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 Second 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 second 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 conducting investor conferences and meetings virtually and in Chicago and Tel Aviv. 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 all for joining our Q2 2023 call. In Q2 2023, Valens Semiconductor revenues reached a record of $24.2 million. We also achieved better than anticipated profitability metrics on our journey towards adjusted EBITDA breakeven by the end of this year. We continue to make progress executing against our long-term growth opportunities as well. As we further push the boundaries of connectivity with our advanced offering and enable our customers to bring to market new disruptive products to existing and untapped markets. We continue to track the current macroeconomic headwinds, the rise in inflation, interest rates and it’s lower than anticipated inventory digestion. While these trends are driving some near-term uncertainty long-term trends for the semiconductor industry and Valens remain positive. I will start our second quarter business discussion with our audio-video business. The audio-video market is highly correlated to macroeconomic trends. We can now see indication for a recovery of the market, which we believe will start to improve at a relatively slow pace towards the end of 2023 and through the first half of 2024 and gained momentum into the second half of 2024. We have identified that one of the main contributors for the expected improvement is the increasing demand for high-performance USB peripherals. As such, Valens Semiconductor is driving adoption of the USB 3.2 standard globally across verticals. Valens Semiconductor's long-term vision is to accelerate the transformation of the video conferencing market with an extensive product portfolio. Our latest chipset the VS6320 is the first single chip in the market for extension of high-performance. The target is growing market and can extend USB3.2 peripherals at up to 100 meters or 328. We recently received the first samples of the VS6320 from the successful payment executed in Q1 2023 and we remain on…

Thank you, Gideon. I'll start with our second quarter results and then provide our outlook for the third quarter and the full year 2023. Starting with our second quarter '23 results. We achieved record quarterly revenue of $24.2 million, an increase of $1.7 million or 7.5% from the second quarter of 2022 and an increase of 1.2% from Q1 2023. Second quarter 2023 gross profit was $14.9 million, with a gross margin of 61.8%, compared to $15.8 million or 70.2% gross margin in Q2 2022. Non-GAAP gross margin reached 63.1%, compared to 71% in Q2 2022. The change compared to Q2 last year was mainly driven by substantially other share from automotive as we doubled the portion of revenue coming from this business, which incurs a lower gross margin than our audio video business. Before referring to OpEx, as Gideon stated, during the second quarter, we have implemented our plan to improve efficiency. The annual savings of this plan is expected to be $9 million, as previously announced. The additional charge incurred in Q2 specifically was $250000, coming mainly from R&D. Operating expenses in Q2 2023, totaled $20.1 million, down from $23.7 million in Q2 2022. Research and development accounted for approximately 60% of Q2 2023 OpEx coming in at $12.2 million, lower than $14.9 million in Q2 2022, mainly due to purchasing of IP in the amount of $2 million in Q2 2022. We also benefited from the strong US dollar versus the Israeli shekel. SG&A expenses were $8 million down from $8.8 million in Q2 2022 mainly due to $0.6 million reduction in D&O insurance premiums as well as positive ForEx related impact. Turning to net loss and adjusted EBITDA. Q2 2023 GAAP net loss was $4.6 million substantially better than the $10 million net loss recorded in…

Thank you, Dror. In face of the ongoing macro economy, and semiconductor sector-specific headwinds has continued to impact most of our end markets. We remain focused on elements in our control and our progress towards profitability. Our main target in the second half of the year are: first, to secure design wins from automotive OEMs for our VA7000 chipset family. This is a major milestone we all have been marching towards. Second, to further enhance our profitable Audio-Video business, with our new offerings. Our strong balance sheet provides the foundation, for us to execute our long-term growth strategy and pursue the promising opportunities that will deliver value for all our stakeholders. I would like to close, by thanking our employees for their commitment and ongoing dedication to the company's success and for the support of all our stakeholders. 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 Rick Schafer of Oppenheimer. Please go ahead.

Okay, and good morning, good afternoon. Nice job managing through a very tough macro. I had two questions, if I could. The first is just a little more color on channel inventory, particularly, it sounds like it's all pretty much in Pro AV. Dror, I think I heard your comment correctly, I mean how much do you think you're undershipping consumption -- and when do you expect the channel to normalize? I think I missed it. I think you mentioned something about it on the call, but I think I missed it.

Hey, Rick. Good to hear you again, and thank you for the question. So yes, I think that your observation is correct. I think that we see most of the impact of the lower-than-anticipated inventory digestion on the audio video business. And in a way, I think that at this point in time, we see, I would call it, 3 phases First one is the one that in the quarter that we are now in the relative quarter. I believe that audio video business is going to bottom in this quarter. According to the guidance that we just provided, we expect to see all in all audio video and alternative revenue at the level of $40 million this quarter. Second, I believe that we are starting to see some improvement in the fourth quarter. We are starting to see better demand from our customers. We see more inventory digestion from our customers along the channel. And third, I believe that we -- according to what we are hearing from our customers in all the discussions that we have with them that we expect to see soft rebound into the first half of 2022. And then as we mentioned in our prepared remarks, we believe that this -- we are going to see that this momentum will continue and will mainly gain momentum into the second half of 2024.

Okay. Thanks for the color. And maybe just for my second question. I just -- I know you mentioned that you're on track to add. I think you said at least to announce at least one new customer in auto. So if there was any other color, you could give around that. And as part of your answer, either you're getting or do -- are customers taking a little longer in auto to launch new products. I mean we've heard that from a couple of your auto peers, your component peers. Are you seeing any shifts into our order patterns, order velocity in vehicle -- in product launch, any change there that you note is within auto?

Okay. So like in the past, we cannot be more specific on the -- and mentioned the names of the opportunities that we have right now in the space of automotive. I can mention here that we see growing demand for our connectivity with the VA 7000 based solutions for various types of vision-based solutions, for example, the surrounding systems. With respect to the second part of your question, if we see some slowdown or it takes more time for your duties to reach a decision. It's a market that with players that take their time. I don't think that it's a surprise. If you remember, we said that we expect to see the initial design before the end of this year. At this point in time, we are confident that we're going to be in service.

Okay. Thanks.

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

Hi, Suji Desilva of Roth MKM. Hi, Gideon, Dror. So maybe to follow up on Rick's question. The pipeline closure for auto the -- what are the drivers for the auto customers for the time frame of those closures? And I guess because you may see one by the end of the year and more in 2024. What's driving their time frame at this point? Are they sampling the chip and testing it, or what are the factors are there? Thanks.

Hi, Suji this is Gideon. Thank you for your question. The process with the automotive player the OEMs is actually there is -- it's a shift. They are shifting from the old system that they use to new systems and they have their own learning curve about what is needed to understand the need for newer bandwidth for newer and for more information in order to predict, an accident in order to predict is something going to happen. And this is a process that actually they are doing their own shift of understanding new needs in the market. And some of them is not predictable for us to know how long it takes, but we see that actually the learning most of them happens. And we see and hear more and more pipeline of companies that understand that for the next generation of ADAS and the next generation of understanding what happens on the road they will need to cope with higher resolution, higher bandwidth and the solutions exist today we have superiority. And yes, it takes the time. And some of the time is their own learning curve of the new world of the new demands. But we see that actually in most of them that the -- actually most of them all of them that they understand and that they come to very similar conclusion and we hope that this will yield to a design win that we'll be able to have this year.

Okay. Thanks, Gideon. And then perhaps a follow-up there as they compare your solution to perhaps better offerings like Ethernet and so forth, what are the one or two key factors you think are standing out that with being a customer toward the balance of the VA solution?

Well, the explanation is technologically. And the higher the bandwidth, the more exposure to electromagnetic influence you have. And this is not a linear thing. Like if you have a camera of 8 megabit versus 4 megabit, it's not double the exposure. It's far more than that. And this is the reason that the need for the EMC becomes such a serious thing. This is the first thing. And the second is the total cost of ownership. In our technology, we allow them to use unshielded cables. And the unshielded cable is the -- is actually having a total cost of ownership which the whole system cost less because we enable user cheaper cable and connectors and actually cheaper labor because its unshielded a lot of things can be done automatically. And there is also a lot less depreciation over the years of what's called aging cables. So these are the key factors. The EMC electromagnetic the total system cost and the bandwidth. That's the three key parameters.

Thank you, David.

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

Hi, this is Blake Friedman on for Vivek. Thanks for taking my question. Just wanted to focus on kind of the full year guide specifically Q4. I know you only guide one quarter out and really discussing Q4 specifically. But just taking the full year guide kind of implies a pretty steep sequential growth in December. So, I'm just curious what you're seeing maybe from kind of a customer perspective that's giving you confidence in that strong ramp-up just because you've heard across the ecosystem. Maybe some continued digestion for a couple of quarters whether it be across industrial or consumer in a variety of other markets. Just any clarity there would be helpful.

So, first of all, good to hear again Blake. The guidance -- first of all, we are not providing guidance today for Q4 basically it's only for Q3 in the full year. But given the fact that we've already provided the first half and we gave the third quarter it's not that complicated to calculate the Q4. I think that the confidence that we have in the Q4 numbers are based on the fact that we know our customer products and based on what they are telling us. But on top of that it's based on backlog and we see that the level of bookings that we already have with them. I think that given that fact that we know what they're expecting and what they see in front of the end customers and the fact that we already received the backlog we see the backlog this is the reason why we see this correction in terms of the Q3 versus Q4.

Got it. And then just to kind of follow-up this is kind of more of just a broader question beyond Q3. But if I think about from a gross margin perspective Obviously with audio/video down the gross margins are kind of coming down into this below 60% level. Just as we move forward if you can kind of give a high-level overview of how we should think about the gross margin recovery in the business that would be great.

Okay. So, in a way Q3 it's a kind of an exception. It's an exception because it's a kind of a perfect storm. We see we just mentioned that we see that audio video reached a button, which means that we do not enjoy the gross margin that we usually see in did -- the fact that we reported lower revenue at the level of about $40 million. We expect to see $40 million in Q3 also means that the impact of the fixed operating expenses in this calculation of gross margin is going to be more dominant. So, Q3 in a way is kind of an exception. It's not something it's not a good reference. Going forward when we go back to the right proportion between audio bid and Automotive I think that it's fair to say at this point in time that we should continue and expand gross margin that will be north to 60%.

Thank you.

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

Hi, good morning. So, just a quick follow-up on your commentary. You did a good job laying out the near-term headwinds for the business for the sector rather -- as you look at industries of your end user -- as you look at the industries of your various end users, which are impacted the most currently, which are in the best position to recover in 2024?

Yeah. Hi Dobson, thank you for the question and nice to hear from you. There are -- I'll describe it as follows. We are a strong player in the Audio-Video world. And in the Audio-Video, we are traditionally working with I would say quite high-end ships, quite high-end customers. And with the new chip the VS6320, we expect -- which is the USB extension, USB3 [ph] extension we expect to go to a broader market which I would say is a shift from the very large conference room to medium, small and even huddle room which are bigger markets and far, far bigger markets and some new players as well. So this is actually one of the growing engines of the AV. Another growing engine is we see more-and-more demanded interest what's called, Industry 4.0, which is an adjacent market to the Audio-Video. It's an Audio-Video Technology that is used not for conference room it's used for a different application. And these are some of the growing-- I would just mention also the education world. Again, it's an Audio-Video Technology, but not going for a regular Audio-Video Conference From or Video Distribution. It's targeted more to the education market Hybrid Education. And these are some of the growing engines from the AV. The automotive those are the same we are looking after the ADAS and Autonomous cars and this is where our -- and actually another market in the Automotive which more-and-more we see interest in the surround view. And so actually these are where we see growing engines in the industry. But from a cash point of view, it is the Audio-Video, because the Automotive any design we now the time it takes until you see it in cash and revenue to take some years.

Thanks very much.

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

First I want to thank everyone. I would like to thank you for joining us today, for our Q2 2023 call and for your continued support and the interest in Valens Semiconductor and all have a great day. Thank you, and goodbye.

Thank you. This concludes the Valens Semiconductor First Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.