025 and beyond. We received further recognition of the VS3000 growing market penetration at InfoComm International, where 3 of our customers won awards for products based on this chipset. A for its innovative dual-sided digital signage solution, [indiscernible] AV for a fully uncompressed 4K and USB 3.2 extension solution in a single box, which also used the VS6320 and MS solution for the first of its kind device capable of extending uncompressed 4K video over USB Type C using display link out mode. It wasn't just our customers. Valens also won awards during the 2 InfoComm events in Beijing and Orlando. At InfoComm China in April, we were honored with the Best of Show Editor Choice Award in the Best Technology Application category for a VS6320 chip. At InfoComm International in June, we were honored with the Best Offshore Award of our VA7000 chip recognized for its innovation, feature set and industry impact. Our technology was at the heart of our AI-powered 360-degrees immersive experience. With an 8-camera setup along the HDBaseT boost perimeter, we enabled real-time gesture recognition and dynamic camera angle control, which could be used in applications such as retail and in-person entertainment. This demonstration was created in collaboration with this 3 embedded look sensing technologies and enabled by NVIDIA. Staying within the cross-industry business unit, I would like to discuss another industry, machine vision. This is another example of go-to-market strategy, target the market with a premium offering and let the market catch up. Valens's A-PHY offering attracted strong interest across a couple of events, automating the choice and ISS in Japan. This was thanks to our chipsets robust EMI performance, long-reach capabilities, and suitability for compact high-bandwidth camera systems. Our presence helps strengthen relationships with key players, positioning A-PHY as a leading candidate for next-gen factory automation and inspection systems. In July, we were proud to announce that our VA7000 chipset is enabling the market's first comprehensive camera to processor MIPI A-PHY platform offered by D3 embedded. The platform brings to market the first product-ready solution for implementing the standard in embedded vision systems, offering D3's customers a series of unique benefits. These includes unparalleled EMI resilience, longer link distances and the ability to operate over simple low-cost cabling. The chipset also features built-in advanced diagnostic for continuous link monitoring and preventive maintenance. This directly addresses one of the major challenges in factory floor machine vision, ensuring round-the-clock system reliability as equipment ages and operating conditions evolve. The platform includes some additional components from other leading companies, a processor from NVIDIA, the Jetson Orin or Nano and Sensor from Sony. In addition, D3 Embedded is offering 685 Design core Discovery Series SKUs. On the significance of this partnership, D3 Embedded CEOs, Scott Reardon remarked A-PHY ability to deliver high-speed data over long distance with exceptional electromagnetic compatibility is a game changer for the industry. Investing in this technology was crucial because it addresses the key challenges our customers face, reliable connectivity in harsh environments and simplified system design, including the industry's first ever use of untreated twisted per channel for multi-gig use cases. By building this platform around MIPI A-PHY and partnering with Valens Semiconductor, we are giving developers a powerful, flexible tool set to accelerate innovation in embedded vision. In all, we continue to support our customers in bringing solutions to the market based on our VA7000 and VS6320 chipsets. We expect machine vision to become an increasingly meaningful part of our revenue mix in the coming quarters with initial revenue anticipated by the end of 2026 and strong growth potential in the years that follow. I would like to close out the discussion of our cross-industry business units with the update on the notable progress we are making in medical endoscopies. We had 2 road shows in Europe and Japan, where we showcased our VA7000 chipsets and their ability to support a new generation of reliable, high-quality endoscopic procedures. While I can't disclose specific names, we have received initial feedback from some of the largest players in the industry. We came away more confident than ever that Valens's value proposition is essential in moving the market forward. As a reminder, this is still a small part of our business, but one with significant long-term potential. Unlocking this potential starts with validation of our offering from the industry's leading players. And in Q2, we began to see that validation taking shape. Now I'd like to turn to the automotive industry. As a reminder, our opportunity in automotive is dominated by the VA7000, the same chipset that drives our offering in the machine vision and medical industries. The VA7000 extends an interface CSI 2 that is used commonly across a number of industries, offering high bandwidth and best-in-class EMI immunity. It is the first chipset on the market to comply with the MIPI A-PHY standard for high-speed sensor connectivity. Late last year, we announced design wins with leading European OEMs for this solution, gaining a strong foothold for the A-PHY within the OEM community. Building on the momentum, in Q2, we brought the VA7000 and the broader A-PHY ecosystem to the global stage. At Auto Shanghai, we unveiled a number of demonstrations showing A-PHY connectivity with products from major industry players. First, we had Qualcomm's Snapdragon Ride for evaluation platform with A-PHY connectivity. Second, we had Chinese Tier 1 supplier, Desay SV with an APY surround view system. Third, we had Horizon Robotics’ Journey platform with A-PHY and finally, an ADAS reference design with Sigmar based on A-PHY. I'd like to make note of one event that really made ways within the industry, the MIPI Alliance Annual Meeting that took place in Russia towards the end of June, which brought together 117 representatives from 36 companies from around the world. The keynote address at the opening plenary was given by a Senior Vice President at Mobileye. I'll remind you that in Q1, we announced that Mobileye is the Tier 1 involved in our 3 A-PHY design wins. In his address, the executive stated that Mobileye anticipates a significant expansion of the A-PHY ecosystem with active participation from all service and camera sensor vendors. In addition, he provides certain feedback about the Valens VA7000 ease of integration, highlighting performance, design flexibility, and fast time to market. In that same meeting, a representative of leading automotive OEM shared with the audience why his company chose Valens A-PHY compliance chipset for their ADAS platforms. His endorsement of our technology was exceptionally strong from highlighting its superior noising unity to its support for smaller, more cost-effective cameras and more. He summed it up best when he said, "A-PHY has much better performance than the incumbent solutions". A word about the momentum of A-PHY in Asia. Earlier this year, we announced interoperability testing with 7 different A-PHY silicon vendors in China, a testament of the vast market opportunity that exists there for the standardized connectivity solution. In addition, we announced a special partnership with the local company, ESWIN Computing, which will allow us to streamline our sales into the Asian markets. This kind of localization activity places us in a stronger competitive position as we advertise our chips to the many global OEM based out of China. As an example, our chipsets are currently undergoing advanced testing by a leading Chinese OEM, which wants to use our solution with a low-cost harness for its next-generation ADAS system. It's clear that momentum around A-PHY is building all around the world. We continue to participate in several evaluation processes at various stages with multiple OEMs. Now before I turn the call to Guy, I want to take a moment to acknowledge the leadership transition we announced in May. I'll be stepping down as CEO of Valens Semiconductor by the end of 2025. It's been an honor leading this exceptional team for over 5.5 years through major milestones from listing on the New York Stock Exchange to securing 3 design wins for the MIPI A-PHY compliant VA7000 chipset to expanding into new verticals like machine vision and medical. This planned transition is designed to ensure continuity and preserve momentum moving forward. Needless to say, if additional time is required, I'll extend my stay until a successor is in place. I plan to remain actively involved as a Board Member and as a shareholder thereafter. With that guide, please go ahead and discuss our financial performance in more detail.

Thank you, Gideon. I'll start with our second quarter results and then provide our outlook for the third quarter of 2025. We generated quarterly revenue of $17.1 million, which exceeded our guidance of between $16.5 million to $16.8 million. This compares to revenue of $16.8 million in Q1 2025 and $13.6 million in Q2 2024. The cross-industry business or CIB, accounted for $12.8 million or approximately 75% of the total revenue, while automotive contributed $4.3 million or approximately 25% of total revenue this quarter. This compares to Q1 2025 revenue of $11.7 million from CIB and $5.1 million from automotive, which represented 70% and 30% of total revenue, respectively. In Q2 2024, revenue from CIB were $8.1 million and $5.5 million were from automotive, representing 60% and 40% of total revenue, respectively. Q2 2025 gross profit was $10.8 million compared to $10.6 million in the first quarter of 2025 and compared to $8.3 million in the second quarter of 2024. Q2 2025 gross margin was 63.5% compared to our guidance of between 63% and 64%. This compares to a Q1 2025 gross margin of 62.9% and 61.4% in Q2 2024. On a segment basis, Q2 2025 gross margin for the CIB was 67.8% and gross margin for automotive was 50.5%. This compares to a Q1 2025 gross margin of 69.1% and 48.4%, respectively, and a Q2 2024 gross margin of 75.4% and 40.9%, respectively. The decrease in the gross margin of the CIB compared to Q2 2024 was due to a change in product mix. The increase in Q2 2025 in automotive gross margin compared to Q1 2025 was due to an optimization of our product costs. Non-GAAP gross margin in Q2 was strong at 67.2%, which compares to 66.7% in Q1 2025 and 64.5% in Q2 2024. Operating expenses in Q2 2025 totaled $18.2 million compared to $20 million in the end of Q1 2025 and $17.8 million in Q2 2024. The decrease compared to Q1 2025 is mainly due to the change in earnout liability. Research and development expenses in Q2 totaled $10.2 million compared to $10.6 million in Q1 2025 and $10 million in Q2 2024. SG&A expenses in Q2 were $8.9 million compared to $9.3 million in Q1 2025 and $7.8 million in Q2 2024. GAAP net loss in Q2 was $7.2 million compared to a net loss of $8.3 million in Q1 2025 and a net loss of $8.9 million in Q2 2024. Adjusted EBITDA in Q2 was a loss of $4 million, better than the guidance range of loss between $4.9 million and $4.4 million. This compares to an adjusted EBITDA loss of $4.3 million in Q1 2025 and an adjusted EBITDA loss of $5.2 million in Q2 2024. GAAP loss per share for Q2 was $0.07 compared to a GAAP loss per share of $0.08 in Q1 2025 and a GAAP loss per share of $0.08 for Q2 2024. Non-GAAP loss per share in Q2 2025 was $0.04 compared to a loss per share of $0.03 in Q1 2025 and a loss per share of $0.04 in Q2 2024. The difference between GAAP and non-GAAP loss per share was mainly due to stock-based compensation, change in earn-out liability, and depreciation and amortization expenses. Now turning to our balance sheet. We ended Q2 with cash, cash equivalents and short-term deposits totaling $102.7 million and no debt. This compares to $112.5 million at the end of Q1 2025 and $130.6 million at the end of Q2 2024. In November '24, we launched our initial share repurchase program of up to $10 million, followed by a second plan in February 2025, increasing our commitment by an additional $15 million. While the first plan was completed during Q1 2025, during Q2, we invested $10.2 million from the second plan, demonstrating our ongoing dedication to returning value to our shareholders. During July 2025, we have completed the share repurchase program under the second plan. Our working capital at the end of Q2 was $106 million compared to $119.8 million at the end of Q1 2025 and $142.3 million at the end of Q2 2024. Our inventory as of June 30, 2025, was $11.5 million, a slight increase from $10.9 million on March 31, 2025, and down from $14.1 million on June 30, 2024. Now I would like to provide our guidance for the third quarter of 2025. As Gideon mentioned, the uncertainty surrounding tariffs has led some customers to reduce their forecast. Therefore, we expect Q3 revenue to be in the range of $15.1 million to $15.6 million. For 2025, we expect revenue to be in the range of $66 million to $71 million. We expect gross margin for Q3 to be in the range of 58% to 60%, and we expect adjusted EBITDA loss in Q3 to be in the range of $7.4 million to $6.8 million loss. Although we have adjusted our full year guidance due to the unpredictable impact of tariffs, our confidence in the company's long- term strategy and market opportunity remains unchanged. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A.

Thank you, Guy. We believe that Valens Semiconductor is well-positioned to return to growth across our target markets, supported by our industry-leading technology and robust balance sheet. Our focus remains in executing our long-term strategy to drive sustainable growth and profitability. I would also like to extend a heartfelt thank you to our employees who are true to the spirit of Valens and much like our technology, demonstrate remarkable resilience and determination. With that, I will now open the call to answer your questions. Operator?

[Operator Instructions] The first question is from Quinn Bolton of Needham & Company.

This is Neil Young on for Quinn Bolton. So you mentioned that the downward revision to both the 3Q and full year revenue guide is primarily tied to tariffs. Could you help us understand how the pressure is distributed across the 2 segments? Specifically, is one segment, CIB or automotive seeing a more pronounced impact in 3Q?

Thank you for the question, and I'll be pleased to answer. We are selling semiconductor to electronic and automotive industries. They are the one who are impacted by the tariffs because their products are produced in countries which are tariffs exposed, and this is the reason we are exposed. It's not that our chips are under tariffs, it's our customers who integrate our chips are those who are in the tariffs, and this is valid both for automotive and for audio-video.

Okay. Great. So in first quarter and second quarter, you talked about the optimization of product costs within automotive. Do you foresee that repeating in 3Q and boosting auto gross margin? I guess, if possible, could you just discuss what you expect from gross margin across the 2 segments in 3Q and maybe throughout the rest of the year?

So we provided the guidance for the third quarter on the gross margin. We typically do not provide the allocation between the different segments for Q3 in terms of the gross margin.

The next question is from Rick Schafer of Oppenheimer.

This is Wei Mok on the line for Rick. With the 3Q outlook and the revised full year guidance lower to $66 million to $71 million, it looks like 3Q should be the bottom. And with some of the tariff policies starting to take shape, are you seeing any improvements in orders and bookings compared to 30 days ago? And which business do you see that rebound accelerate in 4Q?

I'm sorry, can you please repeat? I'm not sure I did understand the question.

Yes, sure. Yes. So you provided the 3Q outlook. It looks like it's going to be declining around 10% for 3Q. But then with the full year guidance, it looks like it's going to be recovering 25% in 4Q. So which business do you see that accelerating in 4Q?

So again, we do not provide allocation between the different segments, not in terms of revenue as well as other parameters. We provide the numbers for the overall company. I would say that in both segments, we see kind of a temporary weakness for the third quarter and kind of a better visibility for the fourth quarter. And altogether for the year, we reduced the guidance as already indicated.

The next question is from Suji Desilva of ROTH Capital.

Any color on the auto 3 OEM design wins? What the next milestones are that we should be watching for?

Suji, thank you for your question. Yes, I can provide some information. And yet, I can't tell the names, but I can say it's very prestigious companies, and it creates a positive noise in the industry that such respective companies selected us purely on quality and our capability to do more than others and the uniqueness of our solution. And we hope that we know -- we hope we know that we will generate more attention and we do with other OEMs. Of course, we don't -- we cannot disclose anything which is in the process only after we have something formally, but we're working with it and leveraging this success of these 3 OEMs.

The next question is from Robert Lynch of Stonegate.

I'm on for Dave Storms today. I just wanted to ask a question around customer acquisition in industrial machine vision. There appear to be some strong tailwinds in machine vision following the D3 platform. Could you speak to the customer acquisition trends within that segment and how the pipeline is shaping up moving forward?

Yes. Thanks for the question, and I will answer as follows. First, the machine vision is -- we have a very good market -- product market fit. It is both AI. It's both cameras that need to be remoted with very low error rate with very high bandwidth and with no compression. So it's exactly what we know to provide them very unique. This market is a market that is growing, and we are speaking with the leading customers in this industry and already have design wins, and we hopefully have a lot more design wins to discuss in the future. And it's mainly with our VA7000 and also a lot of interest with the VS6320. The machine vision looks as very natural progress and very natural development of our products, both from automotive and audio video that find their way to this industry, and this is the source of where we see the demand.

Right. I really appreciate the color there. I guess moving forward and one more left. What momentum are you seeing across end markets like logistics and Pro AV? Are you seeing any acceleration in customer activity across those verticals or anything else there?

Yes. Thanks again for this question and the answer divided to 2. In the regular market, the regional market we have, we see a recovery. It's not very fast recovery, but there is recovery. Definitely the tariff has made it less that could, but there is recovery in the traditional audio-video market. And there is a new developing market, which is the conference rooms, where we have, again, a very good product market fit for the future conference room. Conference room is a growing market. If you see the cameras in a lot more rooms that are complementary the whole video experience, the whole video conferencing experience. And this is a market which we are growing into in this audio-video. And it's -- I would call it a derivative of the segment. I think this is the best definition of the growth. So we have the recovery of the traditional and this additional new segment as well.

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

I just wanted to ask, obviously, tariff uncertainty has caused customers to reduce near-term forecast. But have you seen any change in their product development plans, anything that might affect your longer-term opportunity in the machine vision market?

Thanks again for the question. We don't see a particular change in what the companies are looking to develop. We -- even the opposite, we see that they are very stick to the land and the development of the market, the same development, maybe the speed changes, maybe the tariffs have some influence, but the companies are looking ahead, I believe, with the same focus and the same product road map and going to the same customers of their customers.

Great. And then in the prepared script, Gideon, you mentioned the Snapdragon Ride platform, and I wasn't sure. Could you just expand on what you're doing with that platform? Are you part of that reference design? Was it just a demo to show interoperability? Any other information you could provide would be helpful.

Yes. We show and it's very important for us to show not only that our chips have an advantage. We show how simple it is for the customers to integrate. And some of the advantages for Valens is that integrating the VA7000 propose to customers is very fast and creates stability also very fast. So this is the reason we are making ourselves compatible to chips like the Qualcomm and NVIDIA and others in the industry. And yes, it works well, and it shows interperability very fast.

[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 second quarter 2025 earnings call and for your continued support and interest in Valens Semiconductor, and we hope to meet you again in our next earnings call. Thank you, and goodbye.

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