20-F: Valens Semiconductor Reports Full Year 2023 Results Amidst Industry Cyclicality

Valens Semiconductor releases its annual report for 2023, navigating a challenging semiconductor market with strategic focus on automotive and audio-video sectors.

Summary

• Valens Semiconductor's 2023 annual report highlights the company's performance in a cyclical semiconductor industry.
• The company generated $84.16 million in revenue, a decrease from $90.715 million in the previous year.
• Gross profit decreased to $52.592 million, with a gross margin of 62.5%.
• The company reported a net loss of $19.661 million.
• Approximately 68% of net sales were generated by audio-video products and 32% by automotive products.
• The company is focusing on expanding its presence in the automotive market with its MIPI A-PHY compliant chipsets.
• Valens is also expanding its offerings in the audio-video market with new products like the VS6320 USB3.2 Gen1 extension solution.
• The company is managing its supply chain and inventory levels in response to global economic uncertainties.
• Valens is committed to innovation and is investing in research and development to maintain its competitive edge.
• The company is also working to improve operational efficiency and reduce costs.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While it highlights the company's strengths and growth opportunities, it also acknowledges the challenges and risks associated with the cyclical semiconductor industry and the company's financial performance.

Positives

• The company is a leading provider of high-performance connectivity solutions.
• Valens is the incumbent provider for wired high-performance audio-video connectivity products, compliant with the HDBaseT standard.
• The company's technology was selected by the MIPI Alliance as the basis for the industry standard for high-speed automotive video connectivity (MIPI A-PHY).
• Valens has a strong relationship with Mercedes-Benz to power the infotainment and telematics systems in most of its car models.
• The company is expanding its offerings in the audio-video market with new products like the VS6320 USB3.2 Gen1 extension solution.
• The company is committed to innovation and is investing in research and development to maintain its competitive edge.
• The company has a strong ecosystem momentum towards adoption by Automotive OEMs and Tier 1s.

Negatives

• The company's revenue decreased by 7.2% in 2023 compared to 2022.
• The company's gross profit decreased by 17.0% in 2023 compared to 2022.
• The company reported a net loss of $19.661 million in 2023.
• The company is operating in a cyclical semiconductor industry.

Risks

• The cyclicality of the semiconductor industry could negatively affect the company's sales, production, and margins.
• Competition in the semiconductor industry could lead to declining sales volumes or lower prevailing prices for the company's products.
• Failure to adjust the company's supply chain volume or estimate its customers' demand could adversely affect its net sales.
• Disruptions in the company's relationships with any one of its key customers could adversely affect its business.
• The company may have difficulty selling its products if customers do not design its products into their product offerings.
• The estimates of market opportunity and growth forecasts included in this disclosure may prove to be inaccurate.
• The company's quarterly net sales and operating results are difficult to predict accurately and may fluctuate significantly from period to period.
• The company depends on winning selection processes, and failure to be selected could adversely affect its business in those market segments.
• The company may be unable to maintain appropriate manufacturing capacity or product yields at its CM manufacturing facilities.
• The company's ability to raise capital in the future may be limited and could prevent it from executing its growth strategy.
• The company is exposed to a variety of financial risks, including currency risk, interest rate risk, liquidity risk, commodity price risk, credit risk and other non-insured risks, which may have an adverse effect on its financial results.
• The company may pursue acquisitions and investments in new businesses, products or technologies, joint ventures and other strategic transactions, which may not be successful and could disrupt its business and divert financial and management resources from more productive uses.
• The company may have difficulty attracting, motivating and retaining executives and other key employees.
• The company may not be able to adequately obtain, maintain, protect, defend or enforce its intellectual property rights, which could harm its competitive position.
• The company may be subject to cyber-attacks or other disruptions to or breaches of its information technology, systems or networks that could irreparably damage its reputation and its business, expose it to liability and materially and adversely affect its results of operations.
• There may exist deficiencies in internal financial reporting controls and disclosure procedures that could adversely affect the accuracy and reliability of the company's periodic reporting.
• The company's global business requires it to comply with laws and regulations in countries across the world and exposes it to international business risks that could adversely affect its business.
• The company is subject to governmental regulations and other legal obligations, particularly related to privacy, data protection and information security, across different markets where it conducts its business.
• Failure to comply with the Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject the company to penalties and other adverse consequences.
• Environmental, health and safety (EHS) laws and regulations may expose the company to liability, and such liability and compliance with these laws and regulations may adversely affect its business.
• The Internal Revenue Service (IRS) may not agree that Valens should be treated as a non-U.S. corporation for U.S. federal income tax purposes.
• Changes to tax laws or regulations in Israel, the United States and other jurisdictions expose the company to tax uncertainties and could adversely affect its results of operations or financial condition.
• Changes in government trade policies, including the imposition of tariffs and export restrictions, could limit the company's ability to sell its products to certain customers or demand from certain customers, which may materially and adversely affect its sales and results of operations.
• The company will be subject to legal and regulatory consequences if it does not comply with applicable export control laws and regulations.
• Changing foreign exchange rates may have an adverse effect on the company's financial results.
• The company incurs increased costs as a result of operating as a public company, and its management is required to devote substantial time to new compliance initiatives.
• A market for the company's securities may not be sustained.
• The company's internal controls over financial reporting may not be effective and its independent registered public accounting firm may not be able to attest as to their effectiveness, which could have a significant and adverse effect on the company's business and reputation.
• The company may be named as a party to several legal proceedings in the future, including litigation related to its patents and other intellectual property, which could subject it to liability, require it to indemnify its customers, require it to obtain or renew licenses, require it to stop selling its products or force it to redesign its products.
• Conditions in Israel including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel's war against them, may adversely affect the company's business and limit its ability to market its products, which may lead to a decrease in revenues.
• Investors' rights and responsibilities as the company's shareholders will be governed by Israeli law, which differs in some respects from the rights and responsibilities of shareholders of non-Israeli companies.
• Provisions of Israeli law and the company's amended and restated articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of the company's shares or assets.
• The company's amended and restated articles of association provide that unless the Company consents otherwise, the competent courts of Tel Aviv, Israel shall be the sole and exclusive forum for substantially all disputes between the Company and its shareholders under the Companies Law and the Israeli Securities Law, which could limit our shareholders ability to brings claims and proceedings against, as well as obtain favorable judicial forum for disputes with the Company, its directors, officers and other employees.
• The company has received Israeli government grants for certain research and development activities. The terms of those grants require it to satisfy specified conditions as defined in Israel's Encouragement of Research, Development and Technological Innovation in Industry Law, 5744-1984 (the Innovation Law).
• Certain tax benefits that may be available to the company, if obtained by the company, would require it to continue to meet various conditions and may be terminated or reduced in the future, which could increase the company's costs and taxes.
• It may be difficult to enforce a U.S. judgment against the company, its officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on the company's officers and directors.
• The company's Articles and Israeli law could prevent a takeover that shareholders consider favorable and could also reduce the market price of Valens ordinary shares.
• Payment of dividends may be subject to Israeli withholding taxes.
• The market price and trading volume of Valens ordinary shares may be volatile and could decline significantly.
• If securities or industry analysts do not publish or cease publishing research or reports about Valens, its business, or its market, or if they change their recommendations regarding Valens ordinary shares adversely, then the price and trading volume of Valens ordinary shares could decline.
• Valens failure to meet the continued listing requirements of the NYSE could result in a delisting of its Securities.
• The company is an emerging growth company within the meaning of the Securities Act and takes advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make Valens securities less attractive to investors and may make it more difficult to compare Valens performance with other public companies.
• The company is a foreign private issuer and, as a result, are not subject to U.S. proxy rules but are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. issuer.
• The company may lose its foreign private issuer status in the future, which could result in significant additional costs and expenses.
• As the company is a foreign private issuer and follow certain home country corporate governance practices, its shareholders may not have the same protections afforded to shareholders of companies that are subject to all New York Stock Exchange corporate governance requirements.
• Due to fluctuations in the market price of Valens ordinary shares, there is a significant risk that Valens may be a passive foreign investment company (PFIC) for U.S. federal income tax purposes for 2024 or one or more future taxable years, which could result in adverse U.S. federal income tax consequences to U.S. investors in Valens ordinary shares or Valens warrants.
• If a U.S. investor is treated for U.S. federal income tax purposes as owning at least 10% of Valens ordinary shares, such U.S. investor may be subject to adverse U.S. federal income tax consequences.

Future Outlook

The company expects to invest further in research and development of new products to ensure that it maximizes its considerable market opportunity. The company also expects to expand its serviceable market in automotive with its VA700R, based on the VA7000 chipset family, which provides a connectivity long distance solution for medium and long vehicle sensor connectivity.

Management Comments

• Valens aims to transform digital connectivity across industries, by providing reliable, resilient and optimized solutions for long distance connectivity over simple, low-cost wiring infrastructure, enabling cutting-edge innovation across verticals in the automotive, audio-video and other adjacent markets.
• As data rates continue to increase massively, Valens will continue to enhance its technology continues to evolve to empower the digital applications of the future.

Industry Context

The semiconductor industry is highly cyclical and competitive, characterized by rapid technological change, short product life cycles, and fluctuating supply and demand. Valens is navigating these challenges by focusing on innovation, strategic partnerships, and expanding its presence in key markets like automotive and audio-video.

Comparison to Industry Standards

• Valens competes with both large international companies and smaller companies specializing in narrow markets.
• The company's HDBaseT technology is a leading standard for long-range, high-performance connectivity in the audio-video market, competing with other connectivity solutions.
• In the automotive market, Valens' MIPI A-PHY compliant chipsets compete with other connectivity solutions for ADAS and autonomous driving systems.
• The company's superior physical layer (PHY) technology enables powerful bandwidth over long-reach and low-cost infrastructure, while maintaining error-free links and EMC performance, differentiating it from competitors.

Management Changes

Related Party Transactions

• During the years ended December 31, 2023, 2022 and 2021, the Company granted 300,750, 239,610 and 321,777 options, respectively, at a weighted average exercise price of $3.76, $6.28 and $1.04, respectively to several executive officers, and Board members of the Company.
• In addition, during the years ended December 31, 2023, and 2022, the Company granted 548,849 and 515,103 RSUs, respectively to several executive officers and Board members of the Company.
• During the years ended as of December 31, 2023, and 2022, the Company paid to the non-employee directors, a total amount of $401 thousand, annually.
• In February 2020, the Company changed the employment terms of Mr. Dror Jerushalmi, who is also a member of the Board of Directors, into a fixed term employment of 5 years, ending in January 2025.
• On September 30, 2021, the vesting of 814,272 options of one of the Company's executives were accelerated. The Company expensed $3,396 thousand in the general and administrative expenses due to such vesting acceleration.
• In respect of the execution of the Merger Agreement Closing and the listing as a public Company in the NYSE, certain of the Company's executives received cash bonus in the amount of $1,545 thousand, that was expensed in the general and administrative expenses.
• As of December 31, 2023, and 2022, the Company accrued $0 and $532 respectively, for bonus payments to several executive officers.
• As of December 31, 2023, and 2022, the Company accrued $0 and $142 for services provided to PTK by its Sponsor in connection with the Merger.
• In August 2023, as part of a separation agreement (the Agreement), the Company changed the employment terms of one of its executives, including changes to the Executives options terms. Accordingly, during the year ended December 31,2023, the Company recorded an expense of $289 thousands with regard to the Agreement.

Stakeholder Impact

• Shareholders may experience fluctuations in the value of their investments due to market volatility and company performance.
• Employees may be affected by changes in compensation, benefits, and job security.
• Customers may be impacted by the company's ability to deliver high-quality products and services.
• Suppliers may be affected by changes in the company's demand for materials and components.
• Creditors may be impacted by the company's ability to repay its debts.

Next Steps

• The company intends to grow its business through key areas such as enriching market offerings, expanding and diversifying addressable markets, and increasing its global presence.
• Valens expects to continue expanding its offerings in Corporate (videoconferencing for large and smaller conference rooms), Education (hybrid and remote learning), Industrial (camera sensors and computer vision systems), medical applications (medical imaging, diagnostic and surgical equipment, disposable medical devices, operating room video distribution, etc.) and signage applications, among others.
• The company expects to expand its serviceable market in automotive with its VA700R, based on the VA7000 chipset family, which provides a connectivity long distance solution for medium and long vehicle sensor connectivity.

Key Dates

Keywords

Valens Semiconductor, annual report, semiconductor, financial results, automotive, audio-video, HDBaseT, MIPI A-PHY, revenue, gross margin, net loss, market risk, Israel