Valence Semiconductor (NYSE: VLN) reported its 2023 Q2 Resultsits revenue growth was relatively weak, in line with previously communicated expectations, but profitability was relatively strong, as the company remained on track to meet its breakeven target in 2019. end of 2023.
For me, I need to see Valens achieve a major VA7000 design win by the end of 2023 and the company achieve a solid Adjusted EBITDA breakeven to be able to sustain its business for 2025 or 2026 of these projected VA7000 revenues. Design for growth wins.
Q2 2023 largely in line with expectations
Valens’ second-quarter 2023 revenue was a record quarterly revenue of $24 million, up 8% from the prior year, while gross margin was 62%, down from the previous year’s 70% gross margin.This is mainly due to the growing automotive business portfolio which is less demanding Gross profit margin is higher than audio and video business.
Operating expenses for the second quarter of 2023 were $20 million, down 15% from the prior year, with SG&A and R&D expenses down 20% and 9% from the prior year, respectively, as Valens executed plans to improve corporate efficiency. After implementing the efficiency improvement plan, management expects to realize annual cost savings of $9 million.
Adjusted EBITDA in Q2 2023 was substantially better than the prior year, improving from a loss of $4.5 million in Q2 2022 to a loss of just $0.8 million in Q2 2023. This was largely due to the rescheduling of procurement for new products being developed by Valens, combined with strong foreign exchange this year.
The GAAP net loss for the second quarter of 2023 was $4.6 million, an improvement from the net loss of $10 million for the second quarter of 2022. GAAP loss per share improved from a loss of $0.10 per share to a loss of $0.05 per share. Non-GAAP EPS breakeven in the second quarter of 2023, compared to a loss of $0.08 per share in the same period last year.
At the end of the second quarter of 2023, Valens had $138 million in cash on its balance sheet and no debt.
Most importantly, Valens achieved another new milestone in the second quarter of 2023, with its first-ever quarter of positive cash flow from operating activities.
I think Valens’ strong balance sheet is indicative of the company’s ability to weather the storm, as the company hopes to break even at adjusted EBITDA levels by the end of 2023.
I expect cash generation to continue to improve as profitability improves in the near term.
Management commented that the macro environment remained challenging for its customer demand and sales, and resulted in a longer than expected inventory drain.
In the audiovisual market, given its high correlation to macroeconomic trends, the team is starting to see some signs that the market is recovering. The company expects a gradual recovery from the end of 2023 to the first half of 2024, with a faster recovery in the second half of 2024.
Management reiterated that they believe the third quarter of 2023 will be the lowest quarter of the year and expect revenue to recover from there.
It reiterated its full-year 2023 revenue guidance, which is expected to be between $83.8 million and $84.2 million, with automotive revenue accounting for 30%. Full-year gross margin is expected to be between 62.2% and 62.5%.
Management is guiding for improved adjusted EBITDA to a loss of $16.2 million to $15.6 million. In addition, the company reiterated that it expects to achieve breakeven adjusted EBITDA by the end of 2023, which means it is expected to be cash flow positive by 2024.
While the audio video market remains challenging, one of the near-term drivers of the business is the growing demand for high-performance USB peripherals.
Therefore, Valens has launched the latest chipset VS6320, which is the first single chip on the market for extending high-performance USB.
Valens received first samples of the VS6320 following successful tapeout in Q1 2023, and the company remains on track to deliver first engineering samples to selected customers in Q4 2023.
Therefore, the VS6320 chipset is expected to drive revenue growth in the second half of 2024 as customers start introducing it into new products.
In the automotive space, this year saw the first deployment of Valens’ VA6000 chipset in the Mercedes-Benz S, C and E-Class models. So I expect that to drive automotive revenue in 2023, because that’s the first year that the VA6000 chipset will be deployed in more car models.
In addition to the VA6000, Valens has introduced a new VA7000 automotive chipset for ADAS and safety applications.
Management highlighted that last quarter, Valens built a “large pipeline” with automotive OEMs that are considering large-scale deployments of the VA7000.
Management mentioned that Valens is currently in discussions with OEMs who may choose the VA7000, giving them the confidence to declare the first design win for the VA7000 in 2023.
Note that design wins here may be material, but from the car design win stage, it will take several years to generate the first revenue.
Valens announced a day after its earnings release that LG Electronics Automotive Component Solutions has selected the VA7000 MIPI A-PHY chipset family for its next-generation camera system project.
It is part of LG Electronics’ Digital Cockpit Electronics Solution, which provides advanced driver assistance systems (“ADAS”) to automotive OEMs.
Automotive OEMs are expected to benefit from the solution from 2026, with key benefits of using the VA7000 chipset family including improved electromagnetic compatibility performance and lower total system cost.
Clearly, the fact that LG Electronics has partnered with Valens speaks volumes about the company’s ability to meet the stringent requirements of the automotive industry and reinforces Valens’ position as one of the leaders in connectivity for ADAS applications.
In addition, this announcement is also an important milestone for Valens to move towards the mass production of VA7000.
Valens focuses on improving operational efficiency to meet profitability goals while working to achieve business and technology goals.
The team optimized the R&D infrastructure and streamlined the development platform, enabling Valens to operate in a leaner and more efficient manner.
Market conditions in Valens were tough, with macroeconomic headwinds impacting its AV market, while interest rates and slower-than-expected inventory digestion led to overall weakness.
I think Valens is on track to achieve adjusted EBITDA breakeven by the end of 2023, as evidenced by improved profitability.
Additionally, reviews for the VA7000 pipeline have been positive, with continued new product launches helping to drive near-term revenue growth.
If the VA7000 gets more automotive OEM design wins and breaks even on adjusted EBITDA by the end of 2023, that gives me more confidence that Valens will grow revenue significantly by 2025 or 2026 and be able to sustain the business until then.