Ambarella (NASDAQ:AMBA) Q2 2021 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the MRLS second quarter fiscal year 2021 conference call. At this time, all participants' lives are on the list and only most. After the speaker's presentation, there will be a question and answer session, and to ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is recorded, and if requiring further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Louis Gerhardy. Thank you, and please go ahead and start. Thank you, Chris, and good afternoon. Thank you for joining our second quarter fiscal year 2021 financial results conference call. Our speakers will be Dr. Feng-Ming Wang, President and CEO, and Casey Eichler, CFO.

0:46 The primary purpose of today's call is to provide you with information regarding the results for the second quarter of our fiscal year 2021. The discussion today And the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. were under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we filed with SEC, including the annual report on Form 10-K, filed on March 27, 2020, for fiscal year 2020, ending January 31, 2020, and the Form 10-Q filed on June 8, 2020, for the first quarter of the fiscal year 2021, ending April 30th, 2020.

2:01 Access to our second quarter fiscal 2021 results, press release, historical results, SEC filings, and a replay of today's call can be found on the investor relations portion of our website. With that, I'll turn the call over to Dr. Fermi Long. Thank you, Louis, and glad to meet everyone. First of all, I would like to provide an update on how Umbrella is responding to the health pandemic. We are focused on ensuring the health and safety of our employees, their families, and their communities, and to safely and effectively serve our global base of customers. The majority of our global workforce has returned to their offices, although our U.S. employees continue to work from home.

2:46 Umbrella's workforce has always been globally distributed and collaboratively and we believe this culture and structure helped us adapt, remain highly engaged and productive during this global health crisis. Our business is facing tremendous growth currents. On one hand, AI computer vision has become pervasive. We are embedding AI in all of our new products and we have strong and growing evidence of market acceptance. On the other hand, The pandemic and geopolitical risks are high. The economic constraints of the pandemic remain and we are managing the operational challenges. Despite the challenges, in Q2, we deliver results slightly above the midpoint of the guidance we provided three months ago.

3:39 Q2 revenue of $50.1 million was down 8% sequentially and down 11% versus the same period a year ago. A healthy customer and product mix supported by strong operational execution all contributed to gross margin above the high end of our long-term model. Our AI business continues to show growing signs of acceptance with the CV revenue now representing a mid to high single digit percent of our total Q2 revenue and we are still confident that 10% of our total revenue will be earned from CV products in fiscal year 21. Our CVS has recommended ASP more than 2x our non-CV ASP, and we are now seeing our overall blended ASP increase.

4:27 When revenue growth returns, we expect the higher gross profit dollars per CV unit to drive positive operating and the EPS leverage for shareholders. I will now talk about our markets and the customers. We have previously spoken about our ability to gain SOC share in the professional security camera market outside of China, and this continues to play out. With continued geopolitical uncertainty, we are now seeing additional opportunities to gain market share within China, in particular at the high end and the middle end of the market. Chinese IP camera makers have become concerned about continuity of supply of existing solutions and have We started evaluating camera designs based on umbrella solutions, including our C-Flow AI SOCs.

5:23 Outside of China, we are continuing to see strong design momentum for our C-Flow SOCs in professional IP cameras in all geographies, and a very strong pipeline of new customer introductions planned over the next 12 months. During the quarter, leading Japanese camera supplier, PIPS, previously Panasonic continue to introduce more new models based on our CV4 SOCs following their extensive product rollout in the previous quarter. This include a 4K Vendel resistance or outdoor dome network camera and a 4K outdoor bullet camera both based on Umbrella's CV22 SOCs.

6:09 AI features include Smart Coding Detection, Recognition, and Third-Party Application Support. And in Ogut, Motora Solutions announced the availability of umbrella-based Avigilon H4 thermal elevated temperature detection solution. It is a pre-screening solution that can be used to detect indications of elevated body temperature in a person. Composed of an infrared spectrum thermal camera and the featuring age-based analytics, it provides a contactless alternative to traditional screening methods. In the consumer IP camera market, we have seen a rebound in orders from the major home monitor camera makers following initial push-outs of orders earlier in the quarter as a result of the impact of COVID-19.

7:05 Our customers offering monitored security services have seen an increase in the number of installations in the second half of the quarter, while demand for our customers in self-installation market segments have not recovered. We are also winning new designs for our C4 SOCs in future generations of home monitoring cameras as customers demand advanced AI features such as smart person detection. and in July, Taiwan's baby monitor and sleep analytics company, Kubo, introduced its Kubo AI Plus marker based on our H2L63 SoC. The camera's face detection technology will alert you if you recognize that your baby's mouth and nose are covered or if they are stuck when rolling over.

7:58 During the quarter, we held two online webinars to promote our generous access control reference platform which enables contact-free access control and face recognition. The design has been developed jointly with On Semiconductor and Lumentum and the features of our CV25 SOC to enable 3D sensing capability using a single camera. The two webinars hosted by Lumentum and IPVN, the leader in video surveillance reporting and research, attracted over 200 potential customers and partners helping to secure our first design wins for the new platform. And in the automotive market, we are seeing strong interest in our ASOC solutions for a variety of the new OE applications, including front ADAS, level 2 plus autonomous vehicles, electronic mirrors, and car recorders applications.

8:56 In particular, our CV4 of ASOC winning designs their combination of a low-power advanced initial processing, AI processing performance, and ability to process multiple video streams. Since the beginning of the year, we have won now new OEM design wins that we estimate will generate approximately $200 million in revenue over the lifetime of their production, typically between two and seven years. During the quarter, we won two designs for Japanese automaker Nissan. Chinese tier-one Longhong introduced a pre-installed single-channel Wi-Fi DVR for Dongfeng Nissan passenger cars based on our A12A automotive SOC, while tier-one Hansen also introduced its dealer-fit dual-channel DVR for global Nissan models based on both our A12A and H20 SOC.

9:59 And during the quarter, Shanghai MaxEye began shipping its front ADAT solution in Shangqi Trots, a leading commercial vehicle maker in China. This is a new customer for MaxEye, in addition to the Yutong Wing which we announced on March 3rd. The ADAT system is based on Embraer's CV28, CV4 SoC, and the round MaxEye is deep learning algorithms to achieve high accuracy, visual perception, or 3D scene modeling using molecular vision. In August, UK and European dash cam leader MaxBase launched its next-generation 622 GW 4K dash cam. The first dash cam to offer life-saving emergency SOS alert capabilities.

10:48 Based on Embraer's H22 SoC, the dash cam provides 4K HD recording and image stabilization, while a real-time camera module also supports 1080p video. Also during the quarter, IONI introduces dual-channel car recorder for leading e-commerce company Sound Valley. The aftermarket car recorder features 4M plus 2M resolution recording and is based on H22A automotive SOC. As we mentioned in previous earning calls, we are winning designers for automotive fleet management designs where our CV4 SOC provides the required AI performance for driver monitoring and the front ADAS applications.

11:36 During the quarter, EyeSight Technology, an Israeli company providing driver and the cabin monitoring systems and software announced it has selected CV25 for its telematics fleet device. The device will implement EyeSight's fleet sense drive monitoring solution with eyesight algorithm based being executed on umbrella CV25, CV4, SOC. The CV25 has been selected for its capability to run sophisticated AI algorithm at low power, best in class image processing and ability to support additional applications such as video recording and streaming. In summary, we are addressing AI mega trends such as the security, safety, and Efficiency, all enabled by the integration of our leading video processor and our new computationally intense AI processor.

12:39 We continue to offer evidence of a broad and expanding customer adoption of SOCs. For example, during Q2, we had a record quarter of CV activity with more than 80 unique customers purchase engineering parts Evaluation Kits, and our development boards with activities roughly split between our security and automotive defenses. We are comfortably on track to achieve our guidance for professional security CV revenue on wave one to become mature this year, and we are on track to reach our similar wave two goal for the small home market in calendar year 21.

13:28 Our Wave 3 guidance for auto CV revenue to become material in calendar year 2022 and 2023 is also on track. For example, during Q2, we had six automotive CV production customers. Our long-term automotive revenue funnel is just starting to build with multiple projects, either one or in a bidding pipeline. For example, year-to-date, we have one automotive project representing approximately $200 million in lifetime revenue. Some of the more significant programs start production in calendar year 22 or calendar year 23. And we will be providing further updates as the overall sales funnel develops.

14:17 I would like to thank our employees worldwide for adapting to the changing conditions and delivering strong results. and I am thankful for the support of our customers, vendors and shareholders during these volatile times. I will now turn the call over to Casey who will give you more details about what we are seeing and expect for the business. Thank you. Thank you, Feng-Ming, and good afternoon, everyone. Today I'll review the financial highlights for the second quarter of fiscal year 21 ending July 31st. and provide a financial outlook for our third quarter ending October 31st. During the call, I will discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP and non-GAAP results.

15:05 For non-GAAP reporting, we have eliminated stock-based compensation expense adjusted for the impact of taxes. of $50.1 million was slightly above the midpoint of our original guidance. This represents a decrease of 8% from Q1 and a decrease of 11% when compared to the same quarter in the prior year. In Q2, revenue declined sequentially in automotive and other markets with the security camera business increasing in the low single digits sequentially. Professional security was down and home security increased sequentially. Non-GAAP gross margin for Q2 was 62.4% compared to 59.1% in the preceding quarter and was above the high end of our guidance, primarily due to a professional security concentration ship from China to other parts of Asia and North America. Margins were also supported by continued operational execution in a very difficult environment.

16:08 Non-GAAP operating expense for the second quarter was $30.2 million compared to $31.9 million for the previous quarter. OpEx decreased and was below the low end of our guidance primarily due to reduced employee expenses, lower depreciation from deferred capital expenditures, and a one-time foreign subsidy related to COVID-19 of $700,000. Other income of $1.3 million reflected the impact of lower interest rates. Non-GAAP net income for Q2 was $2.1 million or $0.06 per share compared to non-GAAP net income of $1.3 million or $0.04 per share in the first quarter. The second quarter, the non-GAAP earnings per share were based on 35.4 million diluted shares as compared to 35.2 million diluted shares in the prior quarter.

17:03 The NGAP net income for the second quarter of fiscal year 2021 includes a change in the NGAP tax rate calculation to exclude losses from jurisdictions where there is no tax benefits associated. This was done to improve the alignment of NGAP income tax to the NGAP profit before tax. Accordingly, NGAP net income and non-GAAP earnings per share for the second quarter of fiscal year 20 ended July 31, 2019 have been adjusted for the change in non-GAAP income tax effect and presented consistently with the second quarter of fiscal year 21 presentation. A reconciliation of GAAP to non-GAAP calculation is included in the financial statement portion of our press release.

17:55 Total headcount ended for the second quarter was 758, with about 81% of the employees dedicated to engineering. Approximately 69% of our total headcount is located in Asia. Cash and marketable securities were $410.7 million, down slightly from $411.3 million at the end of the first quarter. In Q2, we had negative operating cash flow of $2.4 million due primarily to increases in operating assets while current liabilities remained relatively unchanged quarter over quarter. Total accounts receivable for the second quarter were $23.3 million or 43 days sales outstanding.

18:41 This compares to accounts receivable of $20.7 million or 34 days sales outstanding at the end of the prior quarter. Net inventory at the end of the second quarter was $23.9 million compared to $22 million in the end of the previous quarter. Days of inventory increased to 109 days in Q2 from 91 days in Q1. We did not purchase any shares of common stock in Q2. In May, Umbrella's board of directors approved an extension of the current $50 million repurchasing program for an additional 12 months ending June 30th As of today, there remains $49 million available from the $50 million repurchase agreement authorized through June 30, 2021.

19:31 We had two 10% plus customers in Q2. W2 Microelectronics, a fulfillment partner serving multiple customers, came in at 56% of revenue, and Chikoni, a Taiwanese ODM who manufactures for multiple customers, came in at 20%. I will now discuss the outlook for the third quarter of fiscal year 21. Forecasting continues to be difficult with geopolitical and pandemic risks continuing to create an environment of low visibility. It is a challenge for us and for our customers to confidently forecast government, business, and consumer spending for our products.

20:16 The rate of order push-out and cancellations were previously discussed in March 3rd, and the June 2nd earnings call has slowed, and design activity has begun to recover. However, not all customers' programs have returned to their pre-pandemic revenue trajectory, and global and many more. In our prior earnings calls, we estimated two professional security camera customers in China had pulled in roughly $10 million of revenue from FY21 to FY20. We believe there has been some inventory reduction but we continue to expect weak and or volatile ordering patterns from these customers.

21:01 During Q2, these two customers combined represented a mid-single-digit proportion of our total revenue. Based on these factors and our best judgment at the current time, we expect total revenue for the third quarter ending October 31, 2020 to be in the range of $52 to $56 million. We anticipate security camera revenue will be down sequentially, with automotive revenue flattish and other revenue expected to increase sequentially. We estimate Q3 non-GAAP gross margin to be between 60% and 62%, compared to the 62.4% in the second quarter, as customer, product mix, and operational control sustain gross margins in our long-term model range of 59% to 62%.

21:56 We expect non-GAAP off-ex in the third quarter to be between $31 and $33 million due to continued lower travel, equipment, and employee expenses related to the current environment. Q3 other income should be modeled around $1.2 million. The Q3 non-GAAP tax rate should be modeled at approximately 15%. We estimate our diluted share count for Q3 to be approximately 35.7 million shares. Ambarella will be participating in the Collier's Institutional Investor Virtual Conference on September 10th, the Deutsche Bank Virtual Conference on September 14th, and Jeffrey's Hong Kong Virtual Conference on September 15th and 16th.

22:46 Please contact Louis for more details on these events. Thank you for joining us today. And with that, I'll turn the call back over to the operator for questions. Thank you. Ladies and gentlemen, as a reminder, to ask a question, you will need to press the star 1 on your telephone. To answer your question, please press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from the line of Matt Ramsey with Calvin. Your line is now open. Thank you very much. Good afternoon, guys. For my first question, I just wanted to follow up on something that you guys just said in the prepared script. I was surprised, I guess, to hear that the combination of Pike Vision and Daiwa, I think, Casey, you said mid-single digits of revenue, if you could confirm that that's right.

23:39 And I guess the follow-up question to that, Fermi, if you could talk to us about the makeup of your current professional security camera business in terms of customers within China, outside of China, and what kind of customer concentration there is in that business at this point, if, in fact, those two big guys are down to that level of revenue currently. Thank you. Well, I think, first of all, we confirm that it's mixed single digits of between hydrogen and dahua. I think there are two factors around that. One is they are definitely, you know, due to the safety stock last year, I think they are definitely true on those safety stock at this point. and also we talk about there's a possibility of they are looking for a second source because they worry about the geopolitical situation.

24:30 So that's definitely two things happening but also in my script I talk about another thing which is not impacting our revenue yet. We talk about our CV for SOC get more design opportunities inside China because also because geopolitical situation and our customers current supplier might facing some supply issues. So that's why we saw some momentum in the design activity in China. However, we do believe our technology especially have been proven outside China. We don't have really a revenue concentration problem because most of our customers outside China, although there are some that are cheaper than the others, but I don't think we have more than 10% customer in any accounts.

25:27 Outside China, we still continue to believe we have the major market shares for both CV and non-CV professional IPK camera supply. But inside China, I think that the mid-single-digit revenue number reflects the two factors I just talked about. But at the same time, I believe that we will have more CV revenue inside China, more CV market share inside China in the near future. Got it. That's really helpful. As a follow-up question, it was nice that you guys provided some revenue information Pipeline Clarity within the automotive business, I think the $200 million. It sounded like that was a two- to three-year revenue lifetime. Is that right? And maybe you could talk to us about how many design wins are in that, what are the relative sizes and concentrations of them?

26:24 I'm just trying to get a sense of Do we have a few big deals that you could build upon in momentum? Is this a whole lot of smaller deals or just any kind of color as to what that pipeline looks like would be helpful? Thanks, guys. Yeah. First of all, I think the pipeline, you talk about the 200 million design win, is only from the beginning of the year to now. All the design we have in the automotive space. We think that there are some big deal, there are some smaller deal. When we say big deal, we're talking about the lifetime revenue close to $100 million in one design. And of course, there are multiple smaller deals for different spaces. And the application cover ADAS, e-neuros, recorders, and also in-cabin monitoring. So there are multiple different applications in there. and also the other thing I can say is that among that $200 million, more than half of that is CV-related applications.

27:29 Great. Thanks, Furby, and congrats on the progress. Thank you. Thank you. And our next question comes from the line of Tristan Guerra with Baird. Your line is now open. Hi. Good afternoon. At this point, and I know you're only guiding a quarter away, is it fair to assume that we should see normal seasonality in your fiscal Q4 top line? And I'm basically asking the question in reference to the prior quarter commentary about the full year revenue guidance year-over-year. Well, we haven't provided any guidance beyond Q3, but I will say that... Although pandemic, we start seeing lesser impact on pandemic in the coming quarters, but the impact is still there.

28:19 However, even with that, we still believe the seasonality is there. Maybe not as dramatic as in the past years, but definitely I think that our Q3 revenue will be higher than Q4, for sure. And also, let's assume that the pandemic impact will be really minimize at the beginning of next year. We should see, you know, a positive growth next year also. So, although we cannot give you a really concrete guidance yet, but I think that's a trend we're talking about. Okay, that's useful. And then, if I look at the longer term, if you could remind us of the operating leverage that exists in the model a few years out, you know, is it Fair to assume that SG&A should grow at half the rate of your revenue growth.

29:07 And then what about R&D? You know, if you could maybe perhaps give some tidbits on the operating leverage beyond just the mix as you're back on your growth starting next year. Yeah. Well, while there will be some growth in sales marketing and SG&A, really the majority of the growth in the OpEx area is in R&D. And that's not only, you know, continuing to grow the team and expand our effort from a headcount perspective, but it's also, you know, although it's amortized, it's the increased tape-out costs, CAD tools, et cetera, that as we go down from, you know, the geometries that we're at now down to the 5 nanometer that we talked about in our last call, Those costs also increase as well.

29:58 The leverage for the model that will offset that growth is really the two times ASP for CV versus non-CV. While the margins are roughly the same, or our margin target is roughly the same, that allows us to have an operating leverage that should get us back to the levels that we were at, 25% plus over the course of time as CV matures out in the model. Great. And then last quick one. Are you guys planning or maybe I missed it and you could remind me, support for LiDAR in the future given that all your demos have centered around, you know, camera support for your CV chips?

30:45 Right. You know, although, you know, we are very vision-centric company, but in the long run, we do believe we want to be the central computers in a level two plus car or even moving forward with level four, level five. So with that goal, we need to support not only just vision-based processing but also we will be able to interface with other sensors like radar, LiDAR or even other potential sensor sensor out there and then we can take in those sensor data to helping our customer to do a sensor fusion algorithm on the CPUs on our chip. I think that's our goal and definitely we're planning to do that and in fact that the functional safety chip that we present CD2 and CD22 functional safety chip also can support taking in LiDAR data and do a sensor fusion on that.

31:46 Great. Thank you very much. Thank you. And our next question comes from the line of Joseph Moore with J.P. Morgan. Your line is now open. Thanks, guys. I wanted to come back to the China surveillance. I guess it seems to be really positive that those two customers are down around mid-single digit and you're seeing design wind traction potentially there when you think about how that business used to be kind of a quarter of your business. So am I Am I being too optimistic about this? And I guess, you know, what is the alternative if High Silicon is compromised in their ability to service those customers and you're starting to see some traction? I mean, shouldn't you start to see, you know, a pretty strong potential ramp? Is there a third competitor?

32:38 Are they enabling new suppliers to sort of offload their U.S.? Just how should I think about where that mid-sale visits can go? Yeah, absolutely, Joe. First of all, I'm not sure that I catch your friend right. To answer the question, from the CV point of view, from the high-end and middle-end products, out of the high-end, we don't believe there is a competitor out there yet. However, the rumor is that... A lot of customers, and also along with HiSelect, they built a huge amount of inventory to try to ride out this uncertainty period. So I think that's one thing you need to consider.

33:26 Then from the high end, the middle end, I think that we are very strong. You can see the evidence on the outside China market. We are basically the leaders and probably have the biggest market share. among all the possible customers. On the low-end side, there's a huge amount of Chinese, Taiwanese companies trying to compete to sell $2 to $3, $4 of a CV chip. And that's on the low-end side. We do see a lot of competition. But for the people who pay attention to the performance, power number, and the best image processing on the middle and high-end products, I think we are probably in a very good position. I would only add, Joe, that I think your interpretation is accurate.

34:13 You know, I think to be able to maintain our revenue and grow our revenue with the headwinds that we talk about and the change in market share there in the short run has been encouraging to us because we've got a lot of other activity going on not only in that business but in other businesses. And as Fermi indicated, you know, We look forward to hopefully having that come back and be a stronger piece, but the fact that we're able to maintain the revenue where it is with that level of business there, I think, is positive. Right. And another point I want to point out is, you know, in Taiwan, we start seeing that there are some shortages on the substrate, and the reason we were told was that high-silicone-containing and so on.

35:25 The thermal win that you talked about with Motorola, I guess, you know, we haven't seen you guys in a lot of these thermal camps before. I think it's a pretty big category given everything that's going on. Like, is that – should we think of that as being a sizable opportunity and just, you know, are you seeing – is there potential for more customers? Could that be a decent-sized business for you? We definitely believe that this is a market that we should target at, and we have worked with several customers, and Motorola being the number one to – out there to ship a product based on our solution. The way we're looking at this market is that a lot of thermal camera today is just building thermal information, but we do see a huge market pools for asking both CMOS image sensor and the thermal sensor combined in a camera so that they can overlay the temperature on the object and applying CV on top of that so you know who when you see a high temperature person you know who they are and how to do contact tracing so I think this is a combination of AI cloud thermal really help us to help our customer to build much better contact tracing algorithm and system I think it's definitely there's a big market for it.

36:45 Great, thank you. Thank you. Thanks. Thank you. And our next question comes from the line of Ross Seymour with Deutsche Bank. Your line is now open. Hi, guys. Thanks for letting me ask a question. One shorter-term question and one longer-term question. Maybe either case here for me. In the shorter-term side of things, I just wanted to walk through the segments just a little bit. It seems like in your guidance for the third quarter, if you have the IP down and you have automotive flat, that the other portion has to be up significantly is Is that just because of seasonality, or is there something else going on there? And also part of that is, why is auto flat sequentially? Most everyone else, at least because the shelter-in-place orders have come off, I know it's early days for you guys in auto, but I would have thought just the world kind of turning back on and that end market would have led to a little bit of sequential growth for you in fiscal three fields.

37:38 Yeah, we could by the end of the quarter see a little bit, but I think the guide to flat is reasonable, and to your point, somewhat pointing to where we are in our life cycle in the automotive business, that maybe differentiates us a little bit from others. The consumer business has been one that typically has grown pretty well in Q3 in front of the holiday season and end of the year, and you're right, we are seeing that. That business today is dominated by DJI and a whole series of products that they have that I think they're having pretty good success with. So we appreciate the relationship and look forward to them having a good season. But I think your assessment is fairly accurate around the consumer. It is really more the normal seasonality along with maybe a few new product introductions that are looking pretty promising.

38:32 Thanks for that, Casey. And then I guess my longer-term question, create a bridge from the shorter to the longer. It's nice to see your gross margin upside so much. So any more color about what happened there? Not company-specific, customer-specific, but how is that so good in the quarter? And then you mentioned that CV has 2X the ASP. Obviously, that will have higher gross profit dollars. Any sort of at least directional commentary on what that does? to the gross margin as well? Do CV gross margins rise versus the prior gen as well, or is it just the dollars we should think about? Right. So for the gross margin, I think the main factor is that the HVDAH combined has only missed single digit of revenue discord. I think that's the main factor. The product mix is always the most important factor for gross margin number.

39:24 And Moving forward, I think that for CV product, we continue to believe that our CV gross margin will be consistent with the video product gross margin. However, like you said, twice higher ASP. So we believe it provides leverage on the EPS, but not on the gross margin. Got it. One final one, if I could see, as a follow-up to your first answer there. If you diversify outside to other Chinese vendors, like you talked about earlier in the call. Is it the same dynamic where the gross margin pressure would be there or is a more fragmented customer base regardless of the geography something that could be less detrimental to your gross margin than Hikvision and Dahua were given their size?

40:10 Thank you. Thank you. Our next question comes from the line of Quinn Bolton with Needham & Company. Your line is now open. Hey, guys. I wanted to ask about the China market. Obviously, HiSilicon is no longer able to supply its security processors by September 14th. Can you give us some sense, how much market share does HiSilicon have?

41:04 in the IP security camera market, which I think you guys in your slide deck estimated about 200 million units. So I would say that inside China, they have the biggest market share. And however, I also want to point out the majority of them is on the low-end side. You know, in fact, if you look at the distribution out in Italy, more than half, a lot more than half is on the low-end side of $2 to $3, $4 ASP chip. However, the most profitable business for us is really on the middle-end, high-end side, and that's where, in the past, HiSilicon has the biggest market share in China. We have the second. Moving forward, I would say that give us some competitive edge to gain some market share on the high-end, middle-end market.

41:57 However, I still want to point out one more time that although HiSilicon cannot ship after September 15th, but there's a huge inventory that we believe having built up for the current customers. And as well as that for the low end side, I think there's quite a few competitors out there competing purely on the price. So that we're gonna see a price pressure on the low end side. Outside China, we don't see a similar scenario. I think that we are supplying through all the non-Chinese customer from the low end to high end because they appreciate using the same system so far across their platform. I think that's one of the key design requirement for almost all our non-Chinese customers.

42:44 If I could get you to maybe even guess for me, if it's a 200 million unit market, you said earlier Hikvision and Dahua, are 60%. So it sounds like just those two customers alone are 120 million units a year. I assume most of that's probably for domestic China. I mean, is the mid-range and the high-end, I mean, is that 30 or 40 million units that you share with high silicon? Or, I mean, it feels like there's tens of millions of units that once those customers burn through the high silicon inventory, that are going to be up for grabs, and it sounds like that's a meaningful unit opportunity. I was just wondering if you could help us at all, try to size what the mid- to high-end market in China might be on a unit basis.

43:31 Well, we don't have that number. You know, it's hard for us to estimate how big it is. I really don't want to give you a wrong impression on that. But maybe we should do it. We will hopefully, from our customer, Chinese customer going to the production with our CV solution, we can give you more visibility how we look at our CV revenue generated through in China market I think that's probably the best time for us to give you more clear indication on that time. Okay. Appreciate it. And then I guess just to follow up on the automotive design pipeline that you talked about being $200 million, I was just wondering, I know you had automotive designs prior to the beginning of this fiscal year. I was wondering, you know, could you give us sort of what the total aggregate design pipeline is now, or if you can't, Give that number is the 200 million, you know, the significant majority of the total pipeline. I'm just trying to, you know, figure out how important that 200 million is in relation to the entire pipeline that you've built up since you started sampling the CV.

44:39 So, first of all, you know, in my script, I talk about sales funnel exercise inside a company. and we are test doing what you're asking is really try to evaluate three category. One is design wing that wholly confirmed with the customer or design inside the pipeline that I think that really have RFQ or answering question or doing evaluation and then that's a secondary category. The third category is the meaningful customer that we think in the long run we want to target and we think that the chance can win. So among those three things, three categories, we put the first and second category into our sales funnel and we'll start building models based on that.

45:26 And, you know, we are not ready to disclose the number, but I think in the near future, very near future, we should be able to talk about that number. And I would think that the $200 million number is just a part of it. It's not a majority of it. Great. Okay. Thanks for me. I appreciate it. Thank you. Thank you. Our next question comes from the line of Kathleen Cassidy with Rosenblatt Securities. Your line is now open. Yeah. Thanks for taking my question. Just around the professional surveillance market outside of China, you're seeing some weakness there, but do you think there's pent-up demand and what kind of Is your customers building up inventory? And with your inventory going up, are you holding inventory for them for when these products get deployed?

46:21 Yes. Hey, Kevin, first of all, welcome back and nice to hear from you. Yeah, thanks. And from the outside China, we don't see there's any inventory buildup. In fact, because of pandemic, people cut back so severely at beginning of the quarter. and we start seeing people trying to pull in orders from our customers. So I would say there's really no inventory build up anywhere outside China and also we continue to believe that the designing activity, designing momentum as well as that many customers will start introducing more and more CV models in the next 12 months will be helping us to build a significant business outside China and also we are very comfortable with our guidance and we talk about wave one meaningful revenue from professional security camera by the end of the year. I think that's definitely there already and we believe we can build up on that.

47:19 Well, the only thing I would add there as well, you know, there are significant challenges, you know, Our relationship with Samsung and our package and test partners have been very good. Zemo and Vincent and his whole team have done an excellent job of really managing this, and there's always a chance that you can have issues. Everything so far they've worked through very, very well, and Samsung and those partners have supported us very well. Okay, great. And maybe if I can turn to the 5 nanometer product, can you? Talk a little more about how that schedule is going, and then also, what's your performance and power consumption improvements are you expecting with 5 nanometer?

48:05 First of all, we will take our 5 nanometer test chip to Samsung, and we're expecting to receive the test chip maybe in two to three months, and then we can start testing it. We believe our first tape-out of 5 nanometer chip will be roughly the end of the year, early next year. and that's our target. And of course, that's definitely another CV chip for our key customers. And the power consumption saving for 5 nanometer is significant. And we believe, for example, that to do a 8K video, we can reach a 2 watts power, which is nobody's there to talk about in the market. I don't think that's even reachable for any other people's design.

48:52 But we do believe that the potential 5 nanometer product can continue to help us to strengthen our position not only as performance improvement but also power improvement, power consumption improvement. Okay, great. Thank you. Thank you. Our next question comes from the line of Torres Vanberg with . Your line is now open. Yes, thank you. First of all, I know you typically don't give out bookings and backlogs, but can you talk about your relative visibility for the October quarter? And it does sound like where there's the most uncertainty is the professional security market. Would that be a fair assessment?

49:38 Yeah, I think that we have pretty good visibility, and like I say, the quarter is, I think, moving very well for us. As far as, you know, I think we've got the right inventory level. and, you know, we feel pretty good about the way we've managed that. But it's not like there isn't, you know, challenges throughout the quarter that, you know, come up from time to time, no question.

50:26 That's great. And as my follow-up to Fermi, on the competitive landscape, I understand the geopolitical stuff. Could you maybe elaborate a little bit on, you know, your partnership with Samsung, the move to 5 nanometer and how that kind of sets you up against, especially that big competitor you have in China, for sort of the battleground next year. Thank you. So, I really think that all competitors in China, meaning high silicon, they're moving very aggressively on the process node also. So, however, like we said before, we believe our power consumption advantage comes from our design, not from the process node. Moving fast with process nodes just being you know defensive so that we don't lose those advantage because we fall behind on the process and also with the 5 nanometer we believe we'll continue to be a leader on the performance per watt as well as continue to provide differentiated features with potential more die size that we can play with providing extra functional features to our customers.

51:35 and our competitive landscape from a security camera high-end side didn't change much. On the low-end side, I talked many times that there are many smaller companies that are trying to compete. On the automotive side, I think our main competitor is Intel, Mobileye, Nvidia and also that NXP and PI and Intel. the FPGA company, Xilinx. So I think they are our key competitors in this space right now. Very good. Thank you for the detail. Thank you. Our next question comes from the line of Suji De Silva with Ross Capital Markets. Your line is now open. Hi, Fermi. Hi, Casey. So I'm trying to get a profile of the security camera business now versus maybe kind of prior peak or How far below prior peak is it, just to understand currently, and what's the mix now looking like versus typically professional consumers?

52:32 Just to understand if consumer can hold up here and professionals weak next quarter. Yeah. Again, on the professional side, the biggest dynamic change is over the last couple of years, we've added several customers, albeit not as big as those two major customers in China, Anwa Tech Wing and others, that I think have helped give us a little more balance But in the short term right now, as we referenced, with those two customers being a bigger part of revenue in the current situation, we have seen a decline in revenue over the last couple quarters there. And as we look forward... What's the adoption of CV and others? That's all remains to be seen. But for us, the mix has changed a little bit because we've gotten a broader acceptance across.

53:21 And even in China, I think Fermi referenced several new customers, albeit smaller, that are starting to engage with our technology. You know, we're going to, I think, continue to partner with everybody. The two customers in China are still very good partners of ours, and we have a relationship where we're trying to be as supportive as possible in any way we can. But that's really the change in the short-term dynamic, and the longer term is, again, something we'll talk to as it develops out. Okay. And then my other question is on the automotive CD pipeline that you talked about, the number and the customers. I'm just trying to understand the geographic mix here, and particularly, you know, what portion of that maybe is targeting the China market versus non-China? Is it geographically diversified?

54:08 Thanks. Well, maybe one thing I can say is in terms of design wing activity or number of production, I think there are several in China. But if you look at the $200 million revenue, the design wing we got from the beginning of the year to now, Majority is outside of China. So, you know, we get a lot of momentum in China with a small design, but also we have momentum, for example, in the U.S. and Japan that continue to help us to build up our pipelines. Okay, great. Thanks, guys. Thank you. Our next question comes from the line of Charlie Anderson with Collier's Securities.

54:53 Your line is now open. Yeah, thank you for taking my questions and graphing all the CV progress. A couple of questions on this. and so forth. Compare $200 million to the previous year, obviously $200 million is higher, but like I said, that in the near future, we're going to disclose our sales funnels for both design wing and also design pipeline, and that will give you more indication of our progress that we make with our customers in automotive space.

55:47 In terms of... I think that a year ago I would say easily they are probably 20% combined total business. So basically that was probably roughly $40 million last year or more than $45 million last year. But at the same time I need to point out one more time that they're pulling some orders last year from this year to protect themselves from a potential geopolitical situation. Just a reminder. Yep, absolutely. And then for my follow-up, we noticed that FedEx has adopted the Daimler delivery van concept that your CV is involved in with Coros. I wonder if you could speak to the potential of that deal and then maybe just that end market broadly. And I'm sort of curious if you could also talk about maybe the content for a delivery vehicle as CV enables some of those use cases.

56:42 Thanks. Right, so I think what you're referring to is really last week I think FedEx was disclosed as a lead customer for Coros and the two company is working on a pilot program which has our CV2 based system for delivery vehicles and warehouse. We announced this in at the CES, but we didn't mention the Federal Express because this is really our customers, really our customers mentioned this time, not us. But however, I think the significant part of this is really showing that our CV chip is mainly designed to focus on ADAS and AD type of application, but in automotive, particularly for delivery truck, that also help our customer to manage inventory as well as other possible applications.

57:34 So in terms of total contents, we talk about there are two CV-2 in there, and the content is roughly between $80, $90 to $100 a car. However, I think that the production date is, you know, I should not talk about production date because it really is our customer's information, but I really think that, you know, we'll leave that production date of this system, of this vehicle to our customer. But I definitely say that's part of our pipeline, not pipeline, I should say our sales funnel numbers that we will disclose in the future. Perfect. Thank you so much.

58:19 You bet. Thank you. And our last question comes from the line of Richard Shen with Craig Hallam. Your line is now open. Thanks, Jeremy and Casey, for getting me on the call. I guess two questions for you. First one, if you look at your professional security market with OEMs outside of China, you talked about having the largest share, and I think it's increasing here. To what degree do you see the potential for even more share coming? Have we reached the end of that? It seems like you would have a bit more room to run from that perspective, but I'd love to hear what you think about that. You know, if there's a successful growth for us outside China, is our hope that our customers will start gaining market share against their Chinese competitors outside China. I think that's probably one of the major areas that I think our customers are hoping for and we hope for, too, that they can grow market share there.

59:14 However, at the same time, In terms of total design win available out there for us to win, we're working hard on that, but if you look at, we already mentioned probably all of the major professional IP and camera outside China already as our customer for CV, and so the biggest issue for us is helping them to start rolling out more CV models to replace a non-CV video camera they have, and that's another way we can grow in terms of the total revenue. So I think that's two areas that we're working on. Okay, that is helpful. Thanks, Fermi. My second question is, and Fermi, I may have caught your comment if I prepared your remarks incorrectly, so set me straight if I'm wrong here, but I think you said you had a very good design engagement quarter with, I think, 80 engagements or so. I wonder if you can characterize that and to the degree to which you're seeing it and kind of You know, emerging markets like, say, robotics.

1:00:16 Can you give us a sense of where you're seeing all that activity and when you think that might come to fruition, particularly in, you know, markets like robotics? Right. So, among the 80 companies, majority of them is, you know, current market with security camera as well as auto. But there are several of them is working on the robotic application. And the size of the market is still relatively small compared to our current market. However, again, I said that many times before, I truly believe 10 years down the road, the robot with computer vision capability is going to be a major market for us, and we come here to invest on that. Although we don't have a visibility of when this is going to be a huge market for us in terms of revenue, but that doesn't stop us from investing in marketing and engineering resources on that too.

1:01:08 so that we can continue to understand the requirement of the market, give us updates about customers' application, and I think that's definitely meaningful for us that we continue to do that. The other thing I would add to that is, you know, we're starting to see more and more activity in the access control area, and we have a couple of announcements that we highlight this quarter, but we've had engagements in the past, too, and that's another, I think, interesting area as well. Appreciate all the detail. That's all from me, guys. Thank you. Thank you. Thank you. And ladies and gentlemen, this does conclude today's question and answer session. I will now let's turn the call back to Dr. Feng-Ming Wang for any closing remarks. Thank you. And thank you all for your attendance today. I'm looking forward to see you next time.

1:01:56 Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.