VLN - Valens Semiconductor: Slow Progress Is Progress Nonetheless

2023-08-14 11:26:35 ET

Summary

• The latest report from VLN came in mixed, with guidance calling for big declines, offset by an outlook calling for a recovery.
• VLN’s performance over the last two years as a listed company leaves something to be desired, especially its rather lackluster pace of growth.
• There are several reasons some may cite as to why the time has come for long VLN, although not everyone may agree.
• VLN could turn it around if it signs up more customers, but success is not guaranteed in a very competitive environment.

The market might have mostly shrugged it off, but Valens Semiconductor ( VLN ), a supplier of high-speed video and data connectivity solutions to the audio-video and automotive markets, hit some milestones in its latest report. However, there might have also been a few other things that tempered the response. Why will be covered next.

VLN is getting closer to breaking even

VLN hit a couple of milestones in the Q2 report. For instance, cash from operations was in positive territory for the first time. Quarterly revenue hit a new record high in Q2 with $24.2M, an increase of 1.2% QoQ and 7.5% YoY. VLN has increased quarterly revenue QoQ in every quarter since it went public in September 2021 through a SPAC, a streak of seven consecutive quarters, and even longer if one includes the numbers before VLN went public.

As a consequence, VLN came close to breaking even in Q2 with a non-GAAP net loss of $0.2M, which is much less than the net loss of $8.1M a year ago. VLN has set a goal of breaking even in terms of adjusted EBITDA by the end of FY2023 and the Q2 report shows that VLN is on track to achieving this with adjusted EBITDA of minus $0.78M, down from $4.5M a year ago.

However, there are a few other things worth noting that some may find less than welcome. VLN may have increased revenue in every quarter, but revenue has grown from $19.1M in Q3 FY2021, the first as a listed company, to $24.2M in Q2 FY2023, an increase of just $5.1M in two years. VLN has grown, but growth is rather slow.

VLN has increased stock-based compensation expense to almost $4M in Q2, up from $3.1M a year ago. This does not matter that much in non-GAAP, but it does in GAAP, which is mostly why Q2's GAAP loss of $4.6M is much higher than its non-GAAP counterpart at $0.2M. Furthermore, new shares resulted in share dilution. The weighted-average of shares outstanding increased to 101,685K, up 4.4% YoY.

Gross margin continued to shrink, although this was primarily due to automotive contributing a greater proportion of total revenue than audio-video. The latter comes with higher margins than the former, which lowered gross margin. VLN ended Q2 with cash, cash equivalents and short-term deposits of $138M with no debt. The table below shows the numbers for Q2 FY2023.

Source: VLN Form 6-K

The outlook sees a dip, followed by a recovery

The Q2 report was released on August 9, which included guidance for Q3, but prior to that, VLN had already announced on June 8 that Q3 would see a steep drop in both the top and the bottom line due to soft demand. From the June statement:

"Looking at the second half of 2023, in the last several weeks we have been witnessing a significantly slower than anticipated pace of bookings and additional customer requests to push out delivery, due to their delayed inventory digestion. As a result, we are reducing our revenue expectations for the second half of 2023."

The June forecast called for Q3 revenue of $14.0-14.2M, a decline of 41.68% QoQ and 39% YoY at the midpoint, which VLN reiterated in its Q2 report. The forecast calls for adjusted EBITDA of minus $11.9-12.2M in Q3, way more than the minus $0.78M in Q2, as shown in the table below.

VLN also revised its FY2023 outlook in June. VLN had earlier called for FY2023 revenue of $97-100M, but this was lowered to $83.8-84.2M in June. However, VLN adjusted the FY2023 outlook once more in the Q2 report, but this time upwards. The updated outlook keeps FY2023 revenue at $83.8-84.2M with automotive contributing around 30%, but gross margin and adjusted EBITDA were revised upwards as shown in the table below. In comparison, VLN finished FY2022 with revenue of $90.7M, non-GAAP gross margin of 70.7%, and adjusted EBITDA of minus $14.9M.

The FY2023 outlook offset to some extent the sting of Q3 guidance. The outlook suggests that while there will be a big drop in Q3, it won't take long for improvement to arrive. With FY2023 revenue of $83.8-84.2M and adjusted EBITDA of minus $15.6-16.2M, Q4 revenue is projected to come in at around $21.8M with adjusted EBITDA of minus $0.21M, both much better than Q3. The latter has a shot at breaking even if VLN comes in at the high end of the forecast.

Nevertheless, the pace of the recovery will be on the modest side. This is expected to last until at least the first half of next year. From the Q2 earnings call:

"The macro environment is still negatively impacting our customer demand and sales. This is leading to inventory digestion, that is taking longer than many have originally anticipated. We expect the recovery to continue at least, through the end of the first half of 2024, which implies a modest pace of recovery in the short term."

A transcript of the Q2 FY2023 earnings call can be found here .

Why VLN may be worth a shot

A previous article from early March suggested that VLN could see its stock price drop even further, possibly even matching the 2022 lows, even though the stock had already lost a huge chunk of its value at that point. With VLN losing more than 30% since then, the stock did indeed make its way back to the 2022 lows.

However, the stock has stabilized in recent months as shown in the chart below, although it has still lost 52.3% of its value YTD. On the other hand, the price cut has resulted in VLN having a market cap of $257M, with the stock priced at $2.56 as of August 11. This would give VLN an enterprise value of about $119M after subtracting cash, cash equivalents and short-term deposits of $138M. With TTM sales of $94.7M, VLN is valued at 2.71 times sales with a market cap of $257M and 1.26 times sales with an enterprise value of $119M.

An enterprise value of $119M compensates to some extent the growth issues, especially if growth takes off in the second half of next year. This may be why the stock is no longer declining the way it was earlier in the year. Note how the stock has gone sideways in the $2.25-2.75 region. Some may see this consolidation in the stock price as a sign the bottom is in after a big decline and the time has come to place bullish bets.

Investor takeaways

VLN has been looking for customers willing to adopt the new VA7000 chipset, and it got what it wanted on August 10 with LG Electronics signing up, giving VLN its first design win for the VA7000. While there won't be any contributions to revenue for several more years, the fact that there is interest in products from VLN is a positive sign when it comes to future growth.

VLN has a healthy balance sheet with more than half its market cap of $257M consisting of cash, cash equivalents and deposits. While VLN is experiencing the effects of a downturn in Q3, with guidance calling for big drops in the top and the bottom line, the outlook sees a recovery starting in Q4. Growth could accelerate towards the latter part of 2024 with new products in the pipeline making contributions.

The stock has lost more than half its value this year, which may be discouraging, but the stock seems to have bottomed out in recent months. VLN is still in the red, but it has done much to reduce losses to the point it is getting closer to breaking even in terms of adjusted EBITDA. VLN is likely to be cash flow positive sometime next year. One could argue the time has come to get in on VLN with all the above in mind.

However, while VLN has the potential to strike it big in markets like automotive, its past performance leaves something to be desired. VLN has released eight earnings reports since it went public and while it has managed to grow in each of them, the results have been rather lackluster. That might change in the future, but up to now, growth has been fairly hard to come by for VLN. For some reason, VLN seems to be having a difficult time signing up customers, even if it did manage to snag a few like Mercedes-Benz.

Keep in mind that VLN is competing in a competitive market that will only become even more competitive. VLN, for instance, is targeting the ADAS market with its VA7000 chipset due to its growth potential, but so too are others as they too expect the ADAS market to expand greatly in the coming years. It's possible that with everybody trying to get a slice of the market, some may be left with empty hands. It's not impossible for VLN to fall into the latter group.

I am on the fence on this one, but I am neutral on VLN. There are legitimate reasons why some could decide to go long VLN, especially after the big drop in the stock price. The bottom seems to be in, and the stock could go on an extended run if VLN hits its near-term targets like breaking even and if it manages to secure a series of design wins with new customers.

The last part is possible, but a review of VLN's past performance suggests one should leave open the possibility of being left disappointed. It's also possible VLN may experience some unexpected setbacks like the downward revision to the outlook from several months ago. VLN is in many ways a speculative bet. VLN could become a winner, but it could lose out in the end also.

Bottom line, some may decide to go long VLN based on the assumption that the bottom is in and VLN is on the path to recovery. Others, on the other hand, may want to wait to see if VLN can do a better job of getting customers to sign up than it has thus far. There is no one size fits all with VLN. An argument can be made for or against going long, and which one makes the most sense can vary from person to person.

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