Ambarella, Inc. (AMBA) Q3 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Ambarella’s Third 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 today’s conference is being recorded. [Operator Instructions] It’s now my pleasure to hand today’s conference over to Louis Gerhardy, Corporate Development. Please go ahead, sir.

Thank you, Holly. Good afternoon and thank you for joining our third quarter fiscal year 2022 financial results conference call for the three months ending October 31, 2021. With me on the call today is Dr. Fermi Wang, President and CEO; and John Young, VP of Finance. The primary purpose of today’s call is to provide you with information regarding the results for the third quarter of our fiscal 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 are under no obligation to update these statements. These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we file with the SEC, including the Annual Report on Form 10-K filed on March 31, 2021 for fiscal year 2021 ending January 31, 2021 and the form 10-Qs filed on June 8th and September 8th of 2021, for the first and second quarters, respectively, of fiscal year 2022. Access to our third 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. Fermi will begin the call with a business update, John will review the financials and then Fermi, John and I will be available for your questions. With that I’ll turn it over to Dr. Fermi Wang.

Thank you, Louis, and good afternoon, everyone. Before proceeding with our Q3 fiscal year 2022 call, I want to note on November 9th we filed an 8-K stating that our CFO, Casey Eichler, would be taking a leave-of-absence for health reasons. We have received many of your kind thoughts and prayers, which we have shared with Casey and his family, and we wish him a speedy recovery. Meanwhile, John Young, VP Finance, has been named interim Principal Financial Officer and Principal Accounting Officer during Casey’s absence. On October 26th our strategic transformation into a deep learning AIoT processing company took another leap forward when we announced the acquisition of Oculii a provider of advanced algorithms for imaging radar systems. Oculii enables us to not only capture incremental perception business, but most importantly feeds our long-term strategy to provide a more comprehensive AIoT processing SoCs to our customers. I’m also pleased to report our market and financial momentum was strong in Q3, with revenue slightly above the high-end of our range of guidance, up 64% year-over-year. Driven by a richer mix of CV SoCs, our average selling price continues to rise, contributing to strong positive operating leverage with non-GAAP operating margins reaching 25% of revenue versus 5% a year ago. Supply dynamics remain a key challenge. On one hand we started to see an expected recovery in supply from Samsung’s wafer fab in Texas, however the shortages of other companies components has become a more significant and a gating factor to our results and outlook. Despite these constraints, we are on track to achieve record revenue this year with CV representing more than 25% of revenue. During Q3 the number of unique CV customers in production grew sequentially and quadrupled versus a year ago. As of today, on a cumulative basis, we have shipped more than 5 million CV SoCs including more than 1 million into the automotive market. Our automotive revenue funnel is expanding. A year ago, we announced a six-year, discounted, automotive revenue funnel of about $600 million, and using the same methodology, this figure has approximately tripled. We will provide more details on January 4th at our Capital Markets Day. I will now provide you with some examples of progress in our target markets. During the quarter, we were excited to see that Rivian, the American electric vehicle maker, started customer deliveries of its R1T truck. The R1T’s Driver+ features 11 cameras, 5 radars and 12 ultrasonic sensors to deliver true hands-free driving assistance along with a full set of safety features. The R1T’s Driver+ system utilizes multiple CV2AQ CVflow automotive SoCs for its AI vision processing. Additionally, the R1T also uses Ambarella’s CV22AQ CVflow automotive SoC for its surround view camera processing and gear guard security system. The Rivian design highlights the use of Ambarella’s AI vision SoCs in centralized automotive computing applications. These applications represent a major new opportunity for Ambarella moving forward. And during the quarter, Chinese truck maker Shanqi entered into mass production with an ADAS system providing lane detection and forward collision warning features. The system is based on Ambarella’s CV22AX automotive AI SoC and is supplied by tier 1 Baolong. In the after-market automotive dash camera market, European market leader Nextbase announced a pilot program with Uber for its 232GW dash cam. The dual camera design is based on Ambarella’s A12 SoC and includes a Cabin View Camera that uses infra-red night vision technology and wide angle 140-degree angle lens to provide an extra level of security for Uber drivers and riders. Also in the dash camera market, Korean market leader Thinkware introduced its QXD7000 and QXD5500 HD designs based on Ambarella’s H22 and A12 automotive SoCs. The QXD7000 includes a radar support mode that helps to pre-record video 10 second before impact, while both models offer ADAS features including forward collision warning, forward vehicle start alert and lane departure warning. In the professional IP security camera market we continue to enjoy strong revenue growth based on worldwide market expansion and our increasing market share outside of China. In Europe, market leader Axis, a unit of Canon, announced its first cameras to use Ambarella’s CVflow SoCs. The new M series cameras offer great image quality even in challenging light conditions, and take advantage of analytics based on deep learning on the edge. Verkada, based in the U.S., is simplifying the management of video security at scale through its hybrid cloud approach and its latest CD62 4K Dome security camera features intelligent edge-based video analytics, powered by Ambarella’s CV22 SoC. Also, industrial giant, Johnson Controls, introduced its Illustra Pro Gen 4 mini-dome, indoor and outdoor PTZ models with resolutions up to 8 megapixels and based on our CV22 SoCs. With built-in AI based object classification, the camera enables events to be narrowed to different classes including person, car, bus and motorcycle. In Korea, market leader Hanwha Techwin introduced multiple camera models spanning dome, bullet, panoramic and license plate recognition designs and leveraging Ambarella’s CV2 and CV22 CVflow SoCs. Also in Korea, IDIS introduced four new cameras based on our S3L SoCs, replacing HiSilicon designs, while CPRO introduced its first 4K AI camera based on our CV22 SoC. In November, Chinese electronics giant Xiaomi introduced a new line of multi-functional, smart door locks with facial recognition, using Ambarella’s AI vision SoCs. The smart door locks fuse structured light and RGB camera technology and AI-based facial recognition software for hands free access, while also incorporating other unlocking methods including fingerprint recognition and near field communication. From these customer engagements, you can see the breadth of AI applications emerging, ranging from L2+ ADAS in EVs with a leader like Rivian, to enterprise class security cameras with an industrial giant like Johnson Controls, and door locks with sensor fusion for the smart home and enterprise market with a major company like Xiaomi. This traction can be traced back to the premium growth R&D investments we have, and will continue to make, into camera and radar perception technologies, automotive functional safety such as ASIL B or D and next generation AI processors on 3 nanometer manufacturing process nodes, all optimized specifically for IoT end point applications. In fact, in the last three years Ambarella invested 59% of revenue into R&D on a GAAP basis, a level far beyond a maintenance levels you see at most companies. Of course, it is not just about quantity of R&D investment, but the quality, and as you know we consider our visual AI R&D to be the best out there. Evidence supporting this continues to mount as we successfully leverage our well established video processing leadership into the computer vision AIoT market. This large growth R&D investment has been focused on processing data collected from the lens of a camera with an “algorithm first” approach. Now we have augmented this investment with the acquisition of Oculii, who uses a similar “algorithm first” approach for the high definition imaging radar market. Radar perception is an incremental market for Ambarella. However, we are most excited about the synergies with Oculii which we expect to be derived from two principal areas. First, we expect our combined camera and radar R&D investment to enable breakthrough levels of perception at economical price-points, as Ambarella is now one of the very few semiconductor companies to have advanced camera and radar technology development under one roof. Second, through our CV SoC roadmap we are able to provide the processing power not just for the perception processing, but we target the incremental processing for the fusion, planning and control layers in a variety of AIoT markets. All of this is expected to drive more value, both higher selling prices and improved market share, for Ambarella and its stakeholders. In summary, during Q3, we demonstrated progress on the strategic front with the acquisition of Oculii and our CV portfolio ramp continues. Our financial results are providing an early look at how we intend to capitalize on an entirely new phase of the digital AI transformation, a phase where deep learning is not just executed in servers, but in our SoC platform designed for the unique needs of the edge AIoT endpoint market. And I want to thank all our stakeholders, employees, suppliers, partners, customers and shareholders, for your continued support. With that, John will now provide our prepared financial comments.

Thank you, Fermi, and good afternoon, everyone. I will review the financials for the third quarter of fiscal year 2022 ending October 31st and provide a financial outlook for our fourth quarter of fiscal year 2022 ending January 31, 2022. 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 and acquisition related costs adjusted for the impact of taxes. Our revenue of $92.2 million was slightly above the high-end of our guidance range, representing a sequential increase of 16% from Q2 and a 64% increase from the year ago quarter. The previously anticipated wafer supply recovery from Samsung’s Austin, Texas, fab helped sequential growth in the quarter. Automotive and IoT camera revenue, combined, increased more than 10% sequentially, and other revenue experienced seasonal growth. Non-GAAP gross margin for Q3 was 63.1%, slightly above the 62.8% in the preceding quarter and slightly above the high-end of our guidance range. The pricing environment for our products is stable, our mix remained favorable, and we are managing higher supply chain costs. Non-GAAP operating expense for the third quarter was $35.6 million, compared to $36.4 million for the previous quarter. Our Q3 operating expense was below the low-end of our guidance primarily due to the timing of non-recurring R&D expenses. Other income of $408,000 was higher than expected primarily due to the realization of gains on investments as they were sold to finance the acquisition of Oculii. The non-GAAP net income for Q3 was $22.2 million or $0.57 per diluted share compared with non-GAAP net income of $13.1 million or $0.35 per diluted share in the second quarter. Total headcount at the end of the third quarter, before the Oculii transaction closed, was 824, up 8% from a year ago, with about 82% of employees dedicated to engineering. Of these engineers, about 69% are developing software and algorithms. Total accounts receivable at the end of Q3 were $44.8 million or 45 days of sales outstanding, versus $38.3 million or 44 days of sales outstanding at the end of the prior quarter. Net inventory at the end of the third quarter was $47 million compared to $42.1 million at the end of the previous quarter. Days of inventory increased to 118 days in Q3 from 115 days in Q2. In Q3 our operating cash flow was a positive $8.3 million, versus a positive $14.4 million in the prior quarter. Cash and marketable securities were $457.8 million, up from $449.2 million at the end of the second quarter. We had two 10% plus revenue customers in Q3. WT Microelectronics, a fulfillment partner in Taiwan who ships to multiple customers in Asia, represented 63% of revenue and Chicony, a Taiwanese ODM who manufacturers for multiple customers, was at 13%. Dahua and Hikvision, combined, declined sequentially and represented a mid single digit portion of our total revenue. In the professional security camera market, market share shifts between some of our customers are becoming noticeable. I’ll now turn to our guidance for the fourth quarter of fiscal year 2022. We completed the acquisition of Oculii on November 5th, and our fourth quarter guidance incorporates Oculii’s results from operations from that point, or about 12 of the 13 weeks in the quarter. As reported by many of our customers, underlying demand remains solid but the supply-side dynamics remain challenging. In Q3, we began to experience the expected improvement in wafer supply following the shortfall from the Texas freeze, however shortages of other companies’ components at our customers became more acute in Q3 and continues into Q4. As a result, our guidance contemplates some of our orders may continue to be rescheduled to ship at a later date. Based on these factors and our best judgment at the current time, we expect total revenue for the fourth quarter ending January 31, 2022 to be in the range of $88.5 million to $91.5 million. Revenue from the automotive market is expected to increase sequentially, with non-auto IoT camera business expected to decline sequentially. In Q4, we expect the revenue from Dahua and Hikvision, combined, to decline to the low-single-digit percent of our total revenue. We estimate Q4 non-GAAP gross margin to be between 63% and 64%. We are experiencing some higher costs to manage the supply chain, but a healthy customer and product mix, together with a relatively stable pricing environment, are likely to enable our gross margin to continue to temporarily remain above the high-end of our long-term model of 59% to 62%. Non-GAAP operating expense in Q4 is projected to be between $39 and $41 million, due to higher SoC development expense, increased hiring, and the inclusion of Oculii’s operations. The Q4 non-GAAP tax rate should be modeled in the 3% to 6% range. We estimate our diluted share count for Q4 to be approximately 39.5 million shares. Ambarella will be participating in Wells Fargo’s TMT Summit tomorrow, December 1st, Imperial Capital’s Security Investors Conference on December 15th, Needham’s Growth Conference on January 12th and Baird’s Vehicle, Technology and Mobility Conference in the last week of January. Our Capital Markets Day will be held on Tuesday, January 4th from 1pm to 4pm at our CES hotel location in Las Vegas, and we will be offering sell-side analyst hosted tours of our demos on January 5th, 6th and 7th. Please contact us if you would like to participate. I will now turn the call over to the operator for questions.

Thank you. [Operator Instructions] And our first question is going to come from the line of Gary Mobley with Wells Fargo Securities.

Hey, guys. Thanks for accommodating me and fitting me in here early in the queue, and wishing Casey a speedy recovery. And I want to start off by asking about the puts and takes as embedded in your December quarter guidance to what extent the seasonality play into it, to what extent do extraneous supply chain factors factoring here. And if not for the extraneous factors that seemingly are constraining your Q4 guide, given the backlog that you have, how many quarter-over-quarter gains or sequential improvements in revenue can you see just based on your backlog support, assuming all of the supply chain issues that you’re dealing with now work in your favor?

Right. This is Fermi. I think, the seasonality is still there, but hardware is reduced from the past. If you look at the historical number in the last five years, our Q3 to Q4 on average reduced by 11%, but we -- our guidance is much smaller than that, just reflecting that the mix of the product is changing and definitely helping us to reduce the magnitude of the seasonality. However, the other gating factor is really that the supply chain issue of other components for our customers, which we start seeing become bigger problems. It’s hard for us to size up the degree, the impact to our revenue, but we do believe there is an impact to our revenue forecast. However, all those the factors have been considered when we provide this 85% to 95% revenue guidance.

Okay. I appreciate that. And hopefully, I’m not catching you flat-footed with this question, but per your fourth quarter revenue guide, you’re expecting roughly 49%, 50% revenue growth in fiscal year ‘22. Given the increasing mix of CV revenue, which I believe is going to be more than 25% of that fiscal year ‘22 revenue, can you give us a sense of the unit growth versus the ASP tailwind for the fiscal year?

Right. So, I really think that the majority of growth is coming from the ASP. And we continue to see a strong ASP growth. We said double the ASP in the past, and we continue to see that as a trend in our near future. And our user number also grows. We talk about CV -- total units, CV units is 5 million cumulatively since the beginning. I think that’s a significant number. And also there, including 1 million in automotive silicon. [Ph] So, I think both sides that we see growth, but I think the ASP is a much bigger factor at this point.

And our next question is going to come from the line of Matt Ramsay with Cowen.

This is Joshua Buchalter on half of Matt. Thanks for taking my question. And congrats on strong quarter. I was hoping if you could dig into diversity and potential time line of the funnel that you mentioned tripled. Are there any particularly large wins contributing? And I realize it’s early, but is there any radar processing or Oculii related revenue embedded within that funnel?

Yes. Hi Josh, this is Louis. We’ll go into a lot more detail on the funnel at our Capital Markets Day in January 4th. But just to give you some of the high-level parameters, continues to be a six-year funnel. It uses the same methodology that we employed a year ago. There is no radar in this funnel yet. And looking at the two key elements that add up to the $1.8 billion, there would be the one component, which increased from $400 million a year ago to about $700 million in this current funnel. And the pipeline portion of it is now about $1.1 billion. And the other thing that we can add to this funnel description and characterizing the current funnel is that a vast majority of it is CV SoCs and in particular, of the increase from a year ago, a vast, vast majority would be computer vision SoCs. Hopefully, that gives you enough color. And again, we’ll go into more details at the Capital Markets Day.

I appreciate that you got the Capital Markets Day coming up. I was also hoping you could provide some more details about the Rivian win. It seems like you’re doing more sensor fusion and centralized processing than some of your other announced wins, is that [Technical Difficulty] and is this the type of win that you’re looking to compete for on a growing basis going forward?

Yes. Thank you. Absolutely, Rivian side, we talked about we have 3 silicons in there, 3 type of silicons in there. The first type is CV2AQ, we have multiple CV2AQ there in the Rivian R1T car. And the function of the CV2AQ is doing video perception. So, that’s definitely the key component that we want to shoot for in the future. And you can see that we’re definitely providing the majority of the perception in the R1T car. The second type of silicon is CV22AQ, which provides the surround view as well as some security camera functions that R1T has. And the third type is B8 is really a SerDes serial/deserial chip for the MIPI interface. And those are three things that we provided through the R&D.

Our next question is going to come from the line of Tore Svanberg with Stifel.

Yes. Congratulations on the solid results. First question for you, Fermi. As it relates to Oculii, obviously, you talked about the radar perception market being an opportunity itself. But you said longer term, obviously, this is much more about creating more value SoCs with more integration. Could you elaborate a little bit on the timing of that? When could we potentially see combined products from the two companies in the marketplace?

Right. So, the product planning for -- to integrate Oculii software into our silicon comes two steps. The first step is that we are working on to integrate the software to our CV2 family. And that’s a product we are working on. We knew how to do it, and we believe that that can be a product we start selling, I’d say, later next year. And the idea is that that’s going to be a product we used to target for the Level 2 ADAS application as well as non-automotive application. And of course, that for all our next-generation chip, we’ll have well integrated RADAR technology into our silicon. And so, you should assume that every silicon we’re going to announce in the future will have our radar technology in there.

That’s very exciting. As my follow-up question, you talked about the landscape for the security camera market kind of changing a little bit. Could you elaborate on that? I mean, I think you did mention it when you talked about the two Chinese customers, but it sounds like there’s some more specific things there, especially as those two customers will be very low percentage of revenues going forward. So, if you could talk a little bit more about that that would be great.

Right. So, I think from a momentum point of view, outside of China, we’re doing very well. We talked about almost all the major customers outside China are using our CV silicon. And in fact, most of them into production already. We mentioned Axis, we mentioned Johnson Controls and we mentioned some Korean company this time. Inside China, I think Dahua continues to use our CV chip. But if you look at what the Hikvision and Dahua announced in the latest quarter, I think there are two things to be noticed. One is, they all talk about a slow Chinese market because the government spending is reduced. And also, they have a huge amount of inventory. We think one company has like 150 days of auto inventory at hand. So, I think those two things really contributed a weak performance of Hikvision and Dahua. But more importantly, I really think that we continue to see that there’s -- there’s still a lot of HiSilicon inventory sitting in the channel. And I think that although it has been a while, but I think we haven’t seen the end of HiSilicon chip yet.

Our next question is going to come from the line of Quinn Bolton with Needham & Company.

Hey, guys. Congratulations on the nice results and best wishes to Casey for a speedy recovery. I wanted just to come back to the $1.8 billion pipeline. I know you said it doesn’t include any radar. But, could you give us some sense as to what you think that radar opportunity might be as you look out several years? I mean, I assume that that’s probably an opportunity that could bring hundreds of millions of dollars of TAM to the Company, but hoping you might be able to size that.

Yes. This is Louis. And the radar market today in the automotive space only is maybe 90 million units. And the Oculii technology, let’s call it, for the imaging radar is just beginning to penetrate the market. And so, if you consider two parts of their business, they have a licensing business and then they have a module business. And on the licensing basis, they can realize low-single-digit license fee per unit. And at the higher end of that, it could be up to $15 of license fee. And on the module side, our expectations for the units in that market are much lower than what we’d anticipate on the software licensing side. But the ASPs in that market, on the other hand, are quite high, and let’s say, it ranges from $200 to $2,000, depending on the type of module and the application, of course, the volume. So, those would be some of the parameters that you’d want to consider. And the key question is what’s the penetration rate of this 4G technology going to be into what’s already a large existing market.

And next question I had is just you talked about some of the supply constraints of other components potentially affecting shipments or causing shipments of your devices to push into future quarters. Do you think any of the demand that’s affected may be perishable, or would you expect anything that sort of slips out of the January quarter would most likely be captured in the April or July quarters?

Yes. This is Fermi. I think, part of the business is perishable. For example, all of the consumer security, which is more like a holiday season sales, I think those are perishable. And I think for the most automotive designs I think pushed out next year. And we see that the short supply really impacts all of our customer products out there, including security camera and automotive. Obviously, automotive are a bigger hit than the security camera at this point. But I think that we don’t see any mitigating factors being reduced anytime soon. So, we definitely continue to watch the progress. And hopefully, we can give you more guidance for next year when we talk in the CMD.

And our next question will come from Andrew Buscaglia with Berenberg.

I just wanted to follow up on -- can you talk a little bit more about home security in this quarter and into Q4 and potentially some momentum even into 2022? I know that second wave of growth is supposed to be pretty strong. I’d like to hear more about some of the factors influencing that Q4 guide as it relates to that specific market.

Yes. So, I think that for consumer security camera, we do believe that the percentage of our CV revenue goes up significantly from Q3 to Q4 and will continue to see next year, particularly, we think there are a few customers will be in production in the near future. So, we believe the second wave of revenue will continue. And the significance of that business is really that people need to justify how -- why people want to use a computer vision on the server side, but instead trying to use the computer vision on the edge side. I think, most of our customers realize that’s a need and it just takes time for them to optimize the product to deliver to a customer. But I think that that trend continues and we don’t see a problem that we’re going to play a major role in that market.

Got it. And your comments on some of your customers having issues. I know you kind of touched on this in the last question a bit. But specifically for auto, do you see this influencing any of the more recent design wins you expect to see converting to revenues beginning early next year, just given what you’re hearing, all the headlines in the market suggest there may be some delays?

Well, I think the delay is not because of short supply. It’s really about how much volume can be delivered. I think that all of our customers show their desire to take the product into market as quickly as possible. But I think the number of shipments into the market will be limited by the supply situation. That’s why it’s hard to really size it up. So from the product production, delivery point of view, I don’t see much of a delay. I think the biggest concern for all of us, including, I think, our customer is whether they can get enough supply to meet the whole demand they have.

Our next question will come from Kevin Cassidy with Rosenblatt Securities.

Congratulations on the great results. Fermi, you gave us a lot of information, a lot of good updates. One thing, I just wanted to know if you have an update on the CV5 progress.

Yes. Thank you for the question. And we didn’t talk about CV5 this time on the script. But I think, first of all, CV5 has been successfully sampled to many, many customers, security camera, automotive and as well as some of the consumer products. And both hardware and software sample has happened. And I believe that CV5 will be in production second half of next year.

Okay, great. And along with that, you had mentioned the 3 and 4 -- or 4 and 3 nanometer R&D happening now. When can we expect something like that to happen? Is that two years out, three years out?

Yes. Well, I think we are focusing more on the 3-nanometer at this point because 3-nanometer is -- 3-nanometer is auto grade, and that’s where we focus on. And the timing of we using 3-nanometer really depends on how fast the sensor can be matured. And we definitely plan to kick off a test chip sometime next year to test out all of our IPs and engineering development, but the product really depends on how fast we can get to yield out of 3 nanometers. But during the meantime, we’re going to -- we are very confident and comfortable with the sensor of 5 nanometer now, and we’re going to see -- continue to see multiple projects going to a [indiscernible] nanometer next year.

Our next question will come from Suji Desilva with Roth Capital.

Hi, everybody. So, you talked about supply chain shortages impacting your customers’ components. Did you specify which end markets were being impacted, or was it broadly across the end markets?

It’s across the board. In fact, every customer we talk to, they got a different type of impact, some just a little but almost all of our automotive customers are talking about different type of supply shortages. Microcontroller is probably the biggest one. On the consumer security camera, even -- most of the consumer security camera, Wi-Fi supply is a big problem. And so, I think that it’s really cause at different levels.

And then, I know you talked about -- you reaffirmed the 25% CV revenue contribution in ‘22. I don’t recall it in the past, if you’ve talked about where you think that might go next year, ‘23 or thereafter? Any color there would be helpful.

Yes, we haven’t addressed next year yet, but I definitely think we need to give you more guidance at the CMD time.

Okay. I look forward to that CMD, you already provided some of that. And then lastly, a follow-up on Rivian. You talked about the wins, and the car has 5 cameras and 10 radars. I’m just curious if that’s the kind of proportion -- or maybe I got backwards, 10 cameras and 5 radars. The proportion of that is consistent what you’re going to see going forward. And also with the chips you’ve sold, the multiple chips, are you now causing other AI chips in the car to be despeced or perhaps replaced by just I’m trying understand how new and perhaps forward-looking the design revenues?

So, first of all, yes, I think the ratio sounds right because first of all, the radar, the 5 positions for radar is really the 1 front and the 4 corners for radar. And some of them start using a radar for internal perception also, but that’s a unique opportunity. But for camera, we’re seeing customers going anywhere between 10 to 15, 16 type of cameras moving forward. So, I think that ratio is probably to stay there. But however, from our point of view, you can see that we are handling quite a few cameras with only -- I would say, 3 combined CV22 chips. Moving forward, I think that will be unified to domain control type of chips. So, I definitely think this is the first generation. And in fact, we saw working with Rivian I would say, three years ago, and it took three years to go to point. And we do believe that moving forward, you will see less -- much less number of digital single processing chip, but it’s much more powerful to handle all of cameras and radars.

And our next question will come from the line of Joe Moore with Morgan Stanley.

I wonder if you could talk about your progress in L2 in passenger cars, both in the U.S. or in the West and also in China. Do you see the biggest successes there coming from replacing the incumbent with single camera forward-facing, or would you anticipate that you get -- it’s things like radar or stereo vision that kind of are -- that’s the new technology shift that brings Ambarella into those sockets?

I think the biggest near-term opportunity is to replace the incumbent of a full facing ADAS market because our current CV2 functional safety chip is well suitable for that. And now, we can integrate radar solution into CV2 functional safety chip and provide a combined sensor fusion online chip become even more powerful solution for our customer. So I really think for the near term, this is the biggest opportunity for us. However that I think you can -- based on Rivian you can see that similar type of design can be used in a consumer vehicle. But I think for the high-volume consumer vehicle, you would require much more integrated solution in terms of number of chips and doing a video and radar integrating to a single domain controller. I think that’s probably a little further out for us.

Okay. And if I could just ask a follow-up. I mean, it seems like the case for stereo vision is pretty compelling. You guys have been talking about it for a number of years. And it seems like with the type of density and frame rate that you guys can pick up that you can do really good distance triangulation at speed. What is the barrier? Is it just price? Is it just sort of time for your customers to do the development? What is it that kind of gets you into those wins longer term?

Right. So first of all, I think the stereo is really trying to providing a different type of sensor modality against LIDAR in Level 4 -- Level 3 or Level 4 cars. And in Level 2, when you’re talking about smaller number of cameras, the price is really becoming sensitive. So, I think for most of -- for people who are evaluating and adopting the stereo processing is really on the -- they want to have multiple sensors to do -- providing that information. So, I think that’s definitely the limit of number of applications that require stereo processing. But however, I still believe this is a very powerful tool for us. In fact, we do have projects that we already take that into production and also that in the near future, we can talk about more design wins we have with stereo. It will take a little longer time.

Our next question is going to come from the line of David O’Connor with BNP Paris. David O’Connor: Maybe for me, a couple on my side on the Oculii. Firstly, can you talk us more a bit around the positioning of ocular radar from the processing perspective versus the existing radar processing guys where you see the microcontroller sitting behind the sensor? And also then on the -- when you integrate Oculii into the CV chip, what type of gross margin upside are we kind of looking at there, given the software component to that? And lastly, on Oculii, do you plan to maintain the module business there initially? Just trying to understand the synergy there of having that margin business with the existing chip business. And maybe one final one for John. I’m not sure -- I joined the call a bit late, but did you quantify how much revenue you’re leaving on the table given these supply constraints? Thank you.

So first of all, on the radar side, we do plan to continue with the module business because, first of all, it’s a very well integrated product, easy for any of our customers who want to evaluate our technology, so that we can easily give them module, so they can understand how their Oculii algorithm software works and through the evaluation. But more importantly, there are some small volume customers, they probably will adopt our module and getting to mass production. So, we do plan to continue to our module business. On the difference -- the differentiation between Oculii and their competitors, I think it really is -- Oculii for us is an algorithm company, and their unique AI algorithm, they -- what they do is they try to generate this we call intelligent transmit waveforms and that adapt based on the environment. And after those waveforms got sent out, and on the receiving side, when we’re receiving those returned signals, we process those information across time so that we can improve the resolution. So, it’s really about the single processing algorithm that Oculii delivered in the last several years, which significantly improved the resolution, both on the angular or horizontal, but more importantly, also on the on the back -- or the range side. So, I think it’s -- very few companies out there or radar company out there is focusing algorithms. You see a lot of the company focusing on just boot up on the hardware side, boost up their transmitters, number of transmitters, receivers, so that they can transmit a lot more signal and which also means a lot more expensive, demand a lot of power consumption. So I think Oculii definitely has a unique approach to solve this resolution problem which is important for radar.

Yes. David, you also had a question in there about gross margins in the Oculii business. And the reason we’re not ready prepared to give guidance on that is you’re correct, the licensing side of the story would carry gross margins that are better than our long-term model. However, when you start layering in the module business, that can bring it back into our long-term model. And so, until we understand that mix a little bit better, I think it’s appropriate to think of this blended as being in our long-term model, 59% to 62%.

And then, David, just finally on your last question, the short answer is no. We didn’t quantify any Q3 lost revenue as a result of the supply chain constraints.

And our next question will come from the line of Tristan Gerra with Baird.

Hi. This is Tyler Bomba on for Tristan. Thanks for taking my questions. First, are you seeing a demand slowdown in China? And is that possibly going to extend from consumer weakness into infrastructure spending there? And then also, do you -- how do you see automotive demand trends in China currently?

I think for China, I think in China, our focus is really on the security camera side, it’s really professional security camera. We don’t work on the consumer security camera inside China. For the professional security camera, we talk about Hikvision and Dahua and a few more companies that already started using our CV solution. So, it’s more of the professional side of business. On the automotive side, I think it’s the number of units -- if you look at the forecast for next year, I think China also -- the forecast for China, Chinese automotive market also reduced in terms of total numbers. But however, the trend of that more people start using computer vision for the advanced ADAS or AD solution are increasing. So, I think that’s kind of washed out in my opinion. And we continue to secure design wins in the Chinese automotive business focused on DMS and ADAS. Like we announced today with Shanqi that is ADAS application for the commercial vehicle. But I definitely think that we work hard to penetrate the consumer vehicle as well as the Level 2+ applications.

Great. And then, for my follow-up, in China, are the surveillance camera OEMs, the professional ones primarily driven by government orders, or are they from the private sector?

I think both. But however, a majority of the -- for example, Hikvision and Dahua has been talked about -- a lot of their projects coming from government projects. And that’s also the reason they show a weak Q4 guidance because I think government spending is reduced in Q4. So, I think that definitely is the main reason that Hikvision and Dahua are doing very well in the last, I would say, 10 years, it’s really about government-driven driving the whole security camera market in China.

Our next question will come from the line of Martin Yang with Oppenheimer.

My question is on your access given first part of with CV design wins. And this, if I remember correctly follows up with the first product -- for three products coming out of Bosch with CVs. So now that those two major IP camera security are adopting CV, do you see we reached a potential milestone where we see a much higher adoption of potential shipments of CV in the professional security center market in -- first in the European market?

I think from an adoption point of view, if you look at it from the company point of view, the coverage is very well for us. But however, if you look at the products they use CV for now, majority of them are still in the higher end side. So, it’s really a high-end product and convert to CV first. And we -- I believe that the biggest opportunity -- revenue opportunity for us moving forward is for our customers gradually moving downwards and putting more and more CV solution to their low-end products, then we’ll start seeing more unit numbers to the -- path to our revenue mix. But I think that because we provide software compatible HD case between our low end to high end CV chip, so anybody who designed in for their 1 CV product, they can easily convert the product to a different type product, a different performance point. So, I do hope that in a near future, we’re going to start seeing more products coming from all of those companies using our CV solutions.

Got it. So, as a follow-up to that, I think comparing to Motorola or Hanwha Techwin, those two customers seems to have adopted CV in professional security camera products much earlier than the European guys. So, is there any way you can tell from product design or the way the early adopters are using CV chip, where you see kind of extrapolated speed of the migrations of CV chip to the low-end security camera products?

Yes, I think you are right. For example, if you look at Motorola’s script, the quarterly announcement, they do start expanding CV solution to many different product lines, which is faster than other companies that we’re seeing. So, I think Motorola, I would say, is definitely the most aggressive one trying to adopt our CV on the high end and gradually moving down to different product lines, like even for the wearable device for security guards, those kind of applications they start using our CV chip too. So, I think Motorola is most aggressive. But however, I do believe most of the companies out there will follow because for them to continue to compete in the market, they need to have a similar offering for the -- to compete with other companies.

Thank you. And our next question is going to come from the line of Derek Soderberg with Colliers Securities.

So, another question on the [Technical Difficulty] curious what you’re hearing from your customers, maybe it’s customer specific. But are any of them giving you sort of a time line for when they expect their customers -- their other customers were returned to normal? There’s been sort of a decent amount of reporting around the auto chip shortage. Just curious if you’re hearing anything like has anything gotten worse in recent months? Any color on that would be great.

I tried to talk to a lot of people in the industry to understand the situation. The consistent message I heard is that they don’t expect the situation will improve until second quarter, maybe third quarter next year the best. I think, however, we do start seeing signs that things changing a little bit, right? We do see that some component catch-up, even yesterday I see some news about microcontroller situation in automotive improved. So, I do hope that the situation is not as bad as everybody is thinking that Q2, Q3, we’ll see -- we’ll have to wait until Q2, Q3 next year to see some improvement. But at this point, the consensus that one of the people I talk to is that this is continuing to going to be a problem for the next few quarters.

And with that, I see no further questions. I would like to turn the call to Dr. Fermi Wang for closing comments.

Thank you. We are excited to be returning to Las Vegas in January to host both, our Capital Markets Day and CES events. And w\e will be demonstrating a wide range of automotive, security, access control and robotics technologies and offer rides in our Level 4 autonomous vehicles and provide our first demonstrations of Oculii’s radar software. So, we really hope that we can see all of you in person. And thank you for your attention today. Goodbye. I’ll talk to you next time.

Once again, we’d like to thank you for participating on today’s conference call. You may now disconnect.