VLN - Valens Semiconductor: Design Win And Breakeven Key For The Investment Thesis

2023-08-30 12:29:16 ET

Summary

• I think the company's results came in-line with expectations, with revenues soft in the near-term and improved profitability due to cost initiatives.
• In addition, Valens reiterates its expectation to reach breakeven adjusted EBITDA by end 2023 and raised full year 2023 adjusted EBITDA guidance.
• The near-term market environment remains challenging but the new product ramp from Valens is expected to counter this.
• The win with LG Electronics Vehicle component Solutions Company is testament to its technology and revenues are expected to be recognized from 2026 onwards.
• Valens is focusing on efficiency improvements in its operations to reach its profitability goal.

Valens Semiconductor ( VLN ) reported its 2Q23 results , which showed relatively weak top-line growth, which was as expected as it was communicated earlier, and relatively stronger profitability, as the company remains to be on track to achieve its breakeven target by end 2023.

For me, I need to see that Valens achieves a significant VA7000 design win by end 2023 and that the company achieves solid adjusted EBITDA breakeven for it to be able to sustain its business for the ramp up in revenues expected in 2025 or 2026 from these VA7000 design wins.

2Q23 came in largely in-line

Valens 2Q23 revenue was a quarterly revenue record of $24 million , up 8% from the prior year, while gross margins came in at 62%, down from the 70% gross margins from the prior year. This was largely due to the growing automotive business mix, which commands a lower gross margins than the audio video business.

Operating expenses in 2Q23 came in at $20 million, down 15% from the prior year, contributed by SG&A and R&D reducing by 20% and 9% respectively from the prior year as Valens executed their plan to improve efficiency in the company. After the efficiency improvement plan is executed, management expects $9 million in annual cost savings.

Adjusted EBITDA for 2Q23 was substantially better than the prior year, improving from a $4.5 million loss in 2Q22 to just a loss of $0.8 million in 2Q23. This was mainly due to a re-scheduling of purchases for a new product that Valens is developing along with strength from foreign exchange in the year.

GAAP net loss came in at $4.6 million in 2Q23, improving from the 2Q22's $10 million net loss. GAAP loss per share improved from a loss of $0.10 per share to a loss of $0.05 per share. Non-GAAP EPS reached breakeven in 2Q23, compared to a loss of $0.08 per share from the prior year.

Valens ended the 2Q23 quarter with $138 million in cash on its balance sheet and no debt.

On top of that, Valens reached another new milestone in 2Q23 with its first ever quarter with positive cash from operating activities.

I think that Valens strong balance sheet is an indication that of the company's ability to navigate tough waters as it looks to breakeven on an adjusted EBITDA level by the end of 2023.

I expect that cash generation will continue to improve as profitability improves in the near-term.

Guidance reiterated

Management commented that the macro environment remains challenging for its customer demand and sales, and is leading to digestion of inventory that is taking longer than expected.

In the audio video market, given that it is highly correlated to macroeconomic trends, the team is starting to see some signs that the market is recovering. The company expects a gradual recovery from end 2023 to the first half of 2024 and a faster recovery in the second half of 2024.

Management reiterated their call that 3Q23 will be their lowest quarter of the year, and expects revenues to pick up from there.

Full year 2023 revenue guidance was reiterated, expected to be in the range of $83.8 million and $84.2 million, with automotive revenues making up 30% of that. Gross margins for the full year is expected to be in the range of 62.2% to 62.5%.

Management is guiding for an improvement to its adjusted EBITDA, bringing it up to a loss in the range of $16.2 million and $15.6 million. In addition, the company reiterates its expectation to reach breakeven adjusted EBITDA by end 2023, which implies that in 2024, it expects to be in a positive cash flow position.

New products

While the audio video market remains challenging, one of the near-term drivers for the business is a growing demand for high-performance USB peripherals.

Thus, Valens has its latest chipset, the VS6320, which is the first single chip in the market for extension of high-performance USB.

Valens received the first samples of the VS6320 from the successful tape-out that was executed in 1Q23 and the company remains on track to ship the first engineering samples to selected customers by 4Q23.

Thus, the VS6320 chipset is expected to drive revenue in the second half of 2024 as customers start to introduce this into their new products.

In the automotive segment, this is the first year in which Valens has its VA6000 chipset being deployed in the Mercedes-Benz S, C and E Class models. Thus, I expect this to drive revenues from the automotive segment in 2023 as this is the first year in which the VA6000 chipset is being deployed across more models.

On top of the VA6000, Valens has its newer VA7000 automotive chipset meant for ADAS and safety applications.

Management highlighted that in the last quarter, Valens grew the "big pipeline" that it has with automotive OEMs that are considering to deploy the VA7000 at scale.

Management mentioned that the current discussions that Valens is having with OEMs that are potentially looking to select the VA7000 gives them the confidence that they are on track to announce its first design wins for VA7000 in 2023.

Take note that the design wins here are potentially material, but from the automotive design win stage, it takes a few years to generate the first revenues.

LG Electronics

Valens announced a day after earnings that LG Electronics Vehicle component Solutions Company selected its VA7000 MIPI A-PHY chipset family for its next generation camera system project.

This is part of LG Electronics' Digital Cockpit Electronic Solutions that enables Advanced Driver-Assistance Systems ("ADAS") for automotive OEMs.

Automotive OEMs are expected to benefit from this solution from 2026 and the key benefits of using the VA7000 chipset family include improved Electromagnetic Compatibility performance and lower Total System Costs.

Clearly, the fact that LG Electronics is partnering with Valens speaks volumes about the company's ability to match the strict requirements of the automotive industry and solidifies Valens position as one of the leading connectivity players for ADAS applications.

In addition, this announcement is a key milestone for Valens to achieve to move towards mass production of VA7000.

Efficiency improvements

Valens is focusing on efficiency improvements in its operations to reach its profitability goal, while at the same time, engaging in its business and technology goals.

The team optimized its R&D and development infrastructure and streamlined its development platform, enabling Valens to operate in a leaner and more efficient manner.

Conclusion

Valens is operating in a tough market with macroeconomic headwinds affecting its audio video market, while interest rates and slower than expected inventory digestion leading to overall weakness.

I think Valens is progressing well towards adjusted EBITDA breakeven by end 2023 and the improving profitability is evidence of that.

Also, commentary on the pipeline for VA7000 is positive and the continued release of new products helps drive near-term top-line growth.

If there are more design wins for VA7000 with automotive OEMs and if the adjusted EBITDA breakeven is achieved by end 2023, this leaves me more confident that Valens will have a significant ramp in revenues by 2025 or 2026, and the ability to sustain the business till then.

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