Ambarella, Inc. (AMBA) CEO Fermi Wang on Q4 2019 Results – Earnings Call Transcript

Ambarella, Inc. (NASDAQ:AMBA) Q4 2019 Earnings Conference Call March 3, 2020 4:30 PM ET

Company Participants

Louis Gerhardy – Corporate Development

Fermi Wang – President and CEO

Casey Eichler – CFO

Conference Call Participants

Adam Gonzalez – Bank of America Securities

Matt Ramsay – Cowen

Ross Seymore – the Deutsche Bank

Joe Moore – Morgan Stanley

Quinn Bolton – Needham and Company

Suji Desilva – ROTH Capital Markets

Charlie Anderson – Dougherty & Company

Tore Svanberg – Stifel


Ladies and gentlemen, thank you for standing by and welcome to Ambarella’s Fourth Quarter and Full-Year 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference call is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Louis Gerhardy, Corporate Development. Thank you and please go ahead, sir.

Louis Gerhardy

Thank you, Chris. Good afternoon and thank you for joining our fourth quarter and fiscal year 2020 financial results conference call. Our speakers will be Dr. Fermi Wang, President and CEO; and Casey Eichler, CFO.

The primary purpose of today’s call is to provide you with information regarding our fourth quarter and fiscal 2020 results. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We’re under no obligation to update these statements.

These risks and uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents that we file with the SEC, including the Annual Report on Form 10-K that we filed on March 29, 2019, for the fiscal year 2019, ending January 31, 2019, and the Form 10-Q filed on December 6, 2019, for the third quarter of fiscal year ending January 31, 2020. Access to our fourth quarter and fiscal 2020 results press release, historical results, SEC filings, and a replay of today’s call can be found on the Investor Relations portion of our website.

I’ll now turn the call over to Dr. Fermi Wang.

Fermi Wang

Thank you, Louis, and good afternoon, everyone.

Before reviewing our results, I will first provide an update on the extraordinary factors, geo-political, also public health that may continue to impact our business. First, on COVID-19, we are and we’ll continue to take the necessary precautions to ensure the safety of our employees. We express our deepest sympathies to those affected worldwide, and we offer our best wishes to them for a complete recovery.

We are starting to see a financial impact from the virus, and we expect to continue to face an elevated LIBOR of demand and supply uncertainty. We are taking precautions to mitigate the risks to our own operation…….

Continue to face an elevated level of demand and supply uncertainty.

We are taking precautions to mitigate the risks to our own operation. Based on what we know as of the time of this call, and to the best of our ability, we have factored – risks into our Q1 guidance. Geo-political risks are a dynamic and they remain high. The Phase 1 trade deal eased the tensions somewhat and our October 15, 8-K update, gave us some clarity to October 9, Entity Lists. But there are wide-variety of geo-political risks at play, including foreign policy, trade, and IP matters.

Factors potential disrupted to our business included new export controls on advanced technologies. The risk customers in China take actions to reduce their dependence on the supply of U.S. components. Potentially subject to the various geo-political factors, changes to the Entity Lists, and old tariffs market share shifts between our customers and the supply chain issues. On the other hand, our largest competitor in the security camera SoC market, HiSilicon, our unit at Huawei, is facing challenges that are helping us gain share outside of China. As you can see, multiple factors are contributing to a wide range of potential outcomes for us.

Fiscal year 2020 revenue of $228.7 million includes a slight leap from the prior year, with no major shift in market exposure. In fiscal year 2020, just a year after taking our CV2, CV22 and CV25, these products generate production revenue from 1,000 customers. It is still very early with CV revenue only a few percent of the total revenue, but with more than 100 different CV customers purchasing engineering parts, evaluating kits, and our development boards in fiscal year 2020. This foundation of activity gives us confidence our CV investment will take another major step forward.

Looking into fiscal year 2021, momentum in our strategy-focused area of CV is strong and we expect CV to reach 10% of total revenue for the year. Our goal is to grow our total revenue in fiscal year 2021, despite the headwinds and uncertainties. At a recent Consumer Electronics Show in January, we experienced a strong turnout with more than 250 customer and partner meetings. With more than 20 indoor and outdoor demos, we exhibited our latest solution for automotive and home monitoring applications, as well as a few new applications, such as access control, robotics, retail, and logistics.

During CES, we announced our first SoCs with automotive safety integrity level B, also known as ASIL-B for safety-critical automotive applications. CV22FS and CV2FS target forward-facing monocular and stereovision ADAS cameras, as well as computer vision ECUs for L2+ and high level of autonomy. Featuring extremely low power consumption, this two SoC make it possible for Tier 1s and OEMs to surpass new car assessment program, or NCAP, performance requirements within the power consumption constraints of single box windshied-mounted forward ADAS cameras.

NEDA a German-based Tier 1 that is one of the largest global supplier to the passenger and the commercial vehicle market, announced it was working with Ambarella on the next generation of intelligent viewing platforms including Surround View Visualization, Driver Monitoring stand-alone vision processing, and e-mirror solutions during CES. [indiscernible] CVflow SoC for their combination of high quality imaging and advanced AI processing enables ZF to offer a wide range of viewing and interior sensing applications.

German ADAS software supplier HELLA Aglaia demonstrated its latest deep learning-based, ADAS software suite running on CV22 SoC. The AI algorithms included multiclass object detection. Detection of driving areas limitations, depth estimation, and classification of traffic lights and the traffic signs. HELLA choose Ambarella CVflow SoC due to their ability to deliver extremely high computer vision processing performance with very low powered consumption.

At our CES location, OEM Mercedes-Benz provided live demonstrations in one of their Sprinter Van of corals for cargo recognition and organization system. The system is designed to make the parcel-delivering process more efficient and deleverages both AI and the stereo-processing capability of CV2 with multiple CV2 SoC program. A rapid expanding list of third-party software develops have chosen to invest resource to develop deep learning AI software on our CVflow platform with a number of these companies demonstrating at CES.

For example, StradVision demonstrated both forward facing ADAS and trouble monitoring instrument simultaneously on a single CV22. More than 17s, forward facing ADAS and recording solution runs on CV25 and target flips in the passenger vehicles. Eyesight’s driver and interior camera system ran three cameras on one CV22. Any vision retail analytics platform was based on four live CV22-based cameras. And the third time’s forward-facing ADAS and the driver monitoring system ran on our CV22.

At the CES Ambarella’s level 4 autonomous vehicle demonstration platform, EVA, or embedded vehicle autonomy successfully completed over 140 autonomous rides on Las Vegas streets. The rides were conducted both during the day and for the first time at night. The EVA cars leveraged Ambarella’s CV22-based stereo SuperCam cameras and Ambarella’s L4 demonstration [indiscernible] together with radar, but without LIDAR.

The demonstration included generic obstacle detection protection and vehicle, bike, motorcycle and the traffic sign detection in the classification. Traffic light detection and management, task planning and autonomous parking.

Ambarella also demonstrated a CS and AI-based three-camera and three-mirror solution running on our single CV22 SoC. This mirror system’s left and right side mirror not only provides an improved field of view in difficult lighting conditions, but by leveraging our CV4 processing in the same chip, we could provide a blind spot detection warning when bikes, car or pedestrians were present.

During CS, Ambarella announced and demonstrated solution for two new AI market applications, 3D excess control and the robotics. Ambarella’s 3D sensing platform addresses access control, security panels, smart-video locks, video doorbells, and a face-recognition pin assistance. The platform is based on Ambarella’s CV25 CVflow AI vision system and chip. On semiconductor RGB-IR imaging sensor and the structure life powered by Lumentum’s vixels.

The sensor uses single sensor for both visible and infrared images for depth sensing. The Ambarella CV25 SoC powers that processing and has floating algorithms, 3D facial recognition algorithms and the leader encoding on a single chip, significantly increasing system capacity.

And Ambarella’s new robotic platform facilitates the development of robotic applications based on Ambarella CV4 SoCs. It targets automated-guided vehicle, or AGV, consumer robots, and industry robots. The robotics platform provides a unified infrastructure for the most common robotics functions, including new processing and open-source contributed, or open CV functions. Our demonstration included a single CV2 chip performing stereo processing, object detection, key tracking, occupancy grid, and video audiometry.

I will now take a little time about something – some additional customer product information from the last quarter, starting with professional security. Ambarella solutions announced in February, the launch of a new addition of the video security portfolio, a visual H5A camera. Based on Ambarella’s video processing SoCs, the new H5A camera line is a close effective solution for budget-conscious video security that requires a small footprint camera for auto use.

Telco, a recent spinout of the global industry giant Schneider Electric intends to announce in March the Sarix enhanced series 3 camera targeting critical infrastructure customers such as airport, CVs, gaming and other enterprises and smart CV customers.

Based on face Ambarella’s CV SoCs and build with the industry-leading image quality, performance, roughness, and the deep learning analytics, these cameras are expected to be shipping later this month.

At IACOS, a security exhibition to be held later in March, Videotec, a major professional security camera OEM and ODM in Taiwan, will all demonstrate their new CV4-based camera. This outdoor fisheye camera will feature 6-megapixel H265 encoding, IP 66 and IK 10 ratings, smart IR, WTR approval, local working and an embedded smart 360 VCA analytics, including intruder detection, crowd detection, and loitering detection.

In the consumer security camera market, home security and automation firm ADT revealed its first do-it-yourself home security platform built by ADT. Ambarella’s H5 or H2L are designed for indoor, outdoor, and doorbell cameras in this platform, all capable recording 1080p videos.

Chinese home monitoring camera maker [indiscernible] introduces a 1S camera, the first consumer model to feature Ambarella’s CV4 SoC, based on our CV25 SoC the camera included facial recognition, path, and vehicle recognition, also tracking and support for Amazon Alexa.

I will now talk a little about some of the product introductions from automotive markets. Gentex Corporation and Aston Martin announced they are joining to develop a camera-based rear-vision system that dramatically improves the driver’s ability to monitor traffic to the rear and the sides of the vehicle.

The Ambarella based prototype was demonstrated at Gentex CES booth in Ashton-Martin DBS Superleggera. Lot of spots and passenger coach OEA in China Etong will use a forward-facing ADAS camera based on CV22 AQ in their commercial fleet. Based on Tier 1 TerraMax IFVS 500, the system provides autonomous emergency brake for vehicles in the pedestrian and lane-keeping functions.

During the quarter, Garmin introduced its tandem dash camera featuring two lenses, each with a 180-degree field view to record in front and inside the car, to provide complete coverage around the driver, featuring 1440 resolution video and night vision, the tandem camera is based on Ambarella’s A12A automotive SoC.

Nextspace, the U.K. and Europe’s leading dash camera supplier introduced its 622 GW model. Based on Ambarella’s H22 automotive SoC, the camera records a 4K video at 30 frames per second and includes image stabilization, super slow motion, night vision and Amazon Alexia integration.

In the China OEM automotive market, Nissan introduced its Nissan electric vehicle featuring a car recorder as a standard feature, supplied by [indiscernible] and based on Ambarella’s S2R SoC, the car recorder offers full video recording. And the Korean, dash cam leader Thinkware introduced new models based on Ambarella’s H22 automotive SoC, the QXD 3,000 and QXD mini, our two channel full HD design with small form factor and super night vision features. While content model is a 4K plus quad HD a design.

In the consumer market segment, Chinese sports and VR camera maker Insta360 introduced its new 1R smooth camera based our H22 V75 SoC. The camera includes a one each sensor, AI Cuba editing software and unique twin mode, which enables camera to offer 5.7K resolution, 360 degree capture or focus P60 wide-angle video.

In summary, fiscal year ’20, we presented a major step forward as we began to establish the commercial foundation for nearly $400 million investment into AI and the computer vision. The three-way we receive revenue, we have previously articulated are all taking shape. That’s why we’ve won in the professional security camera market – where we have a seven customers in production, and this wave, things are very strong position to become material in calendar year ’20.

In wave 2, the home monitoring market, we have two customers’ introduction and we expect these activities will remain high this year with revenue becoming maturing, kind of in year 2021. In the automotive market, we are generating production CV revenue from three fleet and aftermarket customers, and this activity is high across many different locations. We continue to expect auto CV revenue to become material in the calendar year 2022 and calendar year 2023 timeframe.

AI and CV are bringing new product cycle to our existing markets, like security cameras. But most importantly, as you saw at CES, this new product are enabling multi-billion expansion of our serviceable market into vehicle, smart cities, smart homes, industry 4.0 logistics and other robotic applications. Despite the global uncertainty surrounding us, I want to thank Ambarella’s 761 strong team for their perseverance and the successful execution during this critical phase [indiscernible] our company. And we are thankful to all of our other stakeholders, including customers, vendors, and shareholders for your support.

Now, I will turn the call over to Casey for the fourth quarter financial details and guidance for our first quarter of fiscal year 2021.

Casey Eichler

Thank you, Fermi and good afternoon, everyone.

Today, I’ll review the financial highlights for the fourth quarter and FY ’20 ending January 31, and provide a financial outlook for the first quarter of fiscal year ’21.

During the call, I’ll discuss non-GAAP results and ask that you refer to today’s press release for 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. Revenue in FY ’20 increased slightly to $228.7 million with revenue by market similar to the prior year with security camera in the 60% to 65% range and the balance split between automotive and other.

For FY ’20, non-GAAP gross margin was 58.5%, down from 61.2% due to lower margins in professional security camera and other markets, partially offset by higher auto margins.

Non-GAAP operating expenses decreased 2% primarily due to foreign credits included in R&D. Even with non-GAAP R&D expense at 38% of revenue, our operating cash flow was a positive $39.4 million for the year, with no debt, net cash and marketable securities totaling $404.7 million.

Our Q4 revenue of $57.2 million was slightly above the midpoint of our guidance, $55 million to $59 million, and in line with consensus. These results represent a decrease of 16% from Q3 and an increase of 12% when compared to the same quarter of the prior year. As expected, auto and security were down while other revenue increased sequentially.

Non-GAAP gross margin for Q4 was 58.7% up about 60 basis points from the prior quarter and slightly higher than our guidance of 56.5% to 58.5%, primarily due to mix. Non-GAAP operating expenses for the fourth quarter was $30.5 million compared to $29.3 million in Q3. This was close to the midpoint of our guidance of $29.5 million to $31.5 million.

Other income was $1.7 million and primarily represented interest income on cash and marketable securities. Non-GAAP net income for the fourth quarter was $4.9 million or $0.14 per share compared to $11.3 million or $0.32 per share in the third quarter.

The non-GAAP effective tax rate in Q4 was benefit of 1.66%, better than our guidance of 10% at the end of Q3 due to tax law change in Taiwan, foreign tax credits and lower taxable income in foreign jurisdictions.

In the fourth quarter, the non-GAAP earnings per share were based on 35.1 million shares as compared to 34.8 million shares in the prior quarter.

Total headcount at the end of the fourth quarter was 761 with about 81% of our employees dedicated to engineering, most of them focused on software. Approximately 69% of our total headcount is located in Asia.

In Q4, we generated positive operating cash flow of $4.1 million, total accounts receivable at the end of Q4 were $18.5 million or 30 days sales outstanding. This compares to accounts receivable of $21.6 million or 29 days sales outstanding at the end of the prior quarter. That inventory at the end of the fourth quarter was $23 million compared to $19.8 million at the end of the previous quarter.

Days of inventory increased to 82 days in Q4 from 59 days in Q3. We had two 10% plus customer – revenue customers in Q4. WTMicroelectronics, a fulfillment partner in Taiwan, who ships to multiple customers in Asia, came in at 63% of revenue; and Chicony, a Taiwanese OEM, who manufactures for multiple customers, primarily U.S. based, came in at 18.7%.

I’ll now discuss the outlook for the first quarter of fiscal ’21. We expect total revenue for the first quarter to be in the $52 million to $57 million range or down 1% to 9% sequentially, which is less than our typical seasonal decline in Q1.

In Q1, we anticipate all markets to decline seasonally with the exception of the home security camera market where we are seeing strong and broad-based demand.

As Fermi discussed, the geopolitical and now public health factors are bringing significant uncertainty to our forecast in demand and supply, and we are taking measures to protect our employees and operations.

In November, we estimated two professional security camera customers in China had pulled in roughly $10 million of revenue from fiscal year ’21 to fiscal year ’20. And while we’re starting to see weaker ordering patterns from one of these customers in Q1, we still believe a vast majority of the safety stock and inventory has not been depleted.

Going forward, we remain concerned about the dual China and non-China supply chain that is being created and what that means as it relates to our ability to continue to supply to our customers in China.

In addition, due to COVID-19, we have started to see some order push outs and cancellations. And our Q1 guidance assumes these recent trends continue in the quarter. Needless to say, forecasting is extremely difficult.

We estimate Q1 non-GAAP gross margin to be between 57.5% and 59.5% compared to 58.7% in the fourth quarter. We expect non-GAAP OpEx in the first quarter to be between $33 million and $35 million with the increase in Q4 primarily coming from engineering headcount, payroll tax accruals and other engineering expenses.

In Q1, non-GAAP tax rate should be modeled in the 10% to 13% range versus the benefit of 1.7% in Q4. We estimate our diluted share count in Q1 to be approximately 35.4 million shares. We are closely monitoring the public health crisis and we really evaluate external events on a case-by-case basis. We intend to limit the number of executives at each event.

Currently, we intend to participate in the Morgan Stanley TMT conference and the KeyBanc Emerging Technology Summit on March 4. Although, with KeyBanc’s request, we have converted our fireside chat to one-on-one presentation. We also expect to participate in the ROTH conference on March 17th, and the Bank of America Auto Summit on April 7th. Please contact Louis for more details.

Thank you for joining our call today. And with that, I’ll turn it back over to the operator for questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from the line of Adam Gonzalez with Bank of America Securities. Your line is now open.

Adam Gonzalez

I wanted to start with a more long-term question. Fermi, you guys first started talking about this access control opportunity at CESE. You spoke a little bit about it tonight. Can you just give us a sense of what the longer-term opportunity there is?

Fermi Wang

Yes in fact, this technology can be used in many different applications. We kind of touched on – our [Opel] like – just for example, enterprise access control. But it can be applied to many other applications, for example, the payment systems in China they use facial recognition as the way to do identification. So, as you know that the biggest challenge of current face detection everything is that you can be easily fooled by some using a picture or other materials.

So that using – some kind of 3D lightning structure to enhance the algorithm it become necessary for this application. And I think we could estimate the total marketing size of the unit number, we’re talking about probably tens of millions, closer to 20 million to 30 million units and growing fast in the future. So and we also believe, because for the security reasons, the technology required for this kind of system will continue to grow so that we need to continue to better in terms of AI technology for different sensing technology, as well as providing more fusion of different kind of sensor to provide higher confidence on those face detection access control.

So, what I’m trying to say is we think this is a new market and we feel a lot of – we’re addressing a lot of needs from the traditional as well as new applications. And the – most of the things really interests us is we believe the technology requirement for this market will continue to grow, which plays to our strength.

Adam Gonzalez

And then, Casey I have one follow-up. In the press release you talked about growing revenue overall this year, and I appreciate there are a lot of uncertainties with the geopolitical environment and virus concerns. You also outlined in the prepared remarks that your end-market exposure is relatively the same as last year, which I think implies that consumer and your legacy nonstrategic areas is still 10% to 15% of overall revenues, at least?

Could you just help us understand, first on the consumer legacy side, how is that business going to wind down? What do you expect that business to grow and then what are the puts and takes in terms of growing this year overall? Thanks.

Casey Eichler

Well, to kind of clean up the first part of that yes, we’ve said in the past that revenue is about 60% security, 20% auto, and 20% other. And what I’m indicating is it roughly came in at that level. Obviously, we had some pull-ins in the professional security side. But we think – the mix stayed about the same. From the other section, and in particular in a couple of our consumer areas, we had some new product introductions that actually did better than we were forecasting.

So, we saw stronger revenue there last year and I think we’ll continue to see that into this year. But it hasn’t changed our perspective that over the next three to five years we think that is going to continue to decline. But there happens to be a couple current products right now that seem to be helping us there and that’s constructive. As far as the puts and takes, it kind of goes back to Fermi’s comments. Between the China and the virus uncertainty, automotive industry continues to be – it was soft last year, continues to be soft.

And the visibility issue that – of how much disruption we’ve seen or we’re going to see, it’s really hard to say exactly how that’s going to shake out. We’re going to continue to give you good guidance on it. We continue to be excited about our penetration in the markets, and probably most excited about the CV adoption, which isn’t necessary just of this year’s story, but it really sets up the future of the company that Fermi’s been talking about.


And our next question comes from the line of Matt Ramsay with Cowen. Your line is now open.

Matt Ramsay

Fermi, I wanted to talk about the CV adoption. And I think in the prepared remarks you talked about CV being on the order of 10% of revenue in the upcoming fiscal year. That might – I don’t know if that’s above your expectations, about what you guys expected. I assume most of the business you’re picking up from Huawei’s challenges internationally is still non-CV?

So maybe if you could just give us some puts and takes there and what end markets and maybe what China exposure are you guys thinking about of that 10% of revenue that might be CV-based this year? Thank you.

Fermi Wang

First of all, I think that you are right. The CV revenue increase that we see this year, maturity comes from the non-Chinese customers. And especially we announced – we mentioned five customers already like – [indiscernible] Motorola, Harmonic Inc., Panasonic, Vivotek, Telco, you can see that trend. From the professional – this professional IT security camera guide generated – majority of the CV revenue this year. So, we can see that it’s really about the new powerline introduced from our non-Chinese customer at this point.

And we continue to feel confident about this 10% guidance for CV revenue. And I think that we talked about, we have – in addition to the 10 million – sorry 10% revenue growth. We also talked about we have more than 100 customers buying the design kit, engineering parts, and development boards in fiscal year 2020, which really builds a huge base for us to grow in the future. So, I really think this is an important portion of discussion.

And also that you talk about China, I think our China exposure, you need to look in two different ways. First of all, there are a lot of product in manufacturing in China. We talked about we estimate probably 40% roughly in manufacturing in China. But we also talk about how indoor using our chip manufactured in China, but our export through the outside China. So, we think our end-customer exposure in China is roughly 20% of total revenue. I hope that help you to clarify the questions.

Matt Ramsay

No thank you very much for that, Fermi. That does help. As my follow-up, Casey, I noticed that – we talked about here on the call the different uncertainties around geopolitical stuff and with the virus. But – it looks like you guided OpEx up on the order of 10% sequentially. Maybe you could walk us through the new areas of spending and which pieces are ramping? And then also if things do get tough from some of these variables, how much flexibility you have to limit that spending growth? Thanks.

Casey Eichler

Yes. So a majority of that increase is coming in engineering. And that’s in two places. One is, we continue to hire in that area and continue to push the CV platform in the new product introduction there. And so that’s a portion of it. It also is our largest number of employees and when the first of the year comes around, the employee taxes kick in and all the other things that you see in the beginning of the year typically. And so that adds to the engineering line in particular, but across the board, to everywhere.

The other thing that runs through engineering is, as we start to go to lower geometries and cat tools continue to get more expense, mass costs continue to get more expensive, so the amortization of that through the P&L also builds as we start to build these higher – or lower geometry, higher development projects.

Fermi Wang

Matt, this is Fermi. I would like to add, you should expect that we have our first 5-nanometer tape-out this year. Which basically explain to you that the ORE, we have to put into our budget, as well as the cat tools we have to buy to get the 5-nanometer tape-out is extremely higher than the whole PayPal in the past.


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

Ross Seymore

Thanks for letting me ask a question. Congrats on the solid guide. I guess either Casey or Fermi, I guess that’s where I wanted to start with my first question is, if we went 30 days ago, you talked about kind of down, I think low double digits was normal seasonality, and then you have the concern about the inventory digestion from the two big Chinese security camera customers. I guess what’s changed since then that leads you to kind of guiding down roughly 5%, because it seems like the world’s gotten more uncertain. And yet your numbers are better despite highlighting accurately all those uncertainties. So something seems to have gotten significantly better. So any color you can provide on that would be helpful.

Casey Eichler

Right. So, first of all, the previous guidance we provided was 90 days ago in the previous conference call. I don’t think we provide any guidance in any earning call till now. But hardware, you are right, that things changed. I think the Q1 seasonally is a weak quarter for us. And we continue to see the weakness across the market except in consumer security, IT security camera market and we see broad based as well as a higher demand than we expected than before and led by one large customer ring.

So in general, we do see we’re doing well in the market and our customers are doing well in the market. That’s basically the main reason showing some strength in our forecast, our guidance at this time.

Ross Seymore

So is it basically, if it wasn’t for that customer, that’s kind of the primary delta?

Fermi Wang

No, in fact, I say it’s not led by one customer. But this is really a market we’re talking about. We’re talking four-based, customer-based. In fact, we are many consumer IT camera customers. And most of them show strength in Q4 and on the forecast on the Q1. So that push, of course, is our largest customer in this space and they are leading our [indiscernible] forecast.

Ross Seymore

Got it. Okay. Thanks for that. And I guess a slightly longer term question but still the same sort of financial bent to it. The line that you have at the end of your press release saying that your goal is to grow revenue for the year, what are you trying to capture in that? Because you’re starting the year up the better part of 15, mid-teens at least, year-over-year, is there a seasonality difference that you guys expect this year with that $10 million or is it just an abundance of caution given – or an abundance of uncertainty given what’s going on in the world with the virus and geo-political, et cetera?

Fermi Wang

First of all, I think we’ll establish a goal this year that we definitely think – we want to have a growth year this year. And before this COVID-19 situation, we do see, like I said, a strong forecast in certain market segments. And although we cannot predict or forecast what’s going to happen in the next three quarters, we want to maintain the goal that we want to have a growth year, particularly with our strength on the CV, and which is our basis of growth. And hopefully that we can have a stabilized market in the next three quarters. We want to achieve the goals that we set up earlier this year.


And our next question comes from the line of Joe Moore with Morgan Stanley. Your line is now open.

Joe Moore

Just following up on the last question. As you guys have looked at these risk factors that you talked about around COVID, can you give us a sense of how much you might – that might have changed your forecast? Because we hadn’t seen that situation, is it possible to quantify how much of an impact that was?

Fermi Wang

Joe, I think it’s hard for us to provide the whole-year guidance at this point. And COVID-19, obviously there’s an impact to our forecast. And we tried to factor that in our Q1 forecast already. And —

Joe Moore

Yes, I meant just more for the quarter, not for the full year. Just for the quarter.

Fermi Wang

For this quarter, we – I definitely think that with the one month already into the bag and we look at the forecast – we do have the forecast for the next two months. We think – we feel relatively good about our current guidance.

Casey Eichler

Yes, Joe, it’s difficult to say how much impact it’s really having. What we did is we looked at what we’re seeing early in the quarter and what we might expect is or anticipate is further cancellations or push-outs, and tried to work that into our guidance. But we’re kind of caught here because of the one month off from December in a place where all of this is happening really pretty quick in the last week or so. And so, what we tried to communicate is that we tried to factor it into our guidance not only what we’ve seen, but what we think we’re going to see for the quarter.

Joe Moore

And then as you talk about 10% CV for the year, I assume that’s still primarily professional surveillance. And it seems like that means you’re exiting the year at a – with a pretty reasonably good percentage of your professional surveillance business having transitioned. Is that – any context I’m missing there and just maybe you could just kind of help us what that progression looks like.

Fermi Wang

I think we ended the fiscal year 2020 with some initial ramp-up of our professional IP cam. And we made some assumption on how fast the ramp-up will happen this year. And also, concern the factors of the geopolitical situation in COVID-19. But we’re also putting some of the forecasts [indiscernible]. So, between the professional IP camera for the whole year revenue and some of late Q4 consumer IT revenue, that should be the big portion of our [indiscernible].


And our next question comes from the line of Quinn Bolton with Needham and Company. Your line is now open.

Quinn Bolton

Congratulations on the nice spread. I guess just following up on Joe’s question, it sounds like you’ve got a pretty good backlog on hand over the next couple of months. And you’ve judged that down for COVID-19. So, are we right to assume that if you shipped everything in backlog; revenue would have been higher than what you guided? So, you’re actually expecting some pushouts or cancellations from what’s in backlog today?

Casey Eichler

As we said, we’ve seen some already and we have kind of – we don’t think that’s over. We’re going to see some – so, by definition, yes, some of that. Now, you’re always hoping, of course, it’s pushed, not cancelled. And so, initially it tends to be pushed and we’re hoping that that’s the case. But we generally see an increase in business in Q2 and another increase in business in Q3.

And so, all bets are kind of off as far as ordering patterns and how things are flowing today. But we will see some of that, or we hope to see some of that in Q2, because it starts, like I say, it’s pushouts, and what you hope is some of that at some time will get cancelled possibly but you hope you have more pushouts than cancellations.

Quinn Bolton

Great. And then second question. I think subsequent to your – the last quarterly earnings conference call, it seems like the commerce department has increased chatter about potentially changing the de minimis rule. It still sounds like, from your comments today, that a $10 million pull-in to fiscal 2020 and out of fiscal 2021 is the right amount of inventory, that you haven’t seen further inventory build as a result of potential de minimis rule changes?

Fermi Wang

First of all, de minimis rule hasn’t changed. Of course, they are a lot of discussions, but we haven’t seen it change. In terms of the inventory good from our Chinese customers, I think in Q4, they did exactly what we expected them to do. And for Q1, like Casey just reported, one of the customers showed some weak ordering pattern. So, we believe they are trying to decrease their inventory starting this quarter. So, based on that, we believe that the $10 million inventory is still there and that it will take time for them to use all of that.

Quinn Bolton

Great and then just lastly from me, you talked about the 10% of revenue from CV applications, mostly professional security this year. But I think in the script you talked about three sort of aftermarket automotive CV-based wins I’m just wondering if you could give us a timeframe. Do you think that those aftermarket designs could start to ramp in some meaningful way in calendar 2021 or is, even those aftermarket more in the calendar 2022/2023 timeframe?

Fermi Wang

No, I think for those three products we mentioned, I think the ramp up will be this year. But however the size, because of the aftermarket wasn’t fleet management in terms of the volume is not going to be as meaningful as professional security camera that we’re seeing right now. So, I do believe that although the three production products we talk about in the automotive side will contribute, but it’s going to be less than professional IP and cameras.

Casey Eichler

A little bit of that.

Quinn Bolton


Casey Eichler

The temper on the auto was obviously, as we talked about, auto was – is an industry softer last year. And we see that somewhat carrying forward into this year. So that makes you kind of temper your comment, as well.


And our next question comes from the line of Suji Desilva with ROTH Capital Markets. Your line is now open.

Suji Desilva

Just a quick financial question first, Casey. The fiscal 2021 growth revenue guidance – what’s the assumption first in there about the consumer legacy? Is that part stable, is that part declining, just any color there will be helpful?

Casey Eichler

Again, right now we’re seeing it pretty stable. As we saw last year, we thought we were going to start to see a bigger decline than we really saw. So for the year, we really haven’t guided on anything. But right now, it feels pretty stable. This obviously, from a consumer standpoint, this quarter is typically weaker because it’s after the Q4 timeframe. So, even if it was stronger than usual, it doesn’t necessarily mean it would be up. It just would be down less than you might expect.

Suji Desilva

Okay, that’s helpful, Casey. And then a question on the OpEx growth in terms of what’s driving the – you’ve reached 100 engagements on CV so, congratulations on that. Are you seeing partners and channel folks helping you kind of source new engagements or are you still having to deploy people to acquire and then support these additional customers or is the engineering really for the product roadmap and support there? Any color on – where the resources are going to would be helpful?

Fermi Wang

Yes, the go-to-market strategy is still the same. We are leveraging our partners – our business contact. For example, we mentioned the five, six, super partners. They’re all doubling our system, helping us to acquire customers based on their market approach. At the same time, we still have – using our own marketing ourselves to try to capture customers. So, we’re using both. In fact that trying to get a lot more super partners to put our CV silicon. The main reason is – with their help we can access to more customer quicker than by doing everything ourselves.


And our next question comes from the line of Charlie Anderson with Dougherty & Company. Your line is now open.

Charlie Anderson

Yes, thanks for taking my questions and congrats on all the CV progress. Wanted to start with some of the comments around CV more material and OEM for automotive in the 2022-2023 timeframe, I wondered to what degree you guys have visibility today on any wins there. And then as you kind of consider how this year plays out, what would be some of the goals in terms of achieving those and what areas and specifically do you think you’ll see the early success that result in that 2022-2023 ramp? Thanks and I got a follow-up.

Fermi Wang

Right, so for the OEMs, I think there’s a multiple direction that we’re following up, right. So one thing is, for example we talked about – electronic mirrors and we finally start seeing momentum there. And we do believe that will help us to address that with three areas ramping for the calendar year 2022-2023. As well as – the month [indiscernible] that definitely is happening.

And we are – more importantly, the most important thing for us is to continue to talk to the Tier 1s and OEMs for the ADAS and the L2+. I think that’s the biggest area that we spend most of our engineering marketing resource to secure design wins as well as helping our customers. So, all the three areas are the key focus for us right now.

Charlie Anderson

And then for my follow-up Casey just a couple housekeeping on gross margin. It was obviously strong. Sort of curious what you view as the trajectory there. And then inventory you’ve been bringing it down, but you did build a little bit this quarter. So, I’m just kind of curious your thoughts there as well? Thanks.

Casey Eichler

Yes, from an inventory basis, I feel that we’re still pretty lean. Obviously, when we came into the beginning of the quarter, we had a little bit more inventory. And that’s because we saw a little bit more opportunity or a little bit more activity in month one. And so, we had built inventory a little bit, but there really isn’t much to read into that. As far as from a margin perspective, we don’t give longer term guidance other than our model or our target.

We’re kind of hovering around the bottom of that target right now, as I think Fermi mentioned or we both mentioned in the past. Although you aren’t going to see significantly higher margins on the CV products, you are going to see twice the ASPs which gives you the operating leverage that we’re really looking for.

So depending on the mix and what we see happening in the professional business, in particular in China that will really guide kind of where we are in our range. But we’re going to maintain the range at 59 to 62 and work to get back not only in it – but higher up into it than where we are.


And our last question comes from the line of Tore Svanberg with Stifel. Your line is now open.

Tore Svanberg

Yes, thank you. My first question is on the R&D efficiency. So you announced the CV22 and CV2FS products in January. Are these sort of very simple derivative products from a cost perspective or is there still a lot of heavy R&D that goes into those products? I’m just trying to understand, because it does seem like those are very specific for auto?

Fermi Wang

Yes so, from a purely video-processing and AI technology point of view, CV2 and CV2FS for example, are similar. However, the biggest challenge for CV2FS is to build ASIL-B, which is auto grade silicon that amount of engineer effort, not just developing new technology, but follow the process, follow the standard so that we can say we can pass ASIL-B qualification. That’s a significant investment and has been viewed as a big barrier to get into the automotive business.

Now we’ve reached that and we are confident we are going to pass the ASIL-B qualification. I think that investment is behind us, but however, that’s really tight – I think that’s basically. If you view that as a barrier that we have to cross over to get in auto, but from an engineer point of view, from a technology point of view, it’s just similar to the CV2.

Tore Svanberg

That’s really helpful. And Fermi, you mentioned 5-nanometer. When should we expect products to be in production on 5?

Fermi Wang

Well what I said is, we are planning to take our first 5-nanometer chip, but we haven’t talked about the product plan and how we’re going to – what kind of product will it be based on 5-nanometer . But based on our history, you should expect that we’re going to build 5-nanometer product across the board for auto, for security camera, for smart TV, smartphone and it will be a family of chips.

I think that – we kind of basically say we are going to skip 7-nanometer and go to 5-nanometer – directly with our engineering investment. But you should see that in the next few months – after we take our 5-nano, we’re going to provide much more detailed description about our plentiful products with the 5-nanometer products.

Tore Svanberg

Sounds good. One last question for Casey. Casey, the R&D is obviously slipping quite a bit here in the April quarter. Will it kind of flatten out do you think a little bit, for the remaining quarters or will we continue to see these types of step-ups?

Casey Eichler

Yes so again, we don’t typically guide beyond one quarter. But what I’d say is you’re not going to see a step function like that throughout the year. Like I said, there’s some unusual things that come in, like the payroll taxes and some of those that tend to feather out as we get further into the year. So, I think you’re going to see us continue to invest in the R&D and in our OpEx we’ll stay fairly consistent where we are today. But you’re not going to see us back off R&D or really accelerate it much more.


Thank you. And this does conclude today’s question-and-answer session. I would now like to turn the call back to Dr. Wang for closing remarks.

Fermi Wang

And thank you for joining us today. I will talk to you the next time. Thank you. Bye.

Casey Eichler



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

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