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 Third Quarter 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 Third 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 filed 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 will be in New York, Scottsdale, Arizona, and 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, everyone, for joining our call. Q3 quarterly results exceeded our guidance. Q3 2022 revenues were a record of $23.1 million, up 21% compared with Q3 2021. We also achieved better-than anticipated gross margin and adjusted EBITDA. We are increasing our full year revenue guidance and improving our adjusted EBITDA guidance for the year. Our high-speed connectivity technology is used in diversified business activities that support people's daily lives and industries in 2 business segments – audio-video and automotive – in which we continue to diversify and expand our footprint. Now I will turn to a review of our business. Starting with audio-video. Demand for our high-speed uncompressed multimedia distribution solutions was strong, and our audio-video business continued expanding into new applications and verticals from corporate, education, government, industrial, to medical and more. Starting with education. The trend of educational entities using hybrid models to enable students and staff to switch between on-site and remote learning is here to stay, and we are seeing more and more classrooms around the world equipped with video collaboration systems. Hybrid learning enables the continuity of teaching and learning. It increases equitability by giving students access to additional education opportunities that meet their academic needs. In this way, our technology democratizes opportunity and contributes to equity. In the corporate sector, the opportunity across industries and geographies is substantial for audio-video connectivity technology, such as ours and video conferencing technology is increasingly essential for the office space, video meeting and remote work. In command and control, the use of our technology is growing. Many entities across the globe need to visualize their operations, enhance their efficiency, and better safeguard communities. A recent use case in the corporate sector is a multinational electric utility company where security is of paramount importance. The…

Thank you, Gideon. I'll start with our third quarter 2022 results and then provide our outlook for the fourth quarter and our updated full year 2022 guidance. Beginning with our third quarter 2022 results. We exceeded the high end of our revenue, gross margin, and adjusted EBITDA guidance. We achieved record quarterly revenues of $23.1 million, an increase of 21.3% from the third quarter of 2021. The higher than anticipated revenue, driven primarily by audio video, also contributed to an overall higher-than-expected gross margin. Third quarter 2022 gross margin came in at 69.7% compared to last year's 72.4%, reflecting a higher portion of revenue coming from our automotive business, which carries lower gross margins in audio-video. Non-GAAP gross margin was 70.5% compared to 72.7% in Q3 2021. Operating expenses were $21.3 million in Q3 2022, down 3.4% from $22 million in Q3 last year. Research and development expenses grew by $2.1 million from Q3 of 2021. This reflects our continued investment in developing product offerings to address the new business opportunities ahead of us in both automotive and audio video while taking into account our realigned and optimized automotive R&D efforts, which match our prospective customers and partners road map. SG&A expenses were $8.6 million compared to $11.4 million in Q3 2021. Last year's SG&A included onetime expenses in the amount of $5.4 million related to our going public in September 2021. Q3 2022 SG&A was similar to the past 3 quarters as a public company. Turning to net loss and adjusted EBITDA. Q3 GAAP net loss was $5.3 million compared to an $8.5 million loss in Q3 of 2021, and we exceeded our guidance for adjusted EBITDA, reporting an adjusted EBITDA loss of $1.7 million. The better-than-expected adjusted EBITDA reflects a combination of higher-than-expected revenues and gross profit, the…

Thank you, Dror. We are pleased with our results for the third quarter which once again exceeded expectations. We made notable progress in many aspects of our business. First, our automotive business continues to evolve, and we expect revenues from the first-generation products, the VA6000 to grow further, as it this will be used in more car models. Second, we are receiving positive feedback from prospective customers and partners that are evaluating the VA7000. The initial RFIs that we received are an important milestone towards adoption of A-PHY products by automotive OEMs. Third, we continue to see new opportunities in various verticals for our high-margin and diversified audio video business in corporate, education, medical, and industrial among others. Fourth, even in today's challenging economics and the constrained supply environment, we successfully managed to meet all our customers' demand in a timely manner. I want to thank our employees once again for their commitment and ongoing dedication to the company's success. Finally, during the past quarter, we released our first sustainability report, less than a year after being listed as a public company. At Valens, we constantly strive for excellence and innovative ways to ensure our products and solutions meet the highest standard of our customers and provide society the connectivity required in an ever-evolving environment. Operator, I would now like to open the call for questions.

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

Congrats, I know it's tough out there right now. Order velocity for almost everyone, I feel like it seems balanced growth. So I was curious if you could talk about any shifts that you are seeing in your order patterns positive or negative, just anything that you're seeing there in terms of any push outs, whether it's in pro AV or in auto or any significant change to lead times? Just sort of any sense of what you're sort of seeing in terms of your order book?

It is good to talk to you again. Obviously, at this point in time, we will not be providing our guidance for 2023. However, if we analyze our business, and let's start with the automotive, I think that what we're seeing today, we're starting to see indications that our automotive business is expected to double its revenue in 2023 from 2022. So in that respect, we feel that the automotive business is quite resilient. With respect to the audio-video business, so I would say that the audio-video business is probably more correlated to some of the global macro trends that we see today. So we assume that at least during the first part of '23, customers will mainly consume inventories that they accrued in the challenging supply demand environment. Having said that, -- when we analyze the audio-video segment in 2023, we still see the following opportunities. Obviously, we continue to see the expansion of the VA3000 just to refresh your memory. This is the most recent member of our audio-video product family. And we see this product in designs of many industry-leading companies, and we expect to see more revenue contribution from these chip sets in next year in 2023. In addition, our other solutions are now being evaluated, as Gideon mentioned in his prepared remarks, for new applications, and we assume that at least some of them will mature into mass-production products during '23. So I would say maybe to summarize, while we anticipate a more moderate growth rate for this part of the business compared to the projected 2022 year-over-year growth rate -- we still believe that we will continue to see an annual growth in audio-video. With respect to the last part of your question about some cancellations or push outs, I would say that these are tough days for our customers as well. And obviously, their planning is becoming more challenging for them as well. I can tell you that recently, we got some push out requests at least from certain customers. However, those push outs were offset by pull-in requests by other customers, and this resulted in the improved guidance that we shared with you today in this call.

That's great color. And then maybe as a follow-up to that. Gross margin was a lot higher than you guided higher -- much higher than I had modeled. So I was just hoping that you could maybe provide a little color on what's driving that and where we should expect gross margin to stabilize now? I think you've talked in the past about sort of the low mid-60s, but I didn't know if there was any update on sort of gross margin, I guess.

Yes. Sure. So the better-than-expected gross margin is mainly driven by the revenue mix between audio-video and automotive. We just mentioned that the growth in revenue was mainly triggered by the audio-video business that comes with higher gross margins. So that was the first reason. The second reason is that in the third quarter, we still consumed some inventory that was produced in lower costs. Obviously, as we refreshed the inventory -- in this environment -- inflation environment, it comes with higher costs. So I assume that we'll see the implication going forward. In terms of our gross margin going forward, again, today, we provide you the gross margin we anticipate for Q4 and the full year. I think that we are going to meet this target.

The next question is from Suji Desilva of ROTH Capital.

Congratulations on the progress here. So maybe we can talk about audio-video first and just what drove the upside? Does that potential remain each quarter? Is there kind of some secular trend that is helping you guys? A tailwind in a tough environment?

Suji, and thanks for the question. I think that nothing dramatic to report here. I think that one thing that helped us in audio-video is the fact that this part of the business is very diversified. And this is a very strong business. It's a strong point for us. And every quarter, we see the strength in other areas of the business. Again, we continue to see this, as I mentioned before to Rick, we continue to see the expansion of the VA3000. It's a very encouraging sign for us with respect to the penetration of this new product, which, by the way, comes with higher ASP to customers. It's a good sign. And again, nothing special. It's just the nature of the business and the growth that we expect from this business.

And I would like to add that some of the verticals in some of those markets in the audio video are less infected by the atmosphere in the world. Like you know that Valens is not exposed to some of the very sensitive markets today, and we're exposed more to a markets such as hybrid education and hybrid learning and conference rooms, which are left to even zero impacted from the atmosphere, -- of course, not everything is like that, but this is one of the reasons that we keep seeing the growth in the company and -- the growth in the company, and this is one of the reasons for the heads up for next year.

Okay. So switching over to auto perhaps, I'm wondering beyond the lead customer when perhaps Stoneridge and the trucking relationship would contribute to revenue materially if it maybe already is? Just really curious of that, the timing when that would help kind of layer in with the lead customer?

So I think that as we indicated in the past, the project with Stoneridge continues to progress, and we are not changing our previous guidance that we anticipate mass production and ramp up of this business next year in 2023. In that respect, everything is on track, okay? No change to the Stoneridge project, to the truck project.

Okay. If I can sneak in one last quick one Dror, can you just elaborate on the R&D rescheduling. What was behind that? Just to understand the dynamic there.

Sure, Suji. So I think that this is something that we've already mentioned last time, we mentioned that after we started to ship the first samples of the A-PHY product, the VA7000 engineering samples to customers, obviously, we worked with our prospective customers very closely to better understand their road map and their schedule. And based on all these close relationships and joint work with the OEMs and some of the Tier 1s, we realize that we need to realign a bit and adjust our product road map development. It's mainly related to the next generation that we originally planned. And now based on the input that we receive from customers, what is more important to them, what is less important and when they need more new devices, we realize that we need to adjust our road map. I think that the focus today of customers is to make sure that the VA7000 can reach to mass production according to their schedule, they are -- I think that the next generation can wait a bit. Definitely, some other derivatives that we plan. I think that today, the customers are very focused on the benefits that the VA7000 brings. Just to name few them, it's the better EMC, it's the higher bandwidth, the total system coste -- it's a set of advantages that I think that they recognize. Obviously, the ability to work with unshielded twisted pair. It's a set of benefits, and we need to make sure that we help them to get to much production as soon as they can.

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

I guess shifting gears a little bit. Could you speak to some of your key partnerships and collaborations, perhaps specifically with leading players within the space? And how you see those driving standard adoption moving forward?

Okay. I will take you. Thank you very much for the question, and nice to hear from you. I will start with the collaboration with Sony. And one of the strengths of the MIPI A-PHY is that the transmitter can be embedded as part of the silicon of the AA sensor. And this is what Sony did.. And actually, this is, I would say, almost the mastermind of the transmitting a part of the MIPI A-PHY and the collaboration with Sony gives several advantages. First of all Sony has a very, very strong, almost 50% was market share in sensors and growing market share sensors for automotive. And once they embedded the transmitter as part of their whole sensor, they give them advantage both in the price, in the quality, in the simplicity, in the space on the board, in power, like it's an all-win game. And this is a kind of collaboration, which we are very proud of and very proud to be a partner with respectful companies like Sony Semiconductors. The Intel Foundry is a very important collaboration and they would boost the automotive MIPI A-PHY implementations by allowing companies actually to compete with us, but we are very happy with this because this is what will drive the market. And we are happy that a company like Intel recognized and chose MIPI A-PHY as the technology that they want to encourage silicon players to integrate and to manufacture in the future. So these are 2 of the collaborations. Of course, there are more. I think these are the most interesting to share now at this time.

Maybe just to add to what Gideon mentioned, it's the press release and the collaboration that we have with Keysight. Now it's a good sign for mature -- for market maturity. We are starting to see companies that develop test equipment only when they realize and they estimate that they are talking about a market that is going to grow, a market that is going to be matured very fast. And the fact that the company, an established company like Keysight understands that they need to develop -- already develop test equipment that is going, obviously, to serve not just Valens but other players in this market. It's another indication for the developed ecosystem and the fact that they anticipate that they're going to see business, significant business for companies that will develop hybrid solutions.

[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 Q3 2022 call and for your continued support and interest in Valens Semiconductor. Have a great rest of the day.

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