Ambarella, Inc. (AMBA) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Ambarella's Q3 Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Louis Gerhardy, Corporate Development. Thank you. Please go ahead, sir.

Thank you, Gigi. Good afternoon and thank you for joining our third quarter fiscal 2020 financial results conference call. Our speakers will be Dr. Fermi Wang, President, and CEO; and Casey Eichler, CFO. The primary purpose of today's call is to provide you with information regarding the results for the third quarter of our fiscal 2020. 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 we filed with the SEC, including annual report on Form 10-K filed on March 29, 2019 for fiscal 2019 ending January 31, 2019, and the Form 10-Qs filed on June 7, 2019, and on September 6, 2019, for the fiscal year 2020 ending January 31, 2020. Access to our third quarter fiscal 2020 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. I'll now turn the call over to Dr. Fermi Wang.

Thank you, Louis, and good afternoon, everyone. Before I discuss our results, I will provide an update on geopolitical factors that may continue to impact our business. During the quarter, we provided an update on the impact to our business from the entity list published on October 9. While this brought clarity to some trade issues, we continue to see a wide variety of geopolitical risk outstanding, including foreign policy, trade, and IP matters. Factors potentially disruptive to our business include changes to tariffs and all the entity lists, market share shifts between our customers, supply chain issues, potential export regulations on advanced technologies and the potential for customers in China to take actions to reduce their dependency on U.S. components. On the other hand, our largest competitor in the security camera SoC market HiSilicon or Huawei is facing challenges by the helping us gain shares outside of China. As you can see multiple factors, both positive and the negative are contributing to a wide range of potential outcomes for us. We continue to demonstrate strong progress toward our strategy to transform from a pure video processing company to an AI and the computer vision company. During Q2, all of our CV family contributed to the early ramp in our CV revenue with mass production shipments continuing in automotive and security camera markets. CV design activity remains strong. In Q3, we generated pre-production CV revenue including engineering parts, evaluation kits and/or development boards for more than 50 customers across all applications and geographies. Our Q3 fiscal year 2020 revenue of $67.9 million was above the high end of our guidance range and the revenue increased 20% from the $56.4 million in the prior quarter. We stress for our traditional video processing all markets straight by our automotive business. Security camera revenue was driven by strong underlying consumption as recently reported by several of our large customers, as well as inventory restocking at our customers in China and the share gains. I will now talk about our progress in our target markets, starting with security. As China Public Security Expo held in October, we demonstrated a number of events imaging and AI technologies then add enabling the next generation IP security in the robotics applications. This included using a single RGB-IR sensor fusion software to eliminate the mechanical IP filters and to filter and recover information under near-IR illumination. We also demonstrated right person detection using AI business running our CV25 SoC to enable fast system boot and reduce power consumption in battery-powered applications. We also demonstrated our new robotics SDK running multiple new networks and stereo processing concurrently on a single CV2 SoC. To provide a full-frame rate object detection, classification and tracking with depth measurements and the segmentation. We believe the new SDK will enable our customers to develop solutions for a wide range of a new machine learning applications on spending logistics, industry 4.0, new retail and the both consumer and industrial robots. And the GSX 2019 security show held in September, Hanwha Techwin, a leading supplier of IP video security solutions announced its new P&L series of AI cameras based on Ambarella's CV22 CVflow SoCs. The new cameras run network-based algorithms to recognize different types of vehicles, faces, license plates, and other objects, offering greatly enhanced video analytics, accuracy versus previous generations. The camera is available in both 4K and the 5-megapixel resolution models. Also at the GSX show, Bosch introduced multiple new IP cameras based on Ambarella SoC solutions. This included its intelligent I Series cameras, including new FLEXIDOME and the [Vineom] camera models with building video analytics standard. And of the new AUTODOME starlight 7000 I cameras that include intelligent video analytics ability to track and zooming of moving objects, 4K resolutions and presents H.264 video compression, making that ideal for applications such as city and highway surveillance. During our last earnings call, we discussed Motorola, Avigilon's introduction of the H5 AI camera line based on our CVflow SoCs. During the current quarter, Avigilon further extended its portfolio with the introduction of its new H5A cell camera line based on Ambarella's H5 SoCs. Focusing our simplicity, flexibility and the cost-effectiveness, the new cameras coming multiple resolutions and the incorporate visuals on usual motion detection, and advanced AI technology to notify operators of unusual events that might otherwise have been missed. In November, security start-up Bricata announced its new dome series comprising eight new cameras, including both indoor and outdoor models with a range of resolutions up to 4K. The Ambarella based dome series is eight times more powerful than the previous generation, enabling industry-leading edge-based analytics, including advanced vehicle and the person detection. In the home monitoring segment, market leader Ring introduced its indoor camera, a compact plug-in design that you see here and speak to people in the past from your phones, tablet or Apple device. Based on Ambarella's H2LM SOC and the price at only $60, the cameras provide notifications whenever motion is detected based on customized motion zones. Multiple indoor cameras can be connected via ring, a path to provide complete home coverage. And in China, high division's consumer division EZVIZ introduced its Lookout DP1 HD video smart home door viewers based on Ambarella's H3LM SoC. Replacing the peephole in the door, the battery-powered camera allow the homeowner to view visitors remotely on a touchscreen display and communicate with them using two-way audio. And in police camera category, Motorola Solutions announced its a new WatchGuard V300 body-worn camera, the first in the law enforcement industry to remain operational beyond the 12-hour shift, featuring Ambarella's low power H2LM SoC. The camera includes 5K sensor and the full HD recording and it can also be integrated with WatchGuard's in-car video assistance. Now, I will update you on our progress in automotive markets. Ambarella is working with Mercedes-Benz to develop its edge platform for their Cargo Recognition and Organization System called CoROS. The newly developed CoROS assistant actively supports parcel delivery drivers with camera-based object tracking and a machine learning software. A camera assistant in the cargo space automatically recognize as registered parcels using barcodes and the symbols on outside the parcels. This is done in fractions of second, replacing manual time-consuming scanning and assorting of each shipment. Ambarella's CV2 was chosen due to its excellent imaging, molecular and stereovision processing options, and the powerful AI processing platforms. We are seeing strong interest in Ambarella CV4 AI chip from companies that provide aftermarket fleet management solutions for commercial vehicles. Traditionally, video solution from the commercial vehicle comprised of cameras with limited or no active driver assistance or monitoring features. With Ambarella's portfolio of the CVflow AI chips, fleet management solution can provide us can now deploy AI-based applications such as a front ADAS active driver monitoring assistance and blind-spot detection. The CV4 solution have been chosen by multiple providers in Asia and USA, and are expected to go into production in 2020. Given AutoSens Brussels 2019 Automotive Conference held in September, Ambarella partnered with Ausemi and AI software start-up company IRIS to demonstrate a fully integrated in-cab monitoring assistant including both driver and occupancy monitoring functions. The multi-camera system utilize Ambarella's CV2AQ, CV4 SoC to process real-time, high-quality RGB-IR video and Onsemi Global Shopper and RGB-IR image sensors. The IRIS AI software performed the complex body and the facial analytics passenger active monitoring and object detection, all running concurrently on the CV2AQ. The demonstration won awards for the best automotive safety assistant and most innovative in-cab application. And during the Tokyo Motor Show held in September, Ambarella, partnered with a leading Japanese car manufacturer and Sony sensor group to demonstrate an electric new assistant based on Ambarella's CV22 CVflow SoC and Sony's IMX490 image sensor, the electronic new demonstrate outstanding image quality under a number of challenging low light and high contrast lighting conditions. In automotive OEMs, Chinese automaker Chery introduced it's Tiggo 8 SUV featuring an integrated digital video recorder. Supplied by Chinese Tier 1 supplier Skyworth, the recorders is based on Ambrella's A12A automotive SoC and support for HD video recording. In consumer market, we also enjoyed a couple of interesting product introductions during the quarter. In October, drone market leader DJI introduced it's lightest and the smallest model ever, the Mavic Mini, weighing just 249 grams. The $399 drone those not require FAA registration and achieves over 30-minute flying time. It's camera is based on Ambrella's H22 SOC providing 2.7K video at 30 frames per second and 12-megapixel photos, higher than the full HD video, of the previous Spark model. Also during the quarter, Insta360 introduced its GO camera with [indiscernible] wearable model weighing only 30 grams and offering full HD video recording. Based on Ambrella's A12 SoC, the camera includes video stabilization to keep footage steady and use AI-powered flash cut to find your best shots and as you can automatically. In summary, despite the geopolitical and the economy headwinds, we remain highly confident while making the right decision with more than $350 million invested today to-date Into video-based AI. We remain fully committed to driving our CV solution into expanding case of edge endpoint devices. We are leveraging our video processing expertise as well as our established base of customers to sort of not only the traditional human viewing market but also the machine-based market, a large incremental opportunity. The multi-billion-dollar expansion in our SAM originates not only from the new product cycles in our existing markets like a security camera but also by the new machine vision markets including vehicle, smart cities, industry 4.0 logistics, robust and more. As we approach the end of the year, we are looking forward to the Consumer Electronics Show in January. During this event, we will be demonstrating our fully autonomous vehicle EVA, short for Embedded Vehicle Autonomy driving a variety of challenging conditions. We will also be demonstrating our latest solution for ADAS driver monitors, electronic mirrors and in-cabin monitoring in collaboration with our software partners. And then we will show new solutions for robotics, home monitoring, access control, and logistics all averaging AI-based applications and the performance of CV4 SoCs. And we hope to see many of you there. And at the end, I want to thank Ambarella's 756 strong team for their focus and their execution during this very exciting phase of development. And thanks to all our other shareholders including customers, vendors, and shareholders for your continued support. Now, I will turn the call over to Casey for the third quarter financial details and guidance for our fourth quarter of fiscal 2020. Thank you.

Thank you, Fermi, and good afternoon, everyone. Today, I'll review the financial highlights for the third quarter of fiscal '20 and provide a financial outlook for the first quarter of fiscal '20. During the call, I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation to GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense adjusted for the impact of taxes. Our Q3 revenue of $67.9 million exceeded the high-end of our guidance of $63 million to $67 million. These results represent an increase of 20% from Q2 and an increase of 19% when compared to the same quarter of the prior year. In Q3, all markets increased sequentially, led by strength in the automotive OEM and aftermarket. Non-GAAP gross margin for Q3 was 58.1% similar to the preceding quarter. Gross margin was slightly above the high-end of our guidance of 56% to 58% due in part to a richer mix of automotive business in both OEM and aftermarket business. Non-GAAP operating expense for the third quarter was $29.3 million compared to $29.7 million in Q2 after backing out R&D grants related to prior periods. This was below our guidance range of $30 million to $32 million as engineering hardware expenses were below budget. Other income of $1.9 million primarily represented interest income on our cash in multiple Securities. Non-GAAP net income for Q3 was $11.3 million or $0.32 per share compared to $7.3 million or $0.21 per share in the second quarter. The non-GAAP effective tax rate in Q3 was 6.6%, slightly better than our guidance of 10% due to a higher than expected benefit from employee stock option exercises. In the third quarter, the non-GAAP earnings per share were based on 34.8 million shares as compared to 33.9 million shares in the prior quarter. Total headcount at the end of the third quarter was 756 with about 81% of the employees dedicated to engineering, most of whom are focused on software. Approximately 70% of our total headcount is located in Asia. In Q3, we generated a positive cash operating cash flow of $21.9 million. Cash and marketable securities were $400.8 million, up from $375.8 million at the end of the second quarter. We did not repurchase stock during the quarter under the $50 million repurchase program authorized through June 30, 2020. Total accounts receivable at the end of Q3 were $21.6 million or 29 days sales outstanding. This compares to accounts receivable of $27.9 million or 46 days outstanding at the end of the prior quarter. Net inventory at the end of the third quarter was $19.8 million compared to $17.4 million at the end of the previous quarter. Days of inventory decreased to 59 days in Q3 from 67 days in Q2. We had two 10% plus revenue customers in Q3. WT Microelectronics, a fulfillment partner in Taiwan who shifts to multiple customers in Asia came in at 63.2% of revenue, and Chicony, a Taiwanese OEM who manufactures for multiple customers primarily based in U.S. came in at 15.7%. I will now discuss the outlook for the fourth quarter of fiscal '20. Our fourth quarter fiscal '20 guidance is consistent with the current street consensus estimate. We expect total revenue for the fourth quarter to be in the $55 million to $59 million range. Q4 is typically a seasonally slow quarter and we anticipate automotive and security to be down sequentially with other revenue flat to slightly up sequentially. We continue to expect other revenue comprised primarily of consumer electronics products to remain volatile and decline as a percentage of revenue over the next two to three years. The geopolitical economic environment continues to generate a significant amount of uncertainty with our customers' outlooks and supply chain. Needless to say, forecasting is difficult. We estimate Dahua and Hikvision combined by the end of fiscal '20 pulled in approximately $10 million of revenue from fiscal '21. As a reminder, we typically experienced a sequential decline in the first quarter ending in April and a rebound in our second fiscal quarter. We estimate Q4 non-GAAP gross margin to be between 56.5% and 58.5% compared to 58.1% in the third quarter. We expect non-GAAP OpEx in the fourth quarter to be between $29.5 million and $31.5 million. The fourth - the Q4 non-GAAP tax rate should be modeled at 10% versus 6.6% in Q3 and 9.1% in Q2. The tax rate has normalized from Q1 levels as our increased level of profitability enables tax losses in certain jurisdictions to be utilized. We estimate our diluted share count in Q4 to be approximately 35.2 million shares. Ambarella will be participating in the 41st NASDAQ Investor Conference on December 3, in London; the Deutsche Bank Auto Tech Conference on December 10, in San Francisco; the Nomura 101 Conference at CES on January 6; and the Needham Conference in New York on January 14. Please contact Louis for more details on these events. Thank you for joining our call today. And with that, I'll turn the call over to the operator for questions.

[Operator Instructions] And our first question is from Matt Ramsay from Cowen. Your line is now open.

Thank you very much, guys. Good afternoon, everyone. I wanted to ask a couple of longer-term questions for me. One of the - and I know there'll be some focus on the pull-ins from the Chinese customers. But in your other markets, you talked a little bit more in the script today about robotics then I heard you guys talk about in the past and we've known, it's been a long-term opportunity for the company. But now that you're calling it out more on the earnings call here, I wondered maybe if you could talk a little bit about the types of engagements, the breadth, maybe the time to revenue from the engagements that you have in the robotics market. And then I have a follow-up. Thanks.

Yes. Thank you for pointing that out because you are right, this is the first time we have highlighted our robotic application in our conference call. The reason for that is, this is the first time we disclose we have a robotic SDK available for our customers. As you know in the past, we never claim that we have - we are programming platform that the customer can buy our platform and program themselves. Our strategy is always to understand what customer needs and we provide the - in fact there's a video and AI cost or the functions required to deliver for the function for customer application. And therefore - what I mean, we really need to provide a complete shop for SDK. And today's call, we highlighted that we have the first generation of SDK available. In there, we now only provide multiple new networks that are required for most majority of the robotic application, but also we have a mono and the stereo processing, we have low light integrated, and all of that can run concurrently almost CV2A SoC, which I think great achievement - technology achievement. So from a technology point of view, we're making clear that we are ready to support our customer, and also you can see that this SDK become matured after working with the multiple robotic customers for different applications. Although I think you can see that we target on the smart manufacturing, smart city and also logistic applications. You can imagine that if you look at our details, our SDK, you can see that this kind of robotic can be applied to both the commercial as well as consumer applications. So - and just in terms of revenue, I think we are at the beginning of a design win activity and we are probably - we hope that we can close on design win soon, so we are saying probably this is 12 months away revenue opportunity for us. But nonetheless, it's very important for us to highlight that we have robotic SDK target for the robotic applications. Most of customers will find out that - if they review our SDK, they will find out that our SDK has a majority of the function features they required, they can quickly pull their application over and start testing the performance, power consumption and all the benefits we're offering.

Thank you, Fermi, that perspective is helpful. As my follow-up, I wanted to ask a question on the automotive business. Often I hear focus on what you guys are shipping today and towards the data recorders and then sort of the really long-term focus on ADAS and autonomous. And I wanted to ask about a deal that I think you announced just - on this call with Mercedes-Benz for an in-cabin application, maybe you could talk a little bit about what that engagement is and what that opportunity represents? Thank you.

Right. So this is really more of a commercial vehicle and the function is really that in a van - delivery van situation, you can imagine that when parcels have been brought into the cabin and in today, you use manual process to log the parcels and also managing the puzzles. But with our robotic SDK, you can imagine that they can - the camera installed in a van can quickly scale those boxes, determine the size, as well as with the barcode we can understand the information of the receivers, as well as a content over the box. And then you can quickly managing and putting the right place and where the driver need to pull out that box that can be quickly do - quickly done by just looking at the scanned data. So I think that's just show - one way to show you that a lot of the manual processes in the delivery industry in the past will be automized by cameras and that can be done purely by one chip of CV2 running multiple cameras inside there. So this is really a commercial based in-cabin application and we work with the OEMs directly to put the solution together for - and in fact what we did is, just like you said, we provide SDK, but they have worked with us closely to put their application on to CV2. And the reason we want this is really that we sell the solution of low in cabin, the lighting condition is limited and we have a stereo, we have a mono, we have a video processing, and also have CPU integrating one chip to finish - to provide all the function they need to give - for the delivery truck. So we are excited about this opportunity and we believe that this is just one - first - well, the several of design win we will talk about in the future.

Thanks, Fermi. Just one little quick follow-up on that and then I'll jump back in the queue. So are you saying this in-cabin application with Mercedes-Benz was you working directly with that OEM that has developed the software on your CVflow architecture. Is am I reading that right? Thanks.

That's correct.

Our next question is from Adam Gonzalez from Bank of America. Your line is now open.

Congrats on the strong quarter and thanks for taking my question. I think I just wanted to clarify you had called out a $10 million number for the pull-ins from 2021 in security. I - just doing some quick math, it seems like that's been a pretty much big chunk of the upside from - that you've seen in the last couple of quarters in terms of your revenue performance relative to the Street expectations. Am I thinking about that right? Or is - has the market share factor been more of a factor in fiscal '20 relative to the inventory pull-in? Thanks.

Yes. What we're trying to do is characterize - obviously, a lot of people have asked question, we don't have perfect visibility into the character over the last few quarters, what we think that the potential amount is - but we will have shift is, by the end of this year from fiscal '20 - excuse me, fiscal '21 to fiscal '20. And so we actually had to make some assumptions and try to get an understanding from our customers where we are. But what we're trying to say is that for the two years combined if you not heading into the situation, I think we've seen about $10 million pulled in from fiscal 2021 to fiscal 2020.

And is that still a risk moving forward or the update you provided on October 15, do customers have some degree of comfort around need to build inventory in future periods? Or is that just a thing of the past? Thanks.

Well, I think that in our press release in October 9, we stated that we are comfortable. There is no material - financial impact for Q3 and Q4. So we still think that's the case. The uncertainty is in the fiscal year ' 21, how does this bar book consumed by the customer and when are they going to consume and then how they are going to impact on fiscal year '21, which is not clear to us.

And if I can just slip in one more question. I'm just wondering if you had an update from many of your top security camera customers on what their AI-based camera target will be over the next couple of years?

You're talking about a professional security camera?

Yes, professional security, yes.

Yes. In fact, we pretty much think that the battle is kind of done. We won majority of the design win. We talked about in the last several calls and we are on track to deliver the mass production with many of them this year and the balance will follow with next year. So from that point of view, we think that that we just need to continue to help our customer to go into production. In fact, we mentioned several customers today, we - in the past, we talk about Avigilon, Hanwha Techwin, [indiscernible] and in the future, we'll talk about the ones that get ready to move forward. But I assume - I believe that majority of the current professional security camera customer will use our AI solution and the - most of them will be in production by the end of next year.

I think I was just asking more on just the penetration of AI-based cameras overall when you look at the inflow annual unit shipments, but - yes.

Oh, I see. That's a little difficult to say. Based on the current data we saw is really the only the customer who already have the AI camera in production. So from that point of view, I think this is - I think they are doing well, better than their forecast, so I think definitely the AI has momentum. But I think it was on the very early stage of AI camera for professional security, particularly outside China. So I would like to see a couple more quarters of a run rate before we talk about the penetration. But however, one thing I can say is at all our customers are very eager to have put in the product out and introduce the AI-based cameras.

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

Congrats on the results. The $10 million pull-in that you talked about Casey, just not to get too granular on it, but any clue of when you expect that unwind to occur? Is it inclusive of your January quarter guidance? Or do you think it's more of a fiscal '21 dynamic? Any sort of clues on that sort of linearity will be great.

Yes. No, I think it's a fiscal '21 type of a situation. I think that going into next year, it's impossible to tell if they're going to hold it if they're going to burn off in a quarter or over the year. But my assumption is that over the course of fiscal '21, they'll probably get back to more normalized inventory level. But again, that's not an exact science, but I don't - I just see it kind of getting burned off over into fiscal '21.

And then did you see any change in those customers' behavior when they got added to the entity list specific to Ambarella, of course? And then once you guys put out the 8-K that you could continue shipping, was there volatility around that? Or did it happen in such a short period of time that you really couldn't notice?

Well, I think that - of course, they feel relieved that when they realize that we can continue to ship. But I think that one thing also - it's become clear that although we cannot - although we can continue to ship the product to them, they are definitely putting a plan together to focus on non-U.S. based component suppliers. So I think that's a trend that we need to continue to watch.

And then my final question on this topic then I'll go away is, you guys also have been targeting customers outside of China for the - all the reasons we have already discussed. Any sort of metrics on the success and gaining design wins there? And if you've seen in those customers themselves start to gain market share?

Based on our data, we believe that our other - our non-Chinese customer definitely gain market share in U.S. and - but it's not clear get market share outside U.S. So that's our current - the data we have that we can talk about. But I think that definitely reflects that in U.S. more people have concerns about the high silicon solution in other areas.

Yes. Just add to that a clear example is Hanwha Techwin which Fermi talked about over the last couple of quarters. That's a customer that in this whole - as it's always quite out as moved from HiSilicon to Ambarella, and is also moving forward with our CV products, and so there is a clear example there I think that we picked up some market share and I think that they're going to be a good customer and a good player in the market.

Thanks for those details. I sneak one housekeeping one and maybe for you, Casey. In the past, you talked about normal seasonality, I think on your last quarterly call for the January quarter. Is there such a thing is normal seasonal for your April quarter?

Yes. I think they're both - the quarter that we're in and the April quarter are down roughly 12% to 15%, so we've guided to what we thought we were going to see in January, and then I think we'll probably see the normal 12% to 15% there as well. We then tend to have a stronger Q2 and Q3. Obviously, we're not guiding out that far today, but if you looked at historically, those few quarters continued to rebound pretty substantially from the - kind of the low in April, if you will. But that's what I'm talking about when I talk about that.

Our next question is from Joe Moore from Morgan Stanley. Your line is now open.

In terms of the in-cabin monitoring and I guess it's probably similar to Mercedes, you guys seem to be getting quite a lot of wins there and I guess with some of the European in-cap standards that stuff comes into production fairly quickly. Can you talk about when you might see actual revenue coming from those wins? And it seems to be predominantly CV2, so at the more expensive products there that seems like a fairly sophisticated sale for you. So can you talk a little bit more about that?

Right. We haven't given the revenue guidance on the CMS or CMS yet. However, I want to highlight that the for commercial vehicle, CV2 is more suitable because of the requirement for multiple cameras. But I think that for consumer cars, I think CV22 might be a better fit because most of the consumer vehicles does not require stereo and the performance requirement on the camera side also more limited. So I think that's just the difference between the commercial and customer vehicles. But - like you said, we are trying very hard to win design - get design wins on those areas.

And then on the consumer surveillance side, is it reasonable to think about CV sort of announcements over the course of 2020, and then revenue 2021, is that kind of the right timeframe or just maybe an update on what you're seeing on consumer surveillance?

No, I think that's the right time frame. And also there are multiple design win we are bidding on. In fact, we are close to solve them. And so I think the schedule doesn't change.

Our next question is from Quinn Bolton from Needham and Company. Your line is now open.

Just wanted to start first on the CV ramp, especially in the professional security camera. It sounds like it's still probably a fairly low percentage of your security camera revenue, but you've talked now for a few quarters just some of the design wins going to production now over the next 12 months. Can you give us any - help us shape what you think CV might represent as your - as a total of your professional security business say exiting 2019, and where it might go exiting 2020? Is that low single digits going to 25% of revenue, just any help with what you think that ramp might look like as a percent of your sales would be great?

Yes. So obviously the ramp is just for the up in the last two quarters of the year, and so it will be single digits coming into next year. The next year. I think that we can see what we've talked about is material revenue from the CV and that certainly is more than 10% of revenue for next year. And depending on how the consumer ramp comes in next year in the second half, as we said, that's going to start in the second half of next year that will kind of define the size of it. But I think you'll probably see if sometime over the course of next year, starting to talk a little bit more discuss specifics about CV as it becomes material.

And then shifting to China, thinking your script, you had mentioned you're definitely seeing share gains outside of China among the customer base. Just wondering if you could come back and say, within the China market, how that competitive dynamic is shaping up for you, and any sense of your strength within the China customer base for domestic cameras versus export cameras?

Right. So I think in the past, we didn't pay much in their Chinese domestic market because they are basically HiSilicon market. And the for the export business, I think that - right now the thing worries us the most is about the U.S., the - most of our Chinese customers, especially Chinese system companies sourcing from the non-China - non-U.S. components. And so our vintage has to be that we can provide differentiated technology that very few people - Chinese company can complete. That's basically playing to our strength on CV and also video quality in the past, but definitely on the lower side, we're going to see a lot more competitive, because it's not only HiSilicon, there are many lower component supplier come to the space. But however, I do believe in middle and high-end, especially on the AI and also as well as the video processing technology that all can differentiate that and we should be continue to have a position for the export business.

And then just lastly, you guys mentioned the fleet management opportunity, the aftermarket fleet management, but potentially ramping here in calendar '20. That seems like that's a pretty quick ramp. I'm just wondering if you could give us more detail because - again that feels like that could ramp to revenue fairly quickly.

Right. So in fact that usually because most of fleet management does do not require auto-grade chip and they don't require auto qualification. So that front design starts to the revenue usually is 12 to 18 months, which is longer than consumer but definitely shorter than most of the OE - auto OEM business. And we have been working with the several both U.S. and Chinese companies working on the solution for fleet management, basically, in providing now we just recording but also AI for the driver monitoring, ADAS, blind-spot detection, the combination of everything, especially for the multiple cameras around the truck. So I think that's definitely play to our strength. But the system definitely is a lot more complicated than a consumer vehicle. So the trade-off of timelines - I will say design timeline is roughly 12 to 18 months, and we think that we believe the first wave of revenue will come in second half of next year.

[Operator Instructions] Our next question is from Tore Svanberg from Stifel. Your line is now open.

Yes. Thank you and congratulations on managing through this volatile environment. First of all, I guess for Casey, inventory days 57. I know that's relatively normal for this particular quarter. But how are you thinking about managing your own inventories over the next few quarters, given all the uncertainty that's out there?

Yes. I think inventory down over the last four to six quarters, quite a bit. I think we're in kind of a low 30s and came down to uncertainty in the last quarter when we are looking at making sure that we can meet our customers' needs. And in particular, when you look at Chinese [indiscernible] this year and that we're picking inventory up a little bit so that we'd be able to meet the needs for the quarter. But we're going to try to continue. We've got good cash management. We had a great quarter, this quarter and over $400 million in cash. We're proud of that. But we also need to make sure that we're dealing with 14 to 16 week lead times, and we need to make sure that we're be able to react to our customers' needs. And so I think the inventories generally at about the right spot that we're going to have to look out and do our forecast and understand how to balance that going forward.

Sounds good. And - yes. Go ahead, Fermi.

And one more [indiscernible] it's Fermi. I would like to add since we're also working with a sense of foundry partners, they never told us that they have a tight wafer allocation and like this is the first time, they told us that and because I think my speculation is the - some of the customer who cannot get enough allocation from our foundries move their products from Samsung. And this is the first half we start seeing that sensor also have a very tight allocation, although on the wafer - total wafers. So our strategy is definitely trying to make sure that we have inventory to supply our customers in case there is some urgent demand.

Very good. And Fermi, a question for you on CV. It sounds, based on your rhetoric that you're going to see some material - relatively material consumer CV revenue second half of next year. Could you maybe single out a few of the applications that you think will be ramping at that time?

I think this is a consumer, I think our current customer list if you go through that, you can see we have a very strong customer in consumer IP security camera space basically for home monitoring. And I believe that the trend will continue and the AI trend will continue there and most of that are having RFQs out there for the AI-based camera requirement for the second half of next year.

Very good. Just one last question back to Casey. Casey and I know you didn't guide the April quarter per se, but based on your answer, should we then imply that some of this sort of $10 million pull in already start happening that quarter?

It is possible. As I said, - the reason I stated that I think it will probably be burned off during the full fiscal year because it's really hard for me to judge the timing on that. And so it's difficult to pick that. I do think what I did guide to or talked about a little bit for that quarter is we will see the normal seasonal, down 12% or so percent that we've seen over the last few years. I think that will definitely be there. What the impact for inventory will be in that one specific quarter is just really tough for me to say right now.

Our next question is from Charlie Anderson from Dougherty and Company. Your line is now open.

Yes. Thanks for taking my questions and congrats on a strong quarter and guide. I wanted to start with - in light of the $10 million comment, just maybe if you could touch on the - sort of underlying growth rate with an IP security. It sounds like the number of end-users expanding opportunity to pick up market share, you've got a product cycle, that's ramping. So just real-time if we exclude out that $10 million, what do we think of the growth rate going forward to any degree? And I've got a follow-up.

Well, first of all, I think that from a market point of view, the professional security continued growth on a single-digit percentage and the consumers probably higher than that, and we probably follow the market. But sometimes it's very hard to us to put a free on the - this $10 million number. That's really our estimation, based on the feedback on the customers. So there, a lot of gas working there. We just want to give a clear guidance as much as we can to the customers about what we think and the, making sure that people understand the situation.

And then for my follow-up on the R&D credit side, I wonder if maybe Casey, you could just update us on sort of what we expect for the total for the year, and then any view on that going forward in terms of impact? Thanks.

Are you talking about the Italian growth that we talked about?

Correct.

Yes. So that's going to run about $0.5 million a quarter. And so the last quarter had of a catch-up in, and that's what I called out in my discussion. But what we said last quarter and I think it's still - is going to be a pretty good estimate is that it's probably about $0.5 million benefit per quarter, and that's factored in our guidance.

Our next question is from Tore Svanberg from Stifel. Your line is now open.

Yes. Just a quick follow-up for Casey. Casey, as it comes to gross margin, we talked about, obviously, the mix eventually helping the gross margin through fiscal '21. Just wondering if you had any update on that.

Well, I do think, yes. As we get more and more CV revenue and more and more of it in the auto space, that will continue to help us stay in the guidance or get us back into the guidance of 59 to 62 that we have been in. Obviously, in the consumer, and in particular in China, the margin pressure there is probably most significant. The customers there are the largest in the industry and that's a fairly tough market to start with. And so depending on the mix from quarter-to-quarter and that's what you see and for example, we've talked about the last few quarters having a little higher mix there, and that's why the margins have been down a little bit.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Dr. Fermi Wang for closing remarks.

And everyone, I'd like to thank you for joining us today, and I'm looking forward to seeing you - talk to you next time. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.