Ambarella, Inc. (AMBA) Q3 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Ambarella's Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is recorded. [Operator Instructions] I would now like to hand the conference over to your host, Louis Gerhardy, Corporate Development. Please go ahead.

Thank you, Sarah, and good afternoon, everyone. Thank you for joining our third quarter fiscal year 2021 financial results conference call. Calling in today from different locations 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 our third quarter of our fiscal 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 based upon information available today and are subject to risks, uncertainties and assumptions. Should any of these risks and uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We're 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 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 September 9, 2020 for the second quarter ending July 31, 2020, and Form 10-Q filed on June 8, 2020 for the first quarter of the fiscal year ending April 30, 2020. Access to our third quarter fiscal 2021 results press release, historical results, SEC filings, and a replay and prepared transcripts 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 Wang.

Thank you, Louis. Good afternoon, everyone, and thank you for joining us this holiday shortened week. We are pleased to see our multi-year visual AI investment as the major force driving our accelerated business momentum which was apparent in our Q3 results and outlook. Q3 revenue of $56.1 million was above the high-end of our original guidance range. CV led the way but we also faced stronger than expected demand for video processors, despite the persistent geopolitical and public health risks. Gross margin of 62.7% was above the high end of our long-term model for the second consecutive quarter, reflecting a favorable customer mix and continued operational execution. CV revenue was slightly more than 10% of total revenue in Q3 and we continue to expect it to be 10% for the full year. With an ASP about 2x our non-CV ASP, CV units were less than 4% of our total units shipped, and an even smaller portion of the installed base, highlighting the very early stage of this opportunity and the significant multi-year headroom for growth. We anticipate CV revenue will represent about 25% of our total revenue in fiscal year 2022, and we have a flattish outlook for video processors. The megatrends for security, safety and automation are very favorable, and the pandemic appears to be accelerating this digital transformation. To support this anticipated growth, we continue to build our team globally and we intend to further expand our presence around the world to support the rising interest in our CV SoCs from both, existing and new markets. I will now talk about our markets and customers. As we have previously mentioned, Chinese IP security camera makers have become concerned about the continuity of supply from existing Chinese suppliers and have been evaluating alternative camera designs on other solutions. Ambarella's CVflow AI SoCs have won a number of design wins based on their AI performance, high quality imaging and low power. We have now received orders for shipment beginning in the fourth quarter of this year, including orders for our CVflow SoCs from Dahua, China's second largest security camera company. Outside of China, we are continuing to see customers introduce new IP security cameras based on our solutions including our CVflow AI SoCs. During the quarter, Johnson Controls launched its new Tyco Illustra Flex Multisensor Camera. Based on Ambarella's S2E SoC, the camera is equipped with four separate image sensors to provide up to 360° coverage via four separate non-stitched video streams. Each of the four sensors are able to capture 4MP images, enabling the camera to cover an area which might normally require four separate high definition video surveillance cameras. Honeywell introduced its 60 Series IP cameras including 5MP indoor and outdoor dome, bullet and outdoor speed dome models and a 2MP outdoor speed dome model. Based on Ambarella's S5L SoC, the 60 Series offers increased resolution and provide fast notification and verification of potential threats and responses. FLIR introduced its Elara thermal camera for accurately measuring skin temperature at medium- to high-throughput entry control points. Based on Ambarella's CV22 AI SoC, it is equipped with on-edge, intelligent face detection, and issues on-screen prompts to individuals when they need to remove glasses, while also guiding them to the correct position for best measurement. Panasonic iPro continued to expand its portfolio of Ambarella-based models with the introduction of its Vehicle Capture Camera, the WV-X5550. Based on Ambarella's CV22 the camera can capture clear images of vehicle occupants on one channel and license plates on another, even in challenging lighting environments, including night time. In the body worn camera market, Panasonic iPro introduced its BWC4000 camera. Based on Ambarella's CV25 SoC, the BWC4000 records 1080P video and has 12-hour battery life. Also, during the quarter, Motorola introduced its VB400 body-worn camera aimed at security professionals and based on Ambarella's low power SoC. Integrated with Avigilon's Control Center the VB400 can augment fixed video deployments by displaying first-person perspective video from the body-worn camera alongside fixed cameras for superior situational awareness. During the quarter, Comcast announced a new Xfinity Home offering called Self-Protection designed for consumers who want high-quality security cameras, but who may not need a professionally installed and monitored whole-home security system. The new Xfinity's HD home security camera is powered by Ambarella's S3LM SoC and is built for both indoor and outdoor use. This month, we introduced our CV28M camera SoC, the latest in our CVflow family, supporting the introduction of advanced AI features targeting a variety of cameras in new high-volume markets. It's highly efficient AI processing and low power will enable a new class of smart IoT devices for applications including smart home security, retail monitoring, home robotics, and occupancy monitoring. For new AI sensing applications, like retail monitoring or occupancy monitoring, the SoC provides the AI performance to make all decisions in the camera, preserving privacy and avoiding heavy video processing running on back-end servers. In home robotics applications, the CV28M can be connected to a wide range of sensors such as visible, structured light, and time-of-flight, to capture, and then process, the data required for navigation. We are currently sampling CV28M to our customers. The CV28M's software compatibility with existing CVflow families is allowing customers to enter production very quickly, and we have already received mass production orders for shipment beginning in Q1 next year. In the automotive market we are continuing to make great progress as we promote our AI solutions for a variety of automotive applications including ADAS and AD applications to customers worldwide. Today we are announcing our total automotive revenue funnel for the 1st time, and we intend to update it at least once every year. Based on our best judgement, we currently estimate our automotive revenue funnel model is about $600 million with a majority represented by CV for a variety of ADAS and AD applications. The auto funnel revenue runs through FY27 with some of the more significant programs commencing production in CY22 or CY23. This funnel covers business we have won as well as a pipeline of business we are currently competing for. We are seeing shipments of our CVflow-based ADAS solutions for commercial vehicles in China continuing to ramp with customers including Yutong buses, Shanqi trucks and Dongfeng trucks. We are currently the market leader in the OEM car recorder category with customers including Nissan, Honda and Toyota in Japan, and Great Wall, Geely and BYD in China. We are now seeing a recovery in orders for OEM car recorders in both regions, as car manufacturers begin to ramp production back up following the impact of the pandemic. We are pleased to announce that we have our first design wins for our CV2FS automotive functional safety SoCs, which we introduced during CES at the beginning of this year. These SoCs include the AI processing and ASIL features required for safety critical ADAS applications. During the quarter we signed a development agreement to supply our CV2FS SoCs for level 2+ ADAS systems with an OEM manufacturer of electric vehicles. In this application, the CV2FS provides the AI processing performance and flexibility to support a wide array of driver assistance capabilities to improve safety and convenience. Also, during the quarter, we signed a new development agreement with a tier 1 supplier of electronic mirrors for the European commercial vehicle market based on our CV2FS functional safety AI SoCs. The CV2FS was chosen for its ability to process video from multiple cameras and perform advanced AI processing to support features such as vulnerable road user detection and prediction. We are continuing to win new designs for fleet management solutions for commercial vehicles as well as ride sharing and taxi service. With 140 million commercial vehicles in the US and hundreds of millions worldwide, the ability to retrofit existing commercial vehicles with cutting-edge driver monitoring capabilities represents a major opportunity for Ambarella. Our CVflow AI SoCs have the required performance to support front ADAS applications, active driver monitoring and video recording. In November, Ambarella announced a joint reference design for automotive camera applications that simultaneously monitors drivers while capturing vehicle occupants for one-way videoconferencing. The reference design uses software from Smart Eye, a world leader in developing AI-powered eye, mouth and head tracking technology and image sensors from OmniVision Technologies. Ambarella's CV22AQ SoC simultaneously processes both RGB color image and IR and runs Smart Eye's algorithms to analyze the driver's state and alert the vehicle to any unsafe indicators, such as drowsiness. With the holiday season approaching, there have been a number of new consumer product introductions featuring Ambarella SoCs. During the quarter, DJI introduced its Pocket 2 hand-held camera, equipped with a 3-axis motorized gymbal to stabilize movement. The Pocket 2 is based on Ambarella's H22 SoC and shoots 4Kp60 video, takes 64-megapixel photos and includes 8x zoom capability. And on November 4, DJI introduced its Mini2 drone, the replacement for the popular Mavic Mini model. Featuring Ambarella's H22 SoC, the Mini 2 increase its maximum video resolution up to 4K at 30 frames per second, while also shooting 1080p video at up to 60fps. Also, during the quarter Insta360 introduced its OneX2 pocket camera based on Ambarella's H22 SoC. The One X2 includes dual lens 5.7K capture for high resolution 360-degree images, H.265 encoding, AI-based editing and advanced image stabilization. In summary, you have heard today more evidence on the broad and expanding adoption of our SoCs in automotive and security camera market. In the professional security camera market our CV momentum, already strong, should build as we have added new CV customers in Asia, and we expect to see CV become material in the home security camera market over the next year. In auto, our CV traction is strong and a significant part of our expanding funnel. In addition, we continue to develop other IoT markets including enterprise access control, smart locks and counting/occupancy sensors, and we look forward to providing you with updates on our progress. We are making significant progress in our multi-year transformation to a visual AI company, and the return on the investment is ramping. I'm proud and would like to thank and acknowledge all of our employees worldwide for their contribution to our leadership position in the market, and for their execution in the phase of the turbulent environment. I am also thankful for the support of our customers, vendors and shareholders during these 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, Fermi and good afternoon, everyone. Today, I will review the financial highlights for the third quarter of fiscal year 2021 ended October 31 and provide financial outlook for our fourth quarter. During the call, I'll discuss 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, we have eliminated stock-based compensation expense adjusted for the impact of taxes. Our revenue of $56.1 million was above the high-end of our original guidance. This represents an increase of 12% from Q2 and a decrease of 17% when compared to the same quarter of the prior year. In Q3, on a sequential basis, automotive revenue and other increased while Security decreased. Non-GAAP gross margin for Q3 was 62.7% compared to 62.4% in the preceding quarter and remained above the high-end of our guidance primarily due to customer mix as revenue from the two large professional security companies in China remained at low levels. Margins were also supported by continued operational execution in a challenging environment. Non-GAAP operating expense for the third quarter was $32.4 million, compared to $30.2 million in the previous quarter. OpEx was slightly above the mid-point of our guidance range and the consequence of the increase was primarily due to additional chip development expenses and higher employee related costs outside of the U.S. as normal activity resumed. Other income of $673,000 was due primarily to lower interest income as rates continued to remain low. Non-GAAP net income for Q3 was $3.3 million, or $0.09 per share compared to net income of $2.1 million, or $0.06 per share in the second quarter. In the third quarter, the non-GAAP earnings per share was based on 35.8 million diluted shares as compared to 35.4 million in the prior quarter. Total headcount at the end of third quarter was 766 with about 81% of employees in engineering. Approximately 69% of our total headcount is located in Asia. Cash and marketable securities were $423.6 million up from $410.7 million at the end of the second quarter. In Q3, we had positive operating cash flow of $13.1 million. Total accounts receivable at the end of Q3 were $24.1 million, or 39 days sales outstanding. This compares to $23.3 million, or 42 days sales outstanding in the prior quarter. Net inventory at the end of the third quarter was $23.7 million compared to $23.9 million at the end of the previous quarter. Days of revenue increased to 102 days in Q3 from 109 days in Q2. We did not repurchase any shares in the third quarter. In May, Ambarella's Board of Directors approved an extension of the current $50.0 million repurchase program for an additional twelve months ending June 30, 2021. As of today, there remained $49.0 million available for repurchase. We had two customers over 10% of revenue in Q3. WT Microelectronics, fulfillment partner serving multiple customers, came in at 62% of revenue and Chicony, a Taiwanese ODM who manufacture for multiple customers, came in at 18%. I will now discuss the outlook for Q4 FY21. Our visibility has improved, but we remain on guard for risk related to the pandemic and geopolitical factors. Furthermore, as the semiconductor industry supply chain tightens, our operations teams remain vigilant in their efforts to manage manufacturing lead-times and on-time deliveries. We have seen some customer’s request order pull-ins and orders placed within our lead-times. CV design activity is at record highs. 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. As they continue their video processor inventory reduction, we expect their orders will remain weak, offset to some degree by a ramp of computer vision SoC orders. During Q3, these two customers combined remained in the mid-single digit percent of our total revenue, which will likely be the trough for the foreseeable future. Based on these factors and our best judgement at the current time, we expect total revenue for the fourth quarter ending January 31, 2021 to be in the range of $56 million to $60 million. Automotive revenue is benefiting from an early CV ramp and a post pandemic rebound, and we expect auto will be up at least 20% on both a sequential and year-over-year basis. We anticipate security camera revenue will be up in the low double digits sequentially. Following a normal seasonal pattern, “Other” revenue is expected to decline sequentially. We estimate Q4 non-GAAP gross margin to be between 59% and 61% compared to 62.7% in the third quarter, with product and customer mix the primary driver of this change. We expect non-GAAP OPEX in the fourth quarter to be relatively flat in a range between $31.0 and $33.0 million. Q4 other income should be modeled around $500,000. The Q4 non-GAAP tax rate should be modeled at approximately 10%. We estimate our diluted share count for Q4 to be approximately 36.3 million shares. Ambarella is registered to participate in virtual conferences in Q4 including Wells Fargo, Imperial Capital, UBS, Barclays, MKM and Needham. Ambarella will also be hosting virtual CES meetings between January 11 and January 22; please contact Louis for more details on these events. With that, I'd like to turn it over to questions. Operator?

[Operator instructions] Our first question comes from a line of Joe Moore with Morgan Stanley. Your line is now open.

Great, thank you. Congratulations on the quarter. I wonder if you could talk a little bit more about the funnel, the $600 million, I believe, is the number. Can you compare that to the $200 million which was secured design wins from a quarter ago? How much of that $600 million is secured? And then, I assume that as you move forward, there's still an opportunity to add incremental revenues to that funnel in the timeframe that you suggested?

You're right, what we announced last quarter represented the design wins won for the first six months of the year. What we're talking about today is the $600 million is for the design wins that are one and also in our pipeline. So, based on what we have today and in our pipeline, we have $600 million. Now, to your point, that doesn't mean that we can't continue to add to that, we also give that a haircut, as you might imagine, related to what the customers think their revenue is going to be and also, the probability of timing to market. So, I think it's a relatively reasonable and conservative look at it. And there is, to your point, an opportunity to add to that.

Okay, great. And I assume that's mostly computer vision. I mean, is there a video processing component to that?

There is, but there is also a healthy component for computer vision, as well. But there is some vision-based system, as well.

Great, thank you very much.

Let me add one more thing. Hey Joe, I think the [indiscernible], as you mentioned that majority of that $600 million of non-CV.

Our next question comes from the line of Tristan Gerra with Baird Tristan. Your line is now open.

Looking at the design wins that you've announced in the security camera business and at the same time, your two large customers not reordering. Is the inflection point that you're expecting in terms of new orders coming from those customers? And when do you expect the inventory rebuild to happen?

Well, first of all, I think that we do see that the both customer we're cutting -- are using their inventory right now. And also, we start seeing small orders coming from both of them. So that's why -- and Casey just mentioned that, and we think we have trial over the -- there is a -- of the revenue from these two companies at this point. However, moving forward, I think that I expect the Dahua will be strong on a computer vision, and video parts of business will continue to be just flattish. But Hikvision is different though. We haven't announced any design wins with TV designed with Hikvision yet. So, I will say -- I will show this to company separately. But we do believe that first, the inventory is gradually been wear down; two, the CV ramp in Chongdava [ph] will be important for us; and three, in the future, we're going to continue to work with Hikvision to see where we'll have opportunity to work with computer vision technologies.

Okay, great. And then a quick follow up, as you expect your CV business to ramp meaningfully over the next fiscal year, I understand the higher ASPs, is there any impact or how should we look at the trajectory of OpEx as a result?

Yes, I think the modeling for CV we talked about is exactly what you just mentioned. And that is two times -- roughly two times the ASP, a similar gross margin profile, but obviously operating leverage, as we're able to now leverage the $450 million that we've already invested in CV, along with taking our technology more broadly, as Fermi mentioned, to more and more customers. So, I think the CV leverage on an operating basis and on top line basis is as you described it.

Great, thank you.

Thank you. Our next question comes from a line of Matt Ramsay with Cowen. Your line is now open.

Thank you very much. Good afternoon, everybody. For me, I wanted to ask, and I guess Casey, feel free to chime in here, to something from the prepared script. You reiterated TV is 10% of revenue targeted for this year, which -- I don't know, $22 million to $23 million, I guess based on the guidance for the fiscal fourth quarter. And then, I just want to make sure that I heard this correctly that keeping vision camera revenue flat, you expect 25% CV revenue contribution next year, which, I guess, implies a tripling of the CV revenue. I don't know, I'm doing math here in the spreadsheet and probably screwing it up. But I just wanted to see if that's an accurate portrayal of what you said. Thanks.

Yes, I think that everything you say is correct, except one thing, that we continue to expect 10% of CV revenue this year. And also, we provided the guidance that we expect. CV revenue will be 25% of total revenue next year. But that's 2.5 times not 3 times, as you described.

Got it. Thanks. Just following up on Joe's question and maybe ask it in a different way on the auto pipeline number. I just want to really get precise about -- there was a $200 million in one business that you talked about last quarter, and just within that $600 million, what's the progression over the last, I guess, three months of the business won, and the same metric that you gave us last time, I understand that you'll be giving the full pipeline number going forward. But just since you gave us one data point, maybe you could give us the second one, so we can try to draw a line? Thanks.

Based on our current announcement, you see that we signed two new design with this quarter, one is better functional safety chip for ADAS -- smaller level 2+ ADAS application; the other one is for the electronic mirror. So, this is to assure you we'll definitely add more to the pipeline just this quarter. And we didn't disclose because we didn't -- going through this exercise is time-consuming to be accurate. So, we plan to continue to update this, for this final numbers at least once a year, so that we continue to provide you a data point, but also I recorded own computer policies [ph] that win when we get -- which we will not disclose the amount, but you can -- that will give you some indication how we continue to add to our funnel recorder [ph].

Got it. Thank you. One last one for me and I'll get out of the way. I guess, if you are talking about forecasting CV revenue and the remainder of the business for fiscal 2022, what assumptions are you making at Hikvision and Dahua about their ability to secure high silicon chips and what that might mean for your business? Or are you assuming that things stay steady-state and whatever changes happen there may come in the future? Thank you.

I think my assumption for this to customer is different. My assumption is once again Dahua [ph] on CV chip, which we already talked about in this script. In terms of Hikvision, we are -- our current revenue forecast does not include any CV revenue format with this version. Hopefully we can convince them to use our CV technology in the future.

Thanks very much for me. Appreciate it.

Thank you. Our next question comes from the line of Tore Svanberg with Stifel. Your line is now open.

Yes, thank you, and congratulations on the solid results. First of all, it sounds like you're assuming the video process business to be flat in fiscal 2022. Is that just because of CV cannibalizing, or you're just being a bit conservative there, too, given the geopolitical tensions still?

Certainly, we always try to be conservative in the way we look at business going forward. It's going to -- we'll learn over the next couple of years how much is pure growth and how much of it is replacement, there'll be an element of both. But I don't know that we have enough information today to make that determination. Clearly, after you get to that time point, it's going to be more and more cannibalization, because we're not doing new video, only processors for people to continue to extend. So, they're going to have to either continue to use the products we have, or over time go to CV.

Let me add one more thing. I believe when we talk to all the customers out there, I think all of the planning to use CV to gradually replace their video processor technology, because everybody view that, although it's two different technology, it's a continuance of the powerline, all the video processor market will be replaced by CV in a span of three to five, maybe even longer years. But eventually, CV camera will replace that. In my opinion, I really think that in three years, the 50% of video processor market will convert to the CV market which is great for us, because not only helped giving us the chance to grab new market share, but also increase ASPs.

That's great perspective. And I have a question on CV28, it sounds like this is more of a consumer product for you. I'm just wondering if this is something that goes after higher unit volumes? And if so, what implications does that have for ASPs and potentially margins? Thank you.

Right, so first of all, you're absolutely right, we talked about in the past, we want to build a complete family over CV chip based on CVflow architecture, and SV28, this new member is really designed to target a high-value market and also very sensitive to the ASP and the cost. But at the same time, I want to point out, the 2x ASP versus our video processor technology is still applied to CV28, because our low-end video processor price is very low. Also -- that's the first thing, in terms of gross margin, I will say that this chip gross margin won't be as good as, or maybe better, than equivalent video processor technology. But however, is not going to be as high as our corporate gross margin. So that's the balance of this too, where you go to higher value market and you are competing a bit on the pricing side, so CV28 is designed for that.

That makes sense. Thank you again, and congratulations.

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

Hey, congratulations; just wanted to follow-up on the auto funnel for clarification. Did you say that was extended through fiscal 2027? I'm just trying to get the date right.

Yes. It was fiscal 2026. It's a total of six years.

Okay, six years. Can you give us any shape of that funnel? It sounded like you said the bigger ramps happened in calendar 2022, 2023. I would assume, sitting where you are today, there may not be a lot of business that's been added at this point for, say, 2025. So, should we think about it that you ramp up to a steady state level by, say, 2023 with this current funnel, and then it would be flattish for several years? Can you give us any idea how you're viewing that shape? Obviously, anything you add to the funnel in the future will add to this, but just wondering what the shape of that funnel looks like.

It's Louis. You're right about the shape. So, there's some large programs that start to go into production in calendar year 2022 and calendar year 2023. And then, it levels out in terms of annual contribution. But over time, we'd expect those numbers to change as we win new programs or bid on new programs.

Got it. Understood. Okay, thanks. And then Casey, I guess, maybe I missed something on the gross margin guidance, it sounds like Hikvision and Dahua, or maybe just more broadly, China professional is going to remain at a fairly small percentage of revenue in the January quarter, yet margins are going to be down nearly 200 to 400 basis points. It doesn't feel like you have an adverse mix ship back to China professional security. So, what's the cause for the margins to come back down in the January quarter?

It's an overall general mix between several different customers. But there is a fair amount of revenue that we will start to see, I think, in Q4, from those two customers, some of the vision based in is, Fermi just mentioned some of them being CV-based around Dahua. And I think that will be a nice contribution to the top line, but it will also put pressure. It's not the only factor. But it certainly is one of them. As I mentioned, the consumer side of the business is always down this quarter. That's a seasonal thing. So that changes the mix. Not only customer, but also product mix. And so, there's more than just one thing going on, but there will be some recovery in that revenue. And again, as I mentioned, I think while the vision will be relatively stable or not as much growth, we will see that CV start to come in in Q4 in that, while it helps revenue, will also have some margin impact.

And with that vision business maybe starting to come back a little bit. Can we assume now that you're largely through that $10 million inventory purge, or do you think that that $10 million -- that some of that is still burning off in the January quarter?

I think we continue to see that they are burning through this inventory. But we have -- I don't believe I've seen the end of it. Among all the product lines of video processor product line of Hikvision and Dahua ordering for us, we’re only seeing several items coming back to new orders, but remaining still, we haven't seen many orders yet. So, I think that's a sign for two things. One is they continue to burn through the inventory, bucks for subsequent product lines virtually done. So, we start seeing new orders, but so that's why we are saying in the next few quarters, we're going to continue to monitor how they're going to come back. But however, at the same time, I also need to mention that -- I also mentioned that Dahua CV will start ramping in Q4. That will help us on the revenue side put some pressure on the market side.

Thank you. Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.

Thanks. And congratulations on the great results. As you're introducing the new CV devices, the CV28 in particular now, now that all of your customers have done some CV designs, is there a change in the time to market, from the time you introduce the product to the time your customer comes out with the product?

Yes. I think you're absolutely right, all of our CV-family chips from CV to CV20 to CV25 to CV28, they share the sensor for SDK. So to assure CV28 works, the chip was simple to customer, people can port the existing SDK that they already have onto CV28. And that's why we think that time to market is much, much faster. And we also, in my script, I talked about that that we expect to see. We already received orders in Q1 next year, and we expect to call the ship on time.

Okay, great. And on the OpEx side, looks like it's under control, very flat quarter-over-quarter, even with 5-nanometers products coming in the pipeline. Are there any foreseen expenses coming up? Or should we expect this through fiscal year 2022 to be kind of tight controlled over OpEx?

Yes, I think you're going to continue to see the drivers in OpEx be two things. One is, we're going to continue to be hiring, not only in engineering, but we're starting to do some hiring outside of that as we start to really deeply pursue some of these markets that we haven't been in in the past. The second thing is, although there can be a little bit of lumpiness to it, there will be a build in the cost of designing, as you mentioned, in lower technologies, not only the CAD tools and boundaries costs but the overall costs of being on the front edge of this technology will continue to be a driver. Generally, that gets smoothed a little bit, the way we treat that over the quarters. But you can as project start and stop, have a certain amount of lumpiness to it. But I think those are really the two drivers, the rest of the business in pretty good shape.

Thank you. Our next question comes from the line of Charlie Anderson with Colliers Securities. Your line is now open.

Thanks for taking my questions and my congrats on a strong quarter and outlook. I wanted to start with some of the opportunities in automotive, thinking your software partner was acquired, but in Europe was acquired by an automaker, I'm curious how that maybe changes the complexion over there. And then, there's been some reporting on potentially some mandates or some goals in China around partial driving and self-driving. And I wonder if you're seeing that manifest itself in any of the design activity combs up some of the push over there? And then I've got follow up.

Yes, thank you. First of all, Hyla [ph], yes, they are very important so forth going forward and you know, they were required by the EW, and I think the change was [Technical Difficulty]. First of all, I think that the video -- no, we've got more -- we have brent [ph] there now; so I think, with several better VW facility. [Technical Difficulty] And since then, I also realized that we need to have a new software product for other business. We definitely -- we spend a lot of time to develop the potential [Technical Difficulty]. In terms of your second questions; Charlie, can you remind me of your second question?

It was about China, it seems like there's a push toward more partial autonomy and full autonomy, some mandates potentially. I wonder if you're seeing any of that manifests itself in the design activity and some of the planning?

Yes, we do see that. And first of all, I think that more for the commercial vehicle office, in fact that reflects our strong revenue in the Chinese industry -- for our APAC market. So I really think that's one market that we start seeing a formula from the government regulation point of view, and that, I think, will continue. We haven't seen a requirement of super vehicle. So when we hear anything, we'll provide updates.

As Louis mentioned, we're in two different sites. And seems like we're getting a little feedback for some reason at this point, but we'll see what we can do.

Okay, great. And I just had a quick follow up. I was curious if you could maybe update us on the HiSilicon situation? I know last call, you talked about a lot of inventory being out there. Just curious how that's looking now in terms of some of the opportunity to capture some of those sockets. Thanks.

In the last few months, we continue to monitor the situation. We believe the situation is just like what we said last time. There's still plenty of inventory out there but many stay in the peak customers. I think, for example, Hikvision; I believe, we don't have any proof, but we do believe Hikvision has a lot of inventory of HiSilicon chips, so they can continue to ship. But however, for other smaller HiSilicon customer, I think they are looking for newer suppliers. And that's why we are seeing opportunities that we can win. And we mentioned that we win a handful of Chinese professional security camera customers in the last three months, including Dahua, and also we believe they are going to gradually ramp up the production with us in Q4 moving to next year. We also see in other video markets, we see a lot of customers are looking for solutions, and we definitely believe we have an opportunity and technology that we can serve them.

Great. Thank you.

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

Congrats on the strong results and guide. I guess my first question, just another clarification on the automotive funnel side of things. And forgive me if I'm cutting this little to finely, but was that $600 million a combination of both existing design wins? And then I thought, Fermi, you said designs you're competing for, is that like a SAM [ph] analysis? Are those design ones that you're competing for that you think you're going to get? I just want to clarify how concrete those design wins are.

Hey, Ross, this is Louis, for that $600 million funnel, as Fermi said, a majority think of 70% is business that's one, and that business has been discounted, based on our confidence in the revenue forecasts that's been given to us at the time we won the business. The other $200 million are opportunities that we're bidding on, with two discount factors. Discount factor one is the probability of winning that business, discount factor two is the confidence in the revenue forecast that's been provided to us at the time we're bidding on the program. So it's a six-year funnel. And again, as Fermi said, a majority of that business is one.

So another way to say, with the $200 million you gave last quarter that at that point, you had year-to-date, you've pretty much added another $200 million until today. And then, there's the final $200 million is the part that you hope to win?

Last quarter, Ross, what we provided was $200 million won in the first six months of the year. So there's an additional $200 million on that that we had won before that period of time, or more recently.

Okay, thanks for the clarification on that. Then maybe one for Casey, a lot of good questions have been asked and answered already. But you gave great granularity on the sequential guide by your three primary segments. But you just gave directional guide of what they actually were in the prior quarter. So whether it was for the fiscal third quarter, or if you wanted to do it for the entirety of the fiscal year, how do you revenue split between the IP security, automotive and then consumer and other buckets? Just so we just have a baseline to work these percentages off of going forward.

Yes, for the full year, we've said it, and it remains true that the auto side of the business is probably going to be between the 15% and 20% of total revenue, that the consumer business was probably going to be close to 20% of total revenue, and then the balance would be IP security. So we were saying in the past 2020, but it's changed a little bit obviously as the course, but not a lot.

And then as you go into the fourth quarter, this goes back to the gross margin question I think either Tori or Quinn asked about, the revenue mix side of the equation, I get that it sounds like Dahua and Hikvision are going to be a little bit more of the business, still mid-single digits, maybe a little bit more. What is the other mix related headwind, are there positives in the consumer segment that were big tailwinds in the fiscal third quarter that seasonally go away or there's something else going on?

Like I say, it is a mix, the only correction I would make is that for the security camera revenue, we said that it will be -- for the fourth quarter, we said that it will be up in the low double digits, sequentially. So it will be up. And with Dahua that we've talked about -- and Fermi's talked about, as well as some HiSilicon, that's part of it, but not all of the -- that's part of the mix.

Got it. Perfect, thanks.

Thank you. Our next question comes from the line of Andrew Buscaglia with Berenberg. Your line is now open.

Good evening, wanted to follow up on you talking about the computer vision as a percentage of sales around $25 next year, so yes, that's much -- I was modeling that out and I came down just under 20%. So I'm wondering, it seems like you are pretty optimistic here. And I'm wondering if you could provide maybe some breakdown of he what that comprises of next year? I imagine it's mostly professional security. But do you have any other color you can add to how that -- the makeup of that 25%?

Yes. First of all, I think you're right, a big part of that 25% is from professional security camera. We also mentioned that we believe our home security camera business, well run-Bob [ph] with a CV -- economic CV [ph] product next year. And we also mentioned that we think it could be material next year from a revenue point of view. But also, more importantly, on the CV -- on the automotive side, I think our [indiscernible] CV revenue, shortened CV revenue opportunity that we can ramp up, particularly in China, commercial vehicle, and also the buses. Or outside China, we talk about fleet management; all the fleet management customers outside China are using our CV chip for ADAS, well as the federal monitor applications and also believe that this is -- so I think they all fit the potential. This is an opportunity for us for fiscal year 2022. But I think you're absolutely right, and professional security cameras will be the biggest part of it.

So presumably though, you're talking pretty positively on what's going on in automotive, too, with that funnel. So presumably, the real driver for computer vision even comes beyond that calendar year 2022 and beyond? I would think that would be an even bigger driver for that computer vision segment.

I agree with you.

Okay. Interesting. And then maybe last one, Fermi, you said you had some interesting commentary around the security market over three to five years adopting computer vision, is that essentially saying products that you see being sold three to five years from now we'll have to go with -- I guess, what's prompting people to upgrade to these new CV capabilities? What are the drivers behind that? Because that could be a pretty big upgrade cycle.

Well, for professional security camera, the biggest driver is the following. In the past, all of the computer vision is done on the server side. And that requires you to transmit all the video to the server and store it there and do the video analytics on computer vision offline. Which is okay for maybe a media unit or camera, but you want to scale to millions and millions, 10s of millions or hundreds of millions of camera, the huge pressure not only on the bandwidth, infrastructure, but also storage cost. And when we talk to customers, they all agree the only solution for them is to apply computer vision on AH [ph]; so they only tend to analyse the data back to the server and only apply big -- some analytics on video data on the cloud [indiscernible] required. That will dramatically reduce the requirement on the transmitting the video and the server storage and server computation. And that's a huge investment for saving for the customer. That's why we believe that we're going to continue to see the trend. The only other thing however, [indiscernible] part is that the current CV camera is a lot more expensive than video processor camera but however, that's why I said in three to five years, the economy will bring down the cost of the camera, we'll make this more attractive to our customer to replace that. So there's a huge driver purely based on the technology reason, but I think the financial reason will come in three to five years to make this happen. Our internal forecast, we believe that our CV revenue will continue to go up as a big percentage just because of that. And also in auto, we also see the same thing in the future. All the new design we now are winning, majority will not CV raise, because even you don't need a CV put CV in a car today, but people want to put CV processing in there just for making a future upgrade. And just it's a future proof of criteria, really help us to design a lot of CV chips for the automotive abilities.

Got it. Alright, thanks for the color.

Thank you. Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Thanks for taking my question and congratulations on the strong growth. Fermi, I had a few conceptual questions. First one, when do you think automotive CV becomes more than 10% of your sales? Is that something that can happen in 2022, 2023, just conceptually, when should we expect automotive CV to be more than 10% of your sales?

Fermi gave some additional color to the revenue and certainly the emergence of some of these markets, in these early times, it is -- as Fermi I think mentioned. And so, we try to guide as best we can quarter-by-quarter. I don't know that today, we -- we're ready to try to commit to timelines. Conceptually, we think that CV is going to continue to drive all of our revenue platforms. And so we're very bullish, we're seeing the development activity very strong, that's auto included. But how that plays out in these early times over the next few quarters, I think we'll be able to comment on that more broadly as time goes on. But today, I think what we've done is tried to characterize it as best we can.

I see. Okay. And for my follow-up; in the wins that you're having in automotive with CV, how many of them are exclusive where you are the only CV processor in the car? Where you are one of many processors? And if it is the latter, are there certain applications where you have tended to do better? Are there certain applications where the customer is preferring to go with a competitor? So it's more a technology question as to -- whether you're exclusive or not. And where are the applications where you tend to do better versus the competition?

Well, further it may be easier to look at -- from different automotive application point of view. From like, e-mirrors or ADAS or recorders, when they use a CV chip, usually, there is only one end-processor ADAS application. So if we are chosen, then we are the only processor, TV processor in that device, by definition. The hardware that -- like you said, there is others application like level 2+, and people are using multiple chips to CV. In some applications, we are the only one to provide multiple chips into the application but there is cases also that there are some function being done by other chips and we implement our portion of applications. It really depends on the customer's preference, as well as the current market situation. So, for example, that -- for level 2+, mobile AI is dominating the market, so you can imagine that level 2+ there are some customers say, okay, I don't want to change my phone camera, which is mobile iPad for other camera that they can't use other solutions which we can definitely consider, and we want to sell [indiscernible].

Got it. And just lastly, how should we think about operating expense growth? As you're starting to grow your top line at a faster pace and these emerging markets; I understand that you have done a lot of upfront R&D; but is there a simplistic model to drive your operating expense growth? From here will it grow at half the pace of sales growth or what is the right way to think about your OpEx growth for the next one to three years? Thank you.

I think definitely you're going to see -- as I mentioned, leverage coming the model. As I mentioned earlier, that's partly because of the CV and the two times ASPs, which drives the top line. But you're not going to see that get taken out in the operating expenses; you're going to see our operating margin growth continue over the next couple quarters or next couple of years even. But I think you're going to see the leverage in the margins -- sorry, after the margin line come back into the model. We were doing operating margins at 20% to 25%; and historically -- and I don't think there is any reason over the next year or two, you don't see that come back into the target range.

Got it. Thanks very much.

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

Hi, Fermi. Hi, Casey. Looking past the January quarter and the growth there, is there some elements of seasonality looking into the fiscal first quarter 2022? Or are your program ramps, you think, and maybe restocking perhaps going to carry? What's the dynamic looking into the next six months?

Well, looking at historically as you comment, going from Q3 to Q4, we were typically down 10% to 15%. And then, going from Q4 to Q1 we were typically down around 10%. Part of that was driven by the consumer nature of the business historically, but part of what we're seeing now is good growth in that -- starting at the beginnings, it's early but the beginnings of good growth in the CV which because of the update or the profile, the top line profile, I think that will take some of those -- that some of that seasonality out. I think it still exists in the model and we're going to have to see how that matures out, and how CV matures out over the next few quarters. But clearly, we didn't see or we're not going to see that from Q3 to Q4, and when we get out to Q4, we'll get into Q1; but some of that seasonality by the nature of the change in markets and products is going to go away.

Okay, Casey. And then maybe for me -- on the China Hikvision IOI [ph] dynamic here; it seems to me if Hikvision struggles to get HiSilicon chips and doesn't use you guys, I'd imagine some of the tier 2's you're starting to work with in China might start to grow to a share position that's similar to those guys. Is that how this market is going to play out or those two still going to dominate the market or is one of the tier 2 is kind of coming up the curve to become as big as them for you potentially?

Well, I need to be very careful about this because some of the tier 2 you have mentioned are my customers. But however, in China, my personal belief is that Hikvision Dahua and Huawei, now become the third largest security camera provider; those three will continue to have majority of the market share. Just because of their size, and the momentum, and their product portfolio they already have. I think it's -- all the others will have a chance to increase their market share but you will not get to the point so that they can challenge the market share of our Hikvision Dahua or Huawei.

Okay, great. Thanks, Fermi.

Thank you. This concludes today's question-and-answer session. I would now turn the call back over to Dr. Fermi Wang for closing remarks.

And thank you, everybody, for joining us today. And I really think that we made a great progress on CV side, and I'm looking forward to provide you more updates next time. Thank you, now.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.