Ambarella, Inc. (AMBA) Q1 2022 Earnings Report, Transcript and Summary

Thank you for standing by. Welcome to Ambarella's First Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participant 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 being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Louis Gerhardy, Corporate Development and Investor Relations. Please go ahead.

Thank you, Jewel [ph]. Good afternoon and thank you for joining our first quarter fiscal year 2022 financial results conference call for the three months ending April 30, 2021. With me on the call today is 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 first quarter of our fiscal year 2022. 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'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 31, 2021 for fiscal year 2021 ending January 31, 2021. Access to our first quarter fiscal 2022 results press release, historical results, SEC filings, and a transcript of our prepared remarks and a replay of today's call can be found on the Investor Relations portion of our website. Today, we'll begin with our business update from Fermi. I'll review the financial results. And then, we'll open it up and you can direct questions Fermi or Casey. With that, I will turn it over to Fermi.

Thank you, Louis. Good afternoon, and thank you for joining us today. The first quarter was another strong quarter with revenue growing nearly 13% sequentially, and 28% on a year-over-year basis. We continued to deliver positive operating leverage, with non-GAAP operating margins expanding to 12% from 8% in the prior quarter and 1% a year ago. Our results are clearly being driven by the beginning of our CV new product cycle, and to a much lesser degree by industry-wide cyclical forces. In fact, currently, cyclical forces are actually constraining our results, not exaggerating them. Supply chain challenges remain significant, but our execution is strong, and our guidance assumes the worst of the supply chain challenge from the Texas freeze will be felt in Q2 and gradually improve as we progress through the second half. Capacity is tight and lead times for certain substrates remain extended. With solid support from key supply chain partners, including foundry partner Samsung, we usually are not the bottleneck for our customers. With our higher revenue outlook we remain confident CV will be at least 25% of our total revenue this year. Professional security CV revenue, or CV Wave 1, became material last year and momentum continues to build, with new design wins and new customers entering production. We expect our home security CV business, or Wave 2, to become material this year, with several large programs entering mass production. Automotive, or CV Wave 3, has clearly commenced; in fact as of yesterday, May 31st, we have cumulatively shipped more than 450,000 CV SoCs into the automotive market. We expect our automotive business to roughly double this year, and we see tremendous remaining headroom for growth. Our share exiting the year is expected to be only a few percent of a serviceable market we estimate to be about $2.2B in calendar year '21 and approaching $5 billion in calendar year '25. I will now update you on our target market progress, beginning with automotive. The automotive market is being transformed by the introduction of electric vehicles that enable sustainable, high-performance transportation. The requirements for advanced active safety features in these vehicles represents a significant new opportunity for our AI Vision SoCs due to the need for increasing levels of performance in camera-based AI perception. During the quarter, we were excited to see the successful IPO of UK-based electric vehicle maker, Arrival. Founded in 2015, Arrival's mission is to provide affordable and sustainable urban transportation by producing electric vehicles at competitive prices and by pioneering a new method of manufacturing that challenges traditional economies of scale. I am pleased to announce that Arrival has selected Ambarella's CVflow AI vision processors for the environmental perception module used to enable L2+ autonomy in Arrival passenger buses and delivery vans. The inclusion of L2+ autonomous driving capability provides the driver an array of safety and convenience related driver assistance or ADAS capabilities. Ambarella's AI vision processors were chosen because of their neural network processing performance, stereovision support, excellent image quality and extremely low power. We look forward to sharing more information regarding our partnership with Arrival in the near future. In addition to the efficiency our CV SoCs offer, we have also highlighted the advantages of our open platform approach, which allows OEMs and Tier-1s to create differentiated combo products. Today I'm pleased to discuss four examples of this form with recent -- this recent Shanghai Auto Show, namely Great Wall Motors, Momenta, Autocruis and HASCO. In April, we announced that the leading domestic Chinese SUV auto maker, Great Wall Motors, has launched a 3-in-1 combo system based on our CV25AQ for drive recording, driver monitoring or DMS, and occupancy monitoring or OMS. The system is integral to the new WEY Mocha flagship SUV, which was launched during Auto Shanghai 2021 as the first model from GWM's Coffee Intelligence driving platform. This CV25AQ-based system can support a variety of simultaneous, multi-camera channel combinations for recording and/or DMS and OMS, with the entire system meeting Euro NCAP 2025 standards and playing a key role in GWM's Intelligent Drive process. Another combo product leveraging our open CV platform is Momenta's AutoRing A4 fleet management solution combining front ADAS, DMS, and drive recording functions. Based on Ambarella's CV22, the product includes front ADAS features such as Forward Collision Warning, Pedestrian Collision Warning, Headway Monitor Warning and Lane Departure Warning; while DMS features include Face-ID, Fatigue Detection, and Distracted Driver Detection with Full HD video recording. Another active safety combo system, this one from automotive Tier 1 Autocruis, is expected to enter mass production this year targeting commercial fleet deployments. This solution combines front ADAS and DMS functions on a single CV25 SoC. And lastly, HASCO, a spin-out of leading OEM SAIC, demonstrated it's Adapted Driving Beam or ADB solution based on Ambarella's CV22AQ SoC. The solution utilizes both ADAS and the DMS algorithms for intelligent headlight control. As you can see, Ambarella's exhibition at the Shanghai Auto Show in April generated strong interest with more than 50 automotive OEMS and Tier 1s visiting our booth. Ambarella demonstrated a number of designs covering ADAS, electronic mirror, DMS and OMS applications, while also demonstrating partnerships with many of China's leading third-party automotive software companies. One area of significant interest at the show was our Rebel front ADAS reference design, a turnkey platform based on our CV2FS SoC and Sensetime's software stack. This solution includes front ADAS features such as pedestrian detection, lane detection, drivable area detection, traffic light and traffic sign detection, while also supporting millimeter wave radar and visual perception, providing sensor fusion between the camera and radar. Our Rebel reference design provides Tier 1 suppliers and software development partners an open platform for differentiated high-performance automotive systems. I will now update you on our continuing progress in the IP security camera markets. During our Q2 FY21 earnings call on September 2, we stated that, in addition to our SoC share gains in professional security outside of China, for the first time we were also seeing additional opportunities in the professional security market within China. During the last quarter, UnisinSight launched the first of it's cameras based on Ambarella solutions, including 2 megapixel and 4 megapixel models with full-color night vision and people counting capabilities. This is the first camera design in mass production using our new low-cost CV28M CVflow SoC which was introduced at the end of last year. Also during the quarter, Kedacom introduced it's first Ambarella-based designs; the IPC695 and IPC445 cameras based on our CV2 and CV22 SoCs. The IPC695 features include 9 megapixel resolution with HD snapshots and AI-based exposure optimization while the IPC445 features a 4 megapixel dome design with advanced area intrusion detection and motion detection. Our CVflow SoCs are raising the bar in multi-sensor camera designs based on their ability to process multiple high-resolution streams concurrently with AI processing. In April iPro, formerly Panasonic's security camera business, introduced two new models based on our CV2 SoCs; the 8530 and 8570. These cameras are equipped with four sensors per camera capable of independent operation for 360-degree viewing with minimal blind spots and color imaging in just 0.05 lux, or extremely low-light conditions. In the body worn security camera category, UK-based Reveal became the first to introduce new cameras with Ambarella CVflow SoCs to provide a platform for advanced AI-based features. Based on our CV25 SoC, the new K-series cameras include HD recording, movable lens and full color display. And, in April, home monitoring market leader, Ring, a unit of Amazon, introduced two new models based on Ambarella's CVflow SoCs. The new Video Doorbell Pro 2 model raises the bar for video doorbell designs, with 3D motion detection, head-to-toe HD+ video and integration of Alexa greetings. Additionally, Ring's new Floodlight Cam Wired Pro also includes 3D motion detection and adds bird's eye video for precise motion alerts. And lastly, among new customer product introductions, Insta360 introduced its tiny GO 2 action cam based on Ambarella's H22 SoC. The waterproof camera can record 4Kp30 video, includes a 6 time speed hyperlapse mode, image stabilization and is small enough to be worn on shirts or headbands. From these customer engagements, and others, you can see Ambarella's SoCs are enabling customers to add significant value to their products. While efficiency benchmarks like performance-per-Watt and performance-per-dollar are important elements of customer design win decisions, our open platform and it's flexibility also uniquely enable our customers to create optimized and differentiated products and to price them accordingly. Open platform means customers can develop their own software to run on our SoCs, but flexibility means they can be creative and use the hardware and software resources on our SoCs to develop proprietary configurations and feature sets. Such flexibility is usually not available from our competitors. For example, in the automotive market, earlier I discussed projects with Great Wall, Momenta, Autocruis and HASCO that take advantage of the flexibility of our SoCs to create unique combo systems. These powerful solutions integrate what used to be two to three discrete camera products with limited functionality into a unified feature rich solution operating on one Ambarella CV SoC. And we are especially excited by our design win at Arrival where the performance, flexibility and low power of our SoCs is being harnessed for the next-generation of electric vehicles. In conclusion, Ambarella's product portfolio is the strongest in our history. After a very good Q1, despite the supply chain challenges, we are guiding Q2 revenue to be up 48% to 54% year-over-year. Our long-term outlook is fueled by our high level of investment into proprietary technology that is setting the pace of innovation in the visual AI market. Not only is our CV portfolio continuing to expand our reach into new markets, but we believe our visual AI roadmap will enable us to capture more processing value per design win. With that, we are very thankful to have stakeholders, in particular, our dedicated employees, as well as our network of suppliers, customers and investors, who understand the AI vision opportunity and support us as we continue to execute amidst all the challenges that market has thrown at us in recent years. So, once again, thank you.

Thank you, Fermi. I will now review the financial highlights for the first quarter of fiscal year '22 ending April 30, and provide a financial outlook for our second quarter of fiscal year '22 ending July 31. I will be discussing 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. Robust demand was capped in the quarter by supply chain challenges, nevertheless revenue of $70.1 million was slightly above the high-end of our original guidance. This represents a sequential increase of about 13% from Q4, and a 28% increase from the year ago quarter. Automotive revenue increased about 40% sequentially, security grew more than 20% sequentially, and Other product revenue was down more than 25% sequentially. Non-GAAP gross margin for Q1 was 62.9% compared to 61.4% in the preceding quarter. We incurred some higher costs to manage the supply chain challenges, but a relatively stable pricing environment and a more favorable customer mix combined to offset this. Non-GAAP operating expense for the first quarter was $35.4 million, compared to $33.4 million for the previous quarter. Operating expenses increased primarily due to a seasonal increase in payroll taxes and increased headcount. Other income was $593,000, reflecting continuation of the low interest rate environment. Non-GAAP net income for Q1 was $8.9 million, or $0.23 per share compared with non-GAAP net income of $5.1 million, or $0.14 per share in the fourth quarter. In the first quarter, the non-GAAP earnings per share were based on 38.1 million diluted shares as compared to 37.6 million in the prior quarter. Total headcount at the end of the first quarter -- excuse me, total headcount at the end of the first quarter was 803 with about 81% of employees dedicated to engineering. Approximately 68% of our total headcount is located in Asia. Total accounts receivable at the end of Q1 were $34.5 million or 44 days sales outstanding versus $25.0 million or 37 days sales outstanding at the end of the prior quarter. The increase was primarily driven by supply constraints which caused the quarter to be more back-end loaded. Net inventory at the end of the first quarter was $33.1 million compared to $26.1 million at the end of the previous quarter. Days of inventory increased to 102 days in Q1 from 93 days in Q4 for anticipated demand. In Q1 our operating cash outflow was $4.5 million. Cash and marketable securities were $435.5 million, down from $440.7 million at the end of the fourth quarter. We had two 10% plus revenue customers in Q1. WT Microelectronics, a fulfillment partner in Taiwan who ships to multiple customers in Asia, was 63% of revenue and Chicony, a Taiwanese ODM, manufacturing for multiple customers, came in at 16%. Dahua and Hikvision, combined, declined sequentially and represented about 10% of our total revenue in Q1. I will now discuss the outlook for the second quarter of fiscal year 2022. During Q2 we expect to continue to experience a variety of supply chain challenges, in particular from the Texas freeze, which disrupted video processor manufacturing at Samsung's Austin, Texas, wafer fab. We expect wafer deliveries from Samsung's Austin fab to gradually recover in the second half of the year, while other industry-wide cyclical forces are likely to constrain supply through the end of the year. Based on these factors and our best judgement at the current time, we expect total revenue for the second quarter ending July 31, 2021 to be in the range of $74 million to $77 million. We anticipate both, Auto and Security, to increase about 10% sequentially, with Other revenue down about 20% sequentially. We estimate Q2 non-GAAP gross margins to be between 61% and 62% versus 62.9% in the first quarter. We expect to continue to incur higher costs to manage the supply chain challenges, but a stable pricing environment should continue to support gross margins at the mid to high-end of our long-term model of 59% to 62%. We expect non-GAAP operating expenses in the second quarter to be between $36 million and $37.5 million, due primarily to accelerate hiring and increased chip development costs. Other income should be modeled around $200,000 reflecting lower interest rates on our cash and marketable securities. Q2 non-GAAP tax rate should be modeled in the 3% to 6% range. We estimate our diluted share count for Q2 to be approximately 38.3 million shares. Ambarella will be participating in Cowen's TMT Conference and Craig-Hallum's Institutional Investor Conference, both of them tomorrow, June 2, Rosenblatt's Age of AI Scaling Conference on June 3, Bank of America's Global Technology Conference on June 8, and Stifel's Cross Sector Insights Conference on June 9. In addition, in advance of the International Security Conference, also known as ISC West, we will be hosting virtual demos on June 23, please contact us for more information on those events. With that, I will turn it over to the operator, Joel [ph], for polling on Q&A.

Thank you. [Operator Instructions] Our first question comes from Joe Moore with Morgan Stanley. Your line is now open.

Great, thank you. Congratulations on the numbers. I'm wondering if you could talk about the automotive split; since you're saying it's going to more than double this year. You know, what's the split going to be around kind of numbers between OEM and aftermarket? And how much of that do you think will be CV this year?

Right. First of all, I think that the strong growth is coming from three areas. First of all, is from a very strong growth in the OEM drive recorders, which I think in catch-up in Japan, China and Korea were doing very well. And also we have a solid growth in the aftermarket, but mainly in the fleet management table over our recorder business; that's the first -- so that -- the first part is really our existing market. The second growth come from our real [ph] markets. We talk about that we have designing with TMS, and with a ADAS; I think both revenue are ramping up last year and start graduating growth this year, and that definitely injects you to more growth for us in this year. And also, we believe that even L2+ plus email will well help us grow the revenue in the very near future. The third thing is really a CV ASP [ph], we talked about the CV ASPs price higher than the video; and this is definitely another factor that we see all the automotive revenue growth. Although we didn't split out the percentage between CV and non-CV, but we do say that accumulatively, we shipped more than 450,000 CV chips from beginning to now, and you can see that we continue track shipping well in the CV into our automotive market. And hopefully that's answered your question.

Great, that's helpful. Thank you. And then just for a follow-up; in terms of the supply constraints that you guys are seeing in the July quarter; like, obviously, we've heard some of that from your customers. How much unfulfilled demand do you think there will be? And are you negatively impacting your customer shipments in the month of May or when does that start to get cleared up? Thank you.

Right. So, the Texas freeze caused problem for the Samsung tax foundry and therefore impacted us. And like I said, the impact to our Q2 revenue is the worst compared to other quarters, and we believe that the situation will gradually improve in the second half of this year. In terms of the revenue generation, definitely, we -- we impacted our customer delivery for sure. We didn't consult with suppliers, in fact, and also we have to go into allocation mode for the video processors which are produced in Texas -- Samsung Texas foundry. So the impact is there, although we didn't quantify it but I think we really communicated to all customers who are impacted. We continue to expect the impact will be there for Q3 and Q4, but will be at much lesser degree than Q2.

Great, thank you.

There are no further questions. I will now turn the call back to Dr. Fermi Wang for closing remarks.

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

Thanks for taking my question. Our first one just on gross margin. So good, good upside in the April quarter but I think the outlook suggests some reversal of that. So, I was just hoping for some color around what drove the upside in April and what will drive a different trend in July?

Sure. So, a large portion of that, again, is our two major customers in China. So it's a mix overall, but certainly, when their mix goes down that helps our margin and we did see some of that in the quarter. That would probably be along with other margin mix, as that would be the thing that would probably have the highest impact.

Alright. And for my follow-up, for me, I think you mentioned this very nice number over 450,000, I believe, CV shipments into automotive. I think the last quarter you mentioned 300,000; so it went up, right, almost 150,000 units sequentially. Could you give us a sense of how much revenue does that represent? And was this exceeding 450,000; was it in line or different than the expectations that you had?

So, first of all, let me clarify the number. Last quarter, we talked about cumulatively 300,000 this time we talked about cumulatively 450,000. I told you that we shipped 150,000 in wrap as of today; so this is really up. So, we are not saying we shipped 450,000 this quarter; we talk about 450,000 cumulatively, so that's just clarification. In terms of the revenue, I will say that, first of all, the ASP is hired because a lot of things are auto grade shift and also ADAS ASP definitely is much higher than the recorders, and OEM -- even OEM recorders ASP is higher than the aftermarket. So, I think overall that the ASP on both, automotive is pretty healthy for us, and moving forward, we think we can continue to see the same trend. And -- but I think this is assuming that the beginning of a CV ramp up. We talked about our CV revenue wave, which is Wave 3, will materialize in 2023. But we just have to give an indication that we're seeing this wave moving forward and we're going to continue to update you about how fast we can wrap up this revenue.

Thank you.

Thank you. Our next question comes from Gary Mobley with Wells Fargo Securities, Your line is now open.

Hey guys, let me start off by congratulating you to a strong start to the fiscal year. I appreciate the fact that you're able to deliver gross margin upside due to mix and other factors, but I was hoping that maybe you can quantify the supply chain impact, you know, higher substrate cost, higher back-end tests and assembly. And could you speak to perhaps the ability of your group to pass along these price increases or renegotiate some of these price increases for your customers?

Right. So we do see a price increase on the substrates, and to certain extent on the testing packaging side. For those price increase, we have not reflected in our ASP yet, and we believe that at this point that we will not change our ASP. Because of that, we might reconsider this position if our wafer price got changed, but until then, we feel that we're comfortable with the decision. Only price change we did in -- through the last few months was that because of the allocation some of the customer are willing to pay for super high lot [ph] together, bigger allocation. And we help them to get those super high lot [ph] by paying more money, and we ask our customer to share the increase on those are super high lot [ph]. That's the only thing -- the only ASP we grow and reflect to our customer.

Appreciate that. Just my follow-up question I want to ask about your product roadmap direction. If I'm not mistaken, you -- I think envision maybe rolling in some sensor fusion domain controller technology. And I was hoping if you give us an update on where this initiative stands.

As you can see, we have addressed almost -- if you look at the automotive CV market, in fact, we have a solution for all of them except domain controller. And it's our ambition, and we need to have a domain controller type of solution to not with just full sensor premium but also to provide the higher performance at much lower power consumption than our competitors can offer in the near future; and we are developing that and hopefully we can give you updates soon.

Appreciate it. Thanks, guys.

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

Thanks. And congratulations on the strong quarter. You mentioned the Wave 2 happening this year with some large programs, and if that's home security cameras, can you say -- are some of those programs launched? And I guess what percentages would you say you're into? Is it going to be a stronger October quarter compared to this July quarter?

So, I think we -- I see my script just now. I mentioned that Ring announced two products, we saw CVflow SoCs, and they are basically replacing our existing Ring products with video-only solutions. So yes, I think that we continue to see strong momentum of CVflow design wins. And also we expect to see other customer introducing CV -- sorry, other consumer IP security camera customer introduce a CVflow-based solution in the near future and going to production this year.

Okay. Are there still any human vision designs or are all the new design CV designs?

We still see several human visions design wins but I will say that it's more towards lower end or the middle and higher solutions targeting CV space. We still see a mix of CV and non-CV support product space of our customers while we wish to continue to focus more on the CV side because that's where our strength is, and where we have differentiation.

Okay, great. Thank you.

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

Yes, thank you and congratulations on the results. First question is back to oil [ph] and some of the sub segments. If I can maybe just split between recorder and non-recorder, is it safe to say that this year recorder would be about 90% with a lot of the new applications being the other 10, roughly?

I think the 90% is too high for recorders. I don't have a number with me but operating [ph] tells me that our other business will be more than 10%.

Great, thank you. And as my follow-up, I know in the past you've talked about the amount of cameras going into car is about 1.5 in last year. Do you have any estimate this year based on conversations you're having with your customers; how that number could potentially trend up?

Yes, Tore. The 1.5 is like -- I'm sorry, 1.3 is like a third-party market research firm estimate across all new vehicles produced in a year. And so that number, the expectation is that it's going to continue to increase as more and more cameras are used in the car, not just human viewing cameras, but in particular, more and more of the sensing cameras that require the CVflow chips for things such as driver monitoring, or front ADAS or surround view or all kinds of other applications. So, we see that number -- third-party firms continue to see that number increasing over the next several years.

Great, thank you. And congrats, again.

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

Hi guys. Did you guys give a number around what -- exactly what CV represents as a percentage of sales in the quarter? And then given strength in automotive; do you foresee -- you still foresee 25% of your sales being computer vision still this year or has that expectation increased?

Yes. First of all, we still expect that our CV revenue will be more than 25% of our total revenue this year. And yes, we think that we have a very good chance to believe on that. And with automotive continue to increase, definitely that will help us to drive mostly for CV growth. But as you can see that majority of our CV revenues still come from security, particularly professional security camera. And I think that will be continue driver for CV until next year, when the consumer IP can jump up and also more and more automotive CV revenue will come in. So I would say next year we can see continued growth on our CV revenue.

Okay. And this is your fourth quarter in a row with -- at the upper band of that gross margin range and you're guided to kind of upper band at the midpoint. Really, you know, your guidance -- your long-term guidance would imply kind of a sizeable step-down in the back half if you still want to fit in that 59%, call it a 62% range. So what -- I guess what do you need to see or what would provide you some confidence to maybe move that -- the low end of that up at some point? It just seems like you keep outperforming your own? I don't know you have some mix issues but you know, if you could talk a little bit about that?

Certainly, part of it is mixed and a part of it is the uncertainty that Fermi talked about for the second half of the year, depending on how that plays out and there is pricing issues and other issues that could create that to move. Again, we're -- we've been at the high end of the range as you commented, and we'll take that. But we felt that with everything that's going on right now, we needed to be balanced in the way we're looking at over the second half of the year or at least, certainly, the quarter to make sure that we keep our range to where it is today. And if we see something different longer term, then we'll start to think about that.

All right. Thank you, guys.

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

Thank you very much, guys. Good afternoon. Fermi, I was particularly interested in the announcement that you made with Arrival, the CV2FS win. Maybe you could give us -- it sounds like you might be, kind of give us some color as you're able going forward. But if you could give a little bit more color on the background there and what were the folks that you were competing against and the particular features that allowed you to take that big design win down? Thank you.

I think we confused everybody out there, and I think it's -- I truly believe our Arrival, all of the people who has similar solution out there. And I think CV2FS was chosen for several reasons. I think the biggest reason is our performance per watt, and also it's an open platform that really enabled them to do a lot of things on their own. And I think those two things combined help us to get a design wins.

Got it, thank. Thanks, I appreciate that. My follow-up question is for Casey. Obviously, the primary drivers of Ambarella going forward are going to be in auto and security, but I noticed that in the printed results, the other category was down -- I don't know, on the order of 20%, I think you mentioned. And then, looks like it's down 20% again. I'd be interested if there are things changing that you might call out in some of those other smaller markets from a supply demand perspective or is this supply tightness at Samsung and you guys allocating wafers to your more strategic business or is it a combination of both? Thanks.

Yes, it really is a combination of both. When we talked about other a couple of years ago, we expected that to start declining and continue to decline over three to five years. We did have some upside in the past year that we talked and we're happy about. But as we look forward, because we're moving everything towards the CV product line in a lot of those markets, the CV really doesn't have the advantage as it does in some of the markets we've talked about; we'd anticipate that to continue to decline overtime. A lot of that, and historically, in the past few quarters have been just a few customers that really have driven that; Vijay and I [ph], we've talked about in the past and a few others. As we go forward, if we see some opportunities or markets that CV is well suited for where I think you might be able to see some opportunity there. But meanwhile, we've kind of thought about it as a declining market, and we -- you know, we get upside, we've taken it, but we aren't truly changing our viewpoint on that.

Got it. Thanks, guys. Appreciate it.

You bet.

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

Hi, guys, congrats on the strong results. Just had a question -- a couple of questions. But the first one is on the inventory and the supply side of things. How did you guys have your inventory increase so significantly, not that todays are out of whack with anything historically; but I was a little surprised that you have those constraints on one hand that you talked about with revenue in the second quarter being the worst, but your inventory still went up, I think about 25%, 30% sequentially. Is that just different parts where you're not supply constrained outside of the Austin fab or specific and markets likely to be more impacted by the Austin freeze? Any color there would be helpful.

Well, first of all, I think that we have very good visibility for our customers, and the demand is strong. And we -- basically, the inventory number you see is based on -- first of all, the strong demand. Second, I think it's become very clear that we need to give a bigger lead time because the lead time increased a lot, we decide to increase our inventory levels so that we can protect ourselves and protect our customers. The combination of this two really drive our inventory. But at the same time, I think we -- we are confident those inventory is not going to be dead inventory for us, because we know the run rate of the customer, we have multiple customers in the different power lines, and we are confident that we're building an inventory that we will be able to sell. And -- but, the most important thing is consider current environment, we really need to do or make sure that we have large products for our customers, if the lead time of those product continue to be a problem for us.

Thanks for that, Fermi. I guess my follow-up question kind of a two part one here; and it's a little bit following on a prior question that was asked on your other business. But I'm really getting at what seasonality can look like in the back half of the year if you put together the supply loosening up on the positive side and all the design wins you have, but the potential negative side being the fact that the consumer side is just not as big as your business. So, the two questions would be; how would you think about second half seasonality? And any sort of ballpark as a percentage of sales were that consumer business is in the first half of the year? It seems like it must be down to kind of -- I don't know, right around a 10% number. Any kind of right-sizing there for our models would be helpful.

Yes. I think when we look at the second half of the year, as we've talked about, there is a lot of uncertainty in the second half of the year. And so, when we look out, I think we feel the opportunity to continue to supply to our customers barring any change in some of the dynamics that we're seeing today. I think we don't guide beyond one quarter, but I think that we've seen the worst of it, as Fermi talked about earlier in a lot of the areas, and we should be able to meet demand as it comes through in the second half of the year. We're also looking into some of the newer markets that we talked about. As we said, we've got three phases networked [ph]; by the end of this year, into next year we're going to have all phases kind of starting to really kick and that's what's really exciting to us.

Great. Any sort of right-sizing on how big that consumer is? Was it percentage of sales? Was it kind of around 10%-ish in the first quarter and then you implied in your guidance for the second?

You mean the consumer business that was down?

Yes. Just trying to see that -- you know, you gave percentage sequential changes for the quarter and the guide; we just want to make sure the absolutes are aligned as well.

Yes. I think you're going to see that the quarter go -- or excuse me, the numbers go down in that market as well. And so you're going to see the other two go up, and you're going to see the consumer business go down as we talked about.

Okay. And one final housekeeping one. Fermi, you talked about [indiscernible] being, I think, low to mid-teens. Two quarters ago, you said it dropped to about 10% in the most recent quarter. Can you just talk a little bit about did the dollars drop as well as the percentages? And more importantly, what's the update on DAVA rolling out the CV design wins that you have had? Is that a customer that you expect to be a tailwind going forward? Or is there some change in the narrative there?

Great. So for Hikvision, DAVA, it's a -- both are using our video products, and we talked about a build-on inventory few quarters ago. They just -- I think digest the inventory and start reordering for some of the parts, and they continue to reordering but much lower levels. So I think our video product sales to those two company will continue to shrink overtime. And for the DAVA, we are going to ramp up our CV revenue with them. But it's kind of limited by the suppliers was by the subsidiary situation. But I think as soon as we transition out of those problems, we think that DAVA CV revenue will be a growth for us. Overall, I still think that combined, the DAVA sign is probably similar to last quarter.

Great, thank you.

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

Hi, Fermi, Casey and Louis, congratulations on the progress here. Perhaps first for Casey, on the operating leverage here; you got the nice operating margin bump up to 12% here. You talked about the expectations well backs [ph] and what you think we'll be able to do as you continue to grow the revenue, will you need to invest more here or can you keep that relatively stable?

I think we'll continue to invest not only in people, but also in opportunity; and so I think we'll see that. Having said that, you know, we're kind of focused on getting to 20% right now, as you know, the business can in the past has done 20% to 25%, and we think that's still obtainable as well. But right now from where we are, we're focused on getting to those type of margins and -- as your point here, we're kind of growing pretty well over the last few quarters, and we anticipate we should be able to do that into the next few as well.

Okay, great. Well, my question is for Fermi. Perhaps, you know, a lot of press on autonomous attempts here and a notion of camera plus radar, perhaps shifting to camera plus LIDAR; and just you know, kind of what camera can and can't do. Maybe you can talk about the implications for Ambarella's product designs and automotive footprint, and you know, whether that is impactful to you? Whether you're kind of orthogonal to all that?

Right. First of all, we continue to believe the camera is the most important sensor in any kind of autonomous driving market. And also, in front of us, the requirement for the camera technology will continue to grow. As you know, we call it get more -- more camera with car, every camera will have a high resolution, high run rate, you need a stereo processing, you need a much better CV performance to offer more and more different type of detections, and you need to have a sensor fusion. So with that, I really think the camera continue to have -- will continue to have a good roadmap for our camera products for account driving. Having said that, I still believe -- I also believe that redundancy is very important for those market, and we believe that radar, particularly is quick turner [ph] for any camera solutions. And also, I think the reason I didn't say like that is because, you know, our costs on the price side, LIDAR is expensive and radar is more accessible, and also radar is not an optical sensor; and so that is really a good technology complement to our camera technologies.

Okay. Thanks, guys.

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

Hey guys. I'll offer my congratulations. Well, I just wanted to come back to the to the Samsung Austin impact on the business. Did you say, Fermi, that that was just for the video processor side of the business? Or are there any CV products manufactured out of that facility?

Right. It's only video processor, all our CV processor appeared [ph] in Korea foundries.

Got it. Thanks for the clarification. And I guess then with that, mix shift, if you're shipping -- you know, if you're constrained or most constrained on the video processor side, wouldn't that be a tailwind to margins over the next couple of quarters?

No. Our margins basically are the same between CV and the vision-based products. While obviously, we talked about the fact that it doubles, you know, the top line doesn't really change the margin at all.

Got it, okay. And then, lastly, just with these video processor being constrained, do you think any of that demand that you might not meet this quarter or next is perishable? Or would you expect that demand just sort of roll into future quarters, and you'll meet it when you can get the wafers or substrates?

It's perishable. If you look at those video products, some of them go to professional security cameras, some go to a consumer security camera, some go to other consumer market like TGI [ph]. The truth for the consumer security camera and the consumer camera, those demand is perishable. For professional security camera, it may be there, but still, you know, there are some demands -- requirements on different timing for them. For example, usually the selling season -- not selling season, the people at the end of the year try to digest their budget, and usually buy a lot in Q4. So, if we miss those points -- those demand might be also perishable.

Understood. Thanks for that clarification.

Thank you. Our next question comes from Justin Gera [ph] with Baird. Your line is now open.

Hi, good afternoon. Just a quick follow-up on the risk margin outlook. And you've mentioned that some of the candidates that might have an impact on gross margin direction or you put the second half of the year. As your supply improves; is it fair to assume that your surveillance camera customers in China are going to improve as a percentage up to those make them; that's going to be gross margin component to consider for the second half. And also, if you could give us an update on the impact of your development cost on gross margin for the next few quarters?

Yes. Well, as I said, we're not changing our guidance -- our standard guidance that we've had from the margin perspective, regarding quarter by quarter; so we've given that indication. When we get out further, I think that you can see some different mix as we talked about earlier. Again, Japan in particular has a mix issue that can impact us from quarter to quarter, and as we look out into the next couple of quarters, we're going to have to see how that comes out for us. But that's probably -- there is several different mixed elements but that's certainly the biggest one that we've seen historically over the last maybe four to six quarters.

Okay. And then, just as a quick follow-up. Any changes that you see in terms of the competitive environment in China, in surveillance, notably at the low end? I'm assuming that would not impact you, but do you expect any changes in the pricing competitive environment medium-term?

Right. So, in terms of the competitive situation in China, I think HiSilicon is meant to be things that we watch out, because they have -- first of all, they still have tons of inventory sitting either in the customer or within HiSilicon; so we still see seamless [ph] shipping the products. But other than HiSilicon, we have a competitor that in administering or high-end product line. There are many, many, many low-end Chinese/Taiwanese competitors, competing in the low-end video, and even some at low-end CV side. So I think that price pressure is always there on the lower end side, but on the middle-end, high-end side, I think we are comfortable with our current ASP guidance.

Okay. And then just one last quick follow-up which is, when do you think HiSilicon inventories might normalize? And would that translate into an acceleration in demand for your product?

Well, we don't know. But however, our customers gave was an indication they can easily survive without for another 12 months, without any new product. So, I think they are sitting on tons of inventory right now.

Great, thank you very much.

Thank you. Our next question comes from Richard Shannon with Craig-Hallum. Your line is now open.

Well, thanks guys for taking my question. Fermi, maybe kind of an industry question here. The professional security as it relates to CV; how are you seeing the adoption curves here relative to what you saw on the -- in the past transitions from analog to digital? Is it faster or slower? What kind of indications are you seeing on market pricing here that was indicated in those inflections?

Right. So first of all, I -- you know, while we go over through this LO [ph] to digital IP security transition 10 years ago, I remember that first two years it was slow, then suddenly it transitioned. I will say that we are not in a hockey stick yet, we haven't seen that because majority of our professional security camera units number shipment is still in a video-only solution. So with that, I will say that we're still at an early stage of the transition from video to the CV. The -- I think the biggest reason that -- I think the trigger of that transition is the hockey stick need to happen. I think that customer need to try their price, CV camera product price, to maybe only a minimum premium over the current video product; that's what triggered the transitions. And I don't think what they have yet [ph].

That's helpful perspective for me. Thanks for that. My last question here is in the automotive side; again, related to CV applications like DMS and ADAS, etcetera. Not looking so much at the higher end ones like L4 and L5, but more than immediate term ones. Anyway, you have a sense of and can you characterize for us what kind of shared design wins do you think you have in that space right now or have visibility into?

We don't have a number for you. But however, I can say that; I think if you read through our design win activity in the last few quarters, every quarter we publish those design wins. You can see that we have a consistent, maybe even increasing number of design win on the DMS and OMS and ADAS now. So, obviously our market share is increasing on newer term market, but I just don't have a number because most of them are still pretty new. And I will still say that in the ADAS market and mobilize is still dominant, and we still -- we'll just start getting some design wins in there. So, I hope that momentum will continue to carry us moving forward. I will say ADAS was still very small, but for the OMS/DMS it's like, because it's brand new market; I think we have a chance to get bigger market share there.

Okay. Fermi, anyway you'd want to characterize what your goals might be in OMS and DMS? I mean, obviously, it's difficult to compete against directly gets Mobileye, but could you get to 20%, 25% of that market overtime?

In fact, I will go -- the thing we really want to push is not just capturing market share DMS/OMS; we are trying to push the concept that our customer Tier 1 OEM, which have ADAS, have recorders, have DMS/OMS, they need one unified platform to do all of that. Because if you look at ADAS, it's really a front facing camera to do mobile ADAS, and also front facing camera to do recording today; there is no reason these two product cannot be the same. At the same time, the DMS is really -- at same location you have -- of the ADAS camera you're facing inside and looking at the driver. And also, we like to argue the driver and the ADAS need to be synced in the video so that when something happened, you know exactly what are the drivers doing; so that has to be synced. So, I really think the combo product makes sense, and we really think if that scenario become market requirements, that will definitely help us to gain market share because I don't see any other competitor solution can do those kinds of combo products today.

Excellent perspective. I think I'll follow-up online with that one. But thank you very much, Fermi.

Thank you.

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

Yes. Just a quick follow-up and maybe related to the last topic there. Are you still attracted to sampling CV5 this quarter? And is everything sort of on-track with Samsung's 5 nanometer process there?

Yes. The answer is yes, and yes; and we are on-track with both. And we are eager to -- we are working on CV52 in our lab right now. We are -- you know, we believe we'll get ready to sample it. And also, we are working on -- of course, the CV5 is the first 5 nanometer chip with Samsung, and we continue to work with Samsung on the CV5 process improvement, and as well as the production plan. I continue to believe we'll start generating CV5 revenue sometime next year.

That's great. Thank you.

Thank you. Our next question comes from Martin Yang with Oppenheimer. Your line is now open.

Hi, thanks for taking the question. Just one for me. I'm curious if current supply constraints may affect or change how HiSilicon think about adoption for CV? Is there anything that may change their view, maybe getting CV sooner; do you have a view there?

Well, you are talking about Hikvision.

That's right.

So, I think -- we told Hikvision all the time; I think that Hikvision is really following the direction that try to not use -- got to use U.S. component as much as they can. This is probably one company we see they follow a policy to very tightly, and I think that -- so they are -- that's why they buildup so much HiSilicon inventory. And I believe they are trying to find out whether they have options with others or Chinese supplier; so I think that's the current situation. Like I said before, we cannot force people to look at U.S. component, the only thing we can help our customer is to provide a solution that's very hard to find a replacement in China, and that's how we can continue to have a market sharing.

Thank you.

Thank you. Our next question comes from Derek Soderberg with Colliers Securities. Your line is now open.

Hi, guys. Just one question for me as well. Fermi, I'm wondering in your view, which design wins you announced are the most meaningful for the company? If you could maybe just call out the top two or three wins and provide any additional detail on those wins; I think that'd be helpful. Thanks.

[Indiscernible] we just mentioned. I think Arrival is obviously the most important one for me. Not only that's an automotive design win, but this is -- they are important for different reason. Why? This is level 2+ and using our CV4 engine. More importantly, this is the first CV2FS chip design win we announced, and that just show you that our CV2FS, the functional safety chip is in a very good shape, and the customer is already adopting it and testing it. So everything depends on that point of view, I'm excited. But not to mention that Arrival is a great European company, and it attract a lot of attention from different places; I think that's definitely important for us. But the other one that I'm equally excited about is this Great Wall announcement that we had just a month ago. And Great Wall is really a very well-known Chinese OEMs, and they adopt our solution. It's -- which is a tumble solution, by the way, is really a driver recorder with CMS, with OMS, all in one. And they are the first one to really push this concept, and hopefully, with this and we show our capability and performance with GWM, and other people will pick it up say, this is right way to go; and hopefully, that will give us more design wins in the future. So for this reason, so these two are probably the most -- the project I'm most excited about.

Perfect, thanks.

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

And -- first of all, thank you very much for joining us today. And looking forward to seeing you next time. Thank you. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.