Good day, ladies and gentlemen, and welcome to the Ambarella First Quarter Fiscal Year 2019 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Deborah Stapleton, Investor Relations. Ms. Stapleton, you may begin.

Hello and thank you. Good afternoon to everyone, and welcome to Ambarella's First Fiscal Quarter 2019 Financial Results Conference Call. Our speakers today will be Dr. Fermi Wang, President and CEO; and George Laplante, CFO. The primary purpose of today's call is to provide you with information regarding our fiscal 2019 first quarter results. 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. We are 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 that we file with the SEC, including the Annual Report on Form 10-K that we filed on March 30, 2018, for the 2018 fiscal year. Access to our first quarter results press release, historical results, SEC filings and a replay of today's call can all be found on the Investor Relations portion of the website. I will now turn the call over to Dr. Fermi Wang.

Thank you and good afternoon everyone. Our Q1 fiscal year 2019 revenue was $56.9 million, representing a decrease of 11.2% from $64.1 million of revenue in the same period of the prior year. While revenue from our focus markets, IP security and automotive grew year-over-year, revenue from drones, sports, and VR cameras declined. During the quarter, we continued to make steady progress in automotive and IP security markets with a strong design win momentum and revenue growth. The development and the rollout of our CV solutions is also progressing well and in line with the plan as shared with you at the recent Analyst Day event in March. During the quarter, we delivered a working silicon on two new computer vision SoCs, CV22 and the CV2 based on our new CVflow architecture and offering significant increases in Convolutional Neural Network or CNN processing performance. We have now successfully ported a large number of our public domain Neural Networks on to CV22 and have measured [ph] the performance at the power consumption. We compared CV22 with CV1, and we confirmed that the CV22’s CNN performance is roughly four times higher than CV1 as anticipated. Additionally, when we compare the CV22 numbers through competing solutions based on GPU or DSP architectures, we have achieved results that are many times higher in terms of our processing performance per watt. In March we successfully demonstrated to customer and investors our fully autonomous vehicle, EVA or Embedded Vehicle Autonomy on Silicon Valley road. EVA navigated various traffic scenarios presented by Silicon Valley's challenging urban environment. The fully autonomous car combines software and algorithms based on over 20 years autonomous vehicle research with Ambarella's low powered CV1 embedded computer vision processors. EVA's high-resolution SuperCam stereovision cameras delivered a 360-degree shot and long distance viewing capability required…

Thank you, Fermi and good afternoon everyone. Today I will review the financial highlights of the first quarter of fiscal 2019 ended April 30, 2018 as well as the financial outlook for Q2 of fiscal year 2019 and update the outlook for the full fiscal year. During the call, I'll discusses non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting for Q1 fiscal 2019 we have eliminated stock based compensation expense adjusted for the impact of taxes. Our Q1 2019 revenue of $56.9 million represents a decrease of 11.2% from the $64.1 million of revenue in the same period of the prior year. Non-GoPro revenue declined approximately 12.5% in the quarter. In Q1 we saw year-over-year growth in IP security and auto OEM offset by a substantial decline in year-over-year decline in drone revenues. In IP security, year-over-year growth was led by professional security revenues primarily from expansion of revenues from the China customers. Solid revenue increases from OEM automotive video recorders in Japan and China resulted in year-over-year growth for the auto market. Consumer drone revenues in the quarter were down substantially from last year with the majority of our revenue coming from high-end drone market primarily at DJI. Other variables declined from last year as weak sales in the VR and non-GoPro sports cameral markets offset growth in police cameras. Although administratively complicated and expensive, the change to average salary price model under the new revenue recognition rules did not materially impact our revenue in the quarter. Non-GAAP gross margin for Q1 was 61.8% compared to 64.7% in the preceding quarter and 64.3% in the first quarter of the prior year. The lower gross margin, both from previous quarter and prior year was the…

Thank you. [Operator Instructions] Our first question comes from Matt Ramsay with Cowen. Your line is now open.

Thank you very much, good afternoon. Fermi, you guys had some pretty impressive displays of autonomous driving stack at the Analyst Day, and I understand intention from Alberto, yourself and Les was to get those demonstrations in front of customers for initial feedback pretty quickly after the Analyst Day. Maybe you could give us a little bit of commentary about how those demonstrations went with customers, what particular feedback was, and if there is any pain points that they're dealing with, with their current camera suppliers that your solutions might address? Thank you.

Thank you. So first of all I think the customer feedback is very positive, and then I think we - I think everybody understands we bring some special value in terms of our perception system for different market. For example, we talk about three different, let’s say category of customers, one is ADAS, the second one is Level 2, Level 3, the third one is Level 4 powerful Autonomous driving. For ADAS customer, they view us as a SoC supplier to really provide silicon solution for Euro NCAP type of Five Star requirement, and this kind of requirement has really become very challenging as well as become high demand in terms of performance requirements and as well as CN performance as well as perception quality. So I think that – from that market, definitely it is an area which we’re going to focus on because it really gives the fastest way to grow revenue in terms of automotive computer vision revenue, and the feedback was that we definitely proved that we have quality not only on the video quality side but also on the computer vision side and our processing performance, lower power consumption and also accuracy to deliver a solution for ADAS. So that is one category. In terms of Level 2, Level 3, our perception subsystem that can really go in the current system to improve their perception system, accuracy, and quality, particularly not only on the image processing side but also on the high level like lane keeping assistance, or lens cruise control, parking assist, those kind of high level functions that we definitely add value there. And then the third category is really on autonomous cars which is really long-term development, but I think that's really strength of our VisiLab, and we will continue to engage customer there, and there we are also being viewed as a perception subsystem to augment what they have right now. So I think this is where the feedback on a customer and really that single SoC source of ADAS or perception system for Level 2 and above really is where or how our customer is looking at us right now, and where we are going to continue to provide solutions.

Got it. That commentary is helpful. George, just a couple of questions for you, one is around the comments that you made about U.S., China relations with respect to where chipsets can go for both China domestic and I guess China exported security cameras, maybe you could give us a little color as to where we should look and watch for comments and how quickly you expect the decision to potentially be made there? And then second, you had talked about operating expenses continuing to ramp even in the face of a little bit more challenging revenue environment. Do you have an OpEx forecast for it for the full-year just the sort of downward spending can go over the next few quarters? Thank you.

I will answer the second one first. On the OpEx for the year, I had given previous guidance of $120 million to $130 million non-GAAP, that’s excluding stock-based compensation. I think that range is still a proper range, we probably right now are targeting or being successful in hitting the high end of that range. On the China situation, I think there's a couple moving parts there, the first one is particularly around the security space with Hikvision and Dahua potentially being excluded from government sales. In that case, I think it’s really going to be a function of, number one, whether the House of Representatives Bill passes the Senate and then we would have to judge the transition in the U.S. and Europe from China-based products to U.S. and European-based security products. I think we would participate still in that. We still have a very high market share outside of China in security, so I feel we could retain some of that business. When it comes to the second issue is the basic trade negotiations going on between the U.S. and China, obviously that is very difficult to project what the impact is. I think we have to watch over the next month or so how China and the U.S. resolve the ZTE issue and resolve the tariff issue to determine if this escalates into something that could impact our sales to China customers. I don't think there's anything specific other than what's in the press on a daily basis as to what changes take place there.

Thank you, guys. I appreciate it.

Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Hi guys, first question is on some of the new CV chips, the 22 and 2, maybe more specifically on the 2, Fermi you talked about that you got the first silicon back and that's working well, can you give us an update on the chronology of when that would be sampling to customers and if the customers agree that it's a great chip and want to put it into their vehicles, when the revenue ramp would occur?

Right. So in fact the CV2 is being evaluated both for security camera and auto space right, that's if you want to talk about short-term revenue potential, I think the security camera space is the one we should focus on, and let’s talk about that first. In terms of -- because we already sampled CV22 to security camera customer, they already evaluate the CV22 – the CN performance and power consumption like I described in our script, which is really impressive number, and also that we showed our software development platform is very similar to how our S5LM type of software platform, they are very similar so they can leverage that software development easily. So with all of that, I think that CV22, we expect there is a good chance that we'll get design in. And also we are considering CV2 is really a high-end chip of CV22 because we have almost all similar functions, but the CN performance is four to five times better than CV22. So for our security camera customer, particularly Hikvision, Dahua are very aggressive in trying to push out CV based security camera. They want to have a roadmap from the high-end to the midstream, to the low end, and we are providing really enough roadmap and the coverage between CV22 and CV2 for them to use.) So in terms of - we are working hard and we expect that Hikvision, and Dahua to design but I think there are three drivers like I said we have performance to get the Hikvision, Dahua to look and also internally Hikvision, Dahua really have a high desire to introduce CV based, cost effective high performance solution. The third thing is really interesting is ISC West Huawei and HiSilicon come out and claim that they are going to…

Just to add one thing, just in the non-CV auto space we’re still on track with our electronic mirrors and our surround view projects. As you noticed today we announced an electronic mirror deal with BAIC through one of our Tier-1s in China, so I think we’re on target to continue to expand that business and hit our first half of next year revenue targets that we had previously discussed.

Perfect and couple of quick follow-ups for you George, on the gross margin side things are somewhat similar to the prior question on the OpEx side, given all the puts and takes on the mix side of the equation, any color you could provide in the back half of the year there? And then two quick clarifications, tax rate for the rest of the year, you talked about a bunch of moving parts in the pro forma tax rate, could you just give us what your expectations are there and then finally a clarification on the full-year non-GoPro revenue guide, did you say plus or minus 3% or flat plus or minus or was it 3% plus or minus, just want to clarify that? Thanks.

Okay I will start with that one and it’s flat plus or minus 3% on the $258 million. So on the tax rate, I think the tax rate should be somewhere between on average somewhere around the 12% to 13% range for the year, we're still looking at all the impacts later in the year. The gross margin question, I think is very similar to what we had said in the past, the higher mix of China security will bring some of the margin down in the second half. That's why I changed the range to the lower end of my 59 to 62. So, as we lose the higher margin virtual reality portion and the non-GoPro cameras and China security increases as a percent of revenue, we will see some degradation in the margin compared to what we had previously thought.

Perfect, thank you.

Thank you. Our next question comes from Kevin Cassidy with Stifel. Your line is now open.

Thanks for taking my question. And maybe just give a little more details on the conversations you've had with the automotive companies, what are the key features that they are looking for their device especially for ADAS and maybe they're not getting from what's in the market today or any other competitors?

Well, first of all I think that for ADAS function basically we talked both about stereo processing as well as monocular and the CN performance we show in the power consumption for example I quote that compared to current CPU or PSP solution, we have CN performance with CV22 is multiple times better in terms of processing CN processing performance per watt. I think really that we’re providing good complete SoC solution with very good quality on the video processing side as well as a very strong CV solution that the people can really improve the CN performance in big way. So I think that is definitely something we view that as a strength our CV2 and CV22 and on top of CV22 in price and performance, CV2 improved the CN performance by another four to five times. So really I think a lot of our customers view that as a very powerful, low power consumption solution and plus our current video quality, so all the combinations really help people to think that we have a unique offering in the ADAS function. I think for ADAS really majority of CV function moving to CN base and with solid, but I think that with very powerful CN performance at low power consumption I think is key.

Okay. And I think during the Analyst Day you had mentioned you'd be selling the Super Cam, have you had any revenue from your customers yet or potential customers?

Yes, we just started shipping those and obviously some of those units are going out as development units but some of them are being sold, so yes that's starting. We will have a second version later in the year which takes us the Super Cam and incorporates our CV2 chip which will be higher performance. So I would expect those to continue to be sold through the year. Again I don't think the revenue is going to move the needle that much, but I think there's going to be quite a few customers who take the product both the short range and the long range camera systems for development.

All right it could be interesting for investors just for leading indicator of future designs perhaps?

Yes, I'll take that under advisement.

Thank you.

Thank you. Our next question comes from Quinn Bolton with Needham & Company. Your line is now open.

So, just want - George on the updated annual outlook, it certainly sounds like the VR and the non-wearable, non-GoPro wearable cameras are down, drones continue to be weak, but just wanted to ask, was there any change in your outlook in either the automotive or IP security relative to prior expectations?

Not a significant change there, what we noticed just recently is a lot of our VR and non-GoPro sports camera customers started pushing out orders, so we took it upon ourselves to go out and do a detailed review there and concluded that we don't see the market expanding and I think the general feeling there is the second half will be down quite a bit from last year, lot of that probably being market driven especially in the VR section which were their new products. On the security side, I think forecasts came in very similar and same with the auto. I think there's still uncertainty around what's going on between the U.S. and China. We just cannot make any miracle determination of what the impact was, so we've held off on that type of adjustment.

And this is Fermi, just one more comment about security camera. I really think that the thing will move the needle on the security camera revenue is we successfully introduced product into Hikvision and Dahua, we expect that if that happened the ASP will be significant for high teens of ASP instead of current ASP in mid-teen, mid single digit to high single digit. So we're seeing a significant ASP jump for CV solution being introduced.

Got it. And just sort of a follow-up on the potential denial of U.S. government not purchasing China based camera security cameras, if that is enacted I guess I think about your share in China where you compete pretty heavily with HiSilicon relative to your share outside of China, would you say that your share in the non-Chinese OEMs is higher than your share within the Chinese OEMs and if the government doesn't buy China based cameras could that actually end up being a slight benefit?

I think it potentially could, we do have a higher share and major customers in North America and Europe, so I think potentially there may be an ASP improvement. It's difficult to say on the units, but I think you’re right, there could be potential upside there.

But obviously it just sounds like until we know what the government enacts, it’s just there is some uncertainty in that segment of the market?

Yes, I think there's a lot of uncertainty because there's also the potential the China forcing the China customers to use more China sourced semiconductors. So there's so many moving parts right now and I think the view is that things are changing so rapidly that the final outcome and impact is extremely difficult to project.

Great. And then just the last question kind of longer term, if you look at the ADAS market and as well as the perception subsystems where you said you're improving the performance of existing systems, I'm just kind of curious whether you're seeing customers looking to develop their own CNNs where they're running on the CV22 or CV2 chips or are you starting to deliver some of your own CNNs along with the hardware to those auto and ADAS suppliers?

In fact, I think that after we talk to customer, majority customer Tier-1 OEMs particularly the large Tier-1s they prefer to use their own CNN network. And our job is going to help them to port their CN network in CV2 or CV22 and deliver performance. That is why it is so important that we can port public domain you know work quickly after we got CV22 and it is that we cannot – the performance of power consumption number we talk about, that give our customer confidence that we can port their newer network that which is already available in different platforms and port it over and using them. So I think majority, in fact even surprising I think even in China most of the customers want to use their newer network versus using ours which I think is definitely a trend in the market as people are spending so much money and investment to develop new network so they can differentiate, I think that's definitely reflect on the trend.

Okay, thank you Fermi, thank you George.

Thank you. Our next question comes from Suji Desilva with ROTH Capital. Your line is now open.

Hi Fermi, hi George. I know there is lot of uncertainty around the China situation and specific question, but is there any distinction between selling your base video chips versus the upgrade to the computer vision chip into the China IP security market or do you think it is more of a blanket sort of used local semiconductors versus imported semiconductors?

No I think you're right, there's no differentiation between video only or CV based chip for this particular problem. So I think it's just quite hard to identify what is it American based supplier or Chinese based supplier, I think that's where the differentiation is.

Okay, thanks for that clarification and then in Japan auto market, I’m trying to understand how penetrated you are into the surround view and other auto OEM opportunities, how much further do you have an opportunity in terms of incremental customers and what does the pipeline look like in terms of customer or you widely penetrated in Japan?

So let's take one at a time. I think for recall market we really are doing very well in both China and Japan and Korea that we talked about in the past and we continue to have a new design wins in this category. So I think that from weak order side we are confident that we are going to continue to perform and get more revenue upside from that market. On the E-Mirror side, like we said in the past we talk about later this year we're going to start seeing early ramping of our E-Mirror and we just did our first E-Mirror design from China which we also believe that's probably most aggressive market in terms of using this E-Mirror technology at this point. And we believe that the current Tier-1 OEM will use this design to go to multiple OEMs and also that we have other design wins with Tier-1 in China, Japan, Korea and the U.S. that will use this kind of E-Mirror design was A9AQ. So there's a pipeline there, but we just cannot give you enough detail, but when they go to production, but I think the key is that OEM with BAIC in production as we give you indication A9AQ solution is mature and ready to go into production right now.

And then the last question perhaps for George?

Yes, I was going to say Suji, I think we’re still on plan to hopefully have some material revenue in the first half of next year in those product classes.

Okay, great. My last question for George, I know this is it is maybe difficult but in terms of seasonality is the profile changing with the mix of products as you have some headwinds in some of the other categories emerging, and yes if you can even answer if the second half of this year looks like a typical seasonal pattern or if we're deviating from that, that would be helpful? Thank you.

Yes, I think it’s going to deviate this year because some of the consumer markets like sports cameras and virtual reality cameras are probably not going to ramp, like we would normally see in a volume market. I still think we will have some impact from home security cameras, but that will be because it's a smaller market probably we will see a flattening in the second half.

Okay, thanks guys.

Thank you. Our next question comes from Joe Moore with Morgan Stanley. Your line is now open.

Great, thank you. The non-GoPro business being flat for the year plus or minus when you are down kind of high single digits for the first half of the year, can you just kind of understand the headwinds in the back half, what are the tailwinds that can kind of get you back up to that high level?

Yes, it hasn’t really changed as security being up on last year and also in the automotive area, we would see both the aftermarket and the OEM business I think holding up the numbers to get to breakeven for the year, that's our target.

Okay, thank you and then within China surveillance, there's been some focus on custom parts from some of your customers there in both the video processing the traditional markets as well as AI. Can you talk a little bit about that, I know you've been aware of those efforts, can you just kind of give us an update of how you sit competitively within those customers?

Right, so that's for the video only because that's become very obvious that for example Hikvision has its own, I will say affiliation to low end chip, the company is called Dahua and they are doing really low end chip, which is lower end than the HiSilicon chip. So that I think from video point of view we still the Hikvision is using that solution for the lowest end solution for now. But nonetheless it’s definitely indication that big Chinese customer has ambition to become silicon supplier. So I think for us, but at the same time we still have a great relationship with Hikvision in terms of talking about the potential partnership in terms of CV and not video only solution. We have very open dialog in terms of what they are trying to do and what they can what is our positioning in their supply chip. So I think that Hikvision definitely is trying to prepare some low end solution just in case HiSilicon because their competitors because Huawei is coming to competing with them. At the same time, that was definitely a worry for us that moving forward that we think that with our CV2 and CV22 we have a chance to become or continue to be main partners or one of the main partners in their silicon supplier.

Okay, thank you.

Thank you. Our next question comes from Charlie Anderson with Dougherty & Company. Your line is now open.

Yes, thanks for taking my questions. Fermi you mentioned in your script about the legislation in China that could maybe help ADAS camera market, I think in Analyst Day you talked about that being about 20 million units and then OEM 6, 7 million. So if that legislation passes in China, could you maybe help us understand how much larger that market can potentially get result of that?

Right, so first of all although we are not directly involved in the legislation, but I think you can imagine a lot of us our partners in China are involving with that government legislation trying to finalize in the near future. And basically legislation basically going to if will that pass your mandate costs have recorded and progress for the insurers for the excellent result or any kind of arbitration on the court cases. So I think among all the reasons China - we believe China will pass legislation based on the current momentum and the impact is huge, I think basically it means all 20 to 25 million new cars every year in China need to have this and also that basically will push the whole aftermarket transitioning into the OEM market and which is important for us because for OEM market the demand on the quality, I mean Silicon quality, AEC Q wide temperature range they are all our strengths that we are proven supplier on that in China. So definitely would help us to get to 20 to 25 million units market which is market good and the current service market that we have in China, but at the same time give us a chance to continue to compete with our advantages. At the same time, I want to also mention that there is a trend that we are seeing that when more and more people start talking about autonomous car there will be more and more people start talking about OES start talking about they need to record video just because there many accidents happen to ADAS based or autonomous car happening in the field and the people want to know exactly what happened. So a black box type approach is definitely being discussed and I think the trend we’re seeing is that more and more people will consider maybe even legislation in different country will start talking about putting black box implementation into autonomous car. So I think that trend is definitely something we’re watching hopefully that will help us to increase our total available tenant [ph] in the future.

Great, that sounds good. So second question from me is, it sounds like an auto side you get a lot of evaluation hits up, lot of good customer response. I’m wondering Fermi just how you are defining success this year in that endeavor, what are you goals for this year in terms of what you want to accomplish as far as any progress with customers is concerned?

So in fact, in terms of the auto side I think there are several important internal milestone we set up together right, we really look at the design win we can secure, we are looking at we can having some customer announced with us. We are looking at continue to increase the design win in the recorders and E-Mirror type of solutions and also trying to get some design wins in ADAS in the Level 2, Level 3 cars. Those kinds of things are major milestones that we are looking at as evaluation how well we are doing internally in terms of automotive market.

Okay, that’s it from me. Thanks much.

Thank you. Our next question is from Ross Seymore with Deutsche Bank. Your line is now open.

Hi guys, thanks for letting me sneak in a followup. George, I just want to get back to the seasonality question that you mentioned before and not to parse it out in too finer way but when you talked about it flattening out, it looks like the implied second half of the year has to be up somewhere in the kind of non-GoPro $140 million range given your guidance in the first half of the year to get you to the flat, mid point? So when you talked about the seasonality are you more talking the third quarter will still probably go up more and the second quarter down, but not as much as in the past, any sort of just shaping color in the near term? And then as we think probably equally important as we go forward, does seasonality kind of just go out the door as the design wins you guys have in places like the automotive market and then obviously continuation IP security really doesn’t have as much of a seasonal pattern as your former business did?

I think the answer, the first part of your question is yes, I think what we - I didn’t mean that would be flat on Q2, I just felt right now you will see the increase in Q3 and Q4 be less probably than we’ve seen in the past, just the function of the lower consumer portion of that business. Going forward I would expect that to continue to be less of an impact as we get more into auto OEMs and that becomes a bigger part of our business. There is some seasonality to security, the second half in professional security and consumer security is normally higher than the first half. That has been part of seasonality and I think that part will continue. But I think the step-up that we used to see with the heavy concentration of consumer products is probably going to come down from previous years.

Perfect, thank you.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Dr. Fermi Wang for any further remarks.

Yes, I would like to thank everyone for joining us today and a very special thanks to all our employees for their continued dedication and hard work. Thank you and good-bye.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a great day.