Ambarella Inc (AMBA) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ambarella first-quarter FY17 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Deborah Stapleton of Investor Relations.

Ms. Stapleton, you may begin.

Thank you.

Good afternoon, everyone, and welcome to Ambarella's first-quarter FY17 financial results conference call.

Thank you for joining us today.

Our speakers will be Dr. Fermi Wang, President and CEO; and George Laplante, CFO.

The primary purpose of today's call is to provide you with the information regarding our fiscal first quarter.

The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, our 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 that we file with the SEC, including in the annual report on Form 10-K that we filed on March 25, 2016 for the FY16.

Access to our first-quarter results press release, historical results, SEC filings, and a replay of today's call can all be found on the investor relations portions of our website.

Now I will now turn the call to Dr. Fermi Wang.

Thanks, Deb, and good afternoon.

Our Q1 2017 revenue was $57.2 million, representing a decrease of 19.5% from the $71 million of revenue in the same period in the prior fiscal year.

The year-over-year revenue decrease was driven primarily by a decline in the wearable sports camera market, as we forecasted during last quarter's earning call.

Revenue from flying cameras was strong, and we also enjoyed continued revenue growth for our new home monitoring applications.

Design win activity was strong across all market segments, with increasing adoption of Ambarella's new 4K and HEVC SoC solutions.

As we look forward, however, we anticipate the disruption in the availability of Sony image sensors caused by the April 14 Kumamoto, Japan earthquake has and will impact our customers' ability to build cameras.

Ambarella is one of Sony's most significant camera SoC partners for non-cell phone applications.

And as a result, this will impact the timing and scope of demand for our chips over the next several quarters.

George will provide further information during the financial section of today's conference call.

In the drone market, we are enjoying solid sales growth, as well as significant design win momentum.

Volumes are increasing as drone price points continue to come down and the consumers' demand high-quality video recording, and photography and the professional users develop more vertical market commercial applications.

During the recent Asia CES in Shanghai, Ambarella demonstrated the industry-widest range of flying camera SoC solutions, including its A12, A9SE and H2 SoCs, all supporting 4K or Ultra HD resolution video at 30 or 60 frames per second, and advanced electronic image stabilization.

In May, Chinese smart phone giant, Xiaomi, introduced its new Mi drones, which offer consumers the combination of a high-quality video and affordability.

The 1080p60 model sells for approximately $380, and the 4K model for $450.

The drone cameras are based on Ambarella's A7L and A12 camera SoCs, respectively, and includes advanced features, including gimbal-based stabilization, outstanding video quality automatic take-off, and a full 30 minutes of flight time.

In April, at the International Security Conference held in Las Vegas, Ambarella introduced its latest IP security camera SoC, the H5, targeting professional high-quality 4K and multi-image IP camera designs.

S5 is Ambarella's first 14-nanometer IP camera SoC, and supports up to 4Kp100 H.264 or 4Kp60 H.265 video.

It is the industry's first IP camera SoC to support a new 10-bit HEVC profile for outstanding representation of a high-contrast sphinx and greater extended color range.

H5 also includes advanced features such as a 4K multi-exposure, high-dynamic ranged fusion, 360 degree de-warping, ultra-low light processing, and a quad core A53 ARM CPUs to support advanced analytics.

In the home monitoring market, Ambarella continued to expand its customer base for our retail brands, as well as for our service providers offering cloud-based security solutions.

During the quarter, security service provider ADT introduced its OC835 outdoor home monitoring camera.

Based on Ambarella's S2L SoC, the camera features HD video, Wi-Fi connectivity, IR illumination, and the built-in heater to allow the camera to function even in an extremely cold outdoor climate.

At the ISC West show, China-based Yi Technology released its Yi Home Camera 2, a smart Wi-Fi camera-based on Ambarella's S2Lm SoC and featuring 1080p HD video, 130-degree wide lens with lens distortion correction, two-way audio, human detection, and baby crying detection.

The Yi Home Camera 2 is available for $129, including a 32 gigabyte micro SD card for local video storage.

Also during the quarter, LA-based Ring announced its Video Doorbell Pro, an ultra slim video doorbell based on Ambarella's S2Lm camera SoC, and featuring 1080p, HD video, night vision, advanced motion detection and cloud-based video recording.

And in May, San Francisco-based August started shipping its S2Lm-based Doorbell Cam, a Wi-Fi-enabled smart doorbell featuring HD video monitoring and the simplest integration with the August Smart Lock.

In the sports camera market, Yi Technology introduced its Yi 2 action camera, based on Ambarella's new A9SE SoC in May.

The camera supports video with a 4K revolution at 30 frames per second, as well as 12 megapixel stills.

It includes 6 axis electronic image stabilization to reduce jerky video during high motion, as well as building lens distortion correction to enable wide-angle viewing without image distortion.

The new A9SE SoC leverages its 28-nanometer process technology to reduce power and extend battery life, allowing the camera to record up to two hours of 4K video on one charge.

In the automotive after-market, Ambarella provides camera SoC solutions for video camera recorders or dash cams.

Additionally, we are now seeing opportunities for video camera recorders to be offered as an integrated option in new OEM car models.

During the recent Beijing Automotive Show, Peugeot showcased its 2016 Dongfeng 3008 model, with factory-installed Garmin video camera recorders.

The full HD camera based on Ambarella's A7L SoC, is seamlessly integrated into the rearview mirror and also provides lane departure warning and a forward collision warning driver assistance.

At the recent consumer electronics show, Asia, Qihoo 360, a leading Chinese Internet cable company, showcased two new connected dash cameras.

The first model based on Ambarella's A7L SoC, supports a full HD video recording at 60 frames per second for smooth video recording, even at high driving speeds.

The second camera, embedded in the rear-view mirror, makes use of powerful computational compatibility over Ambarella's A12A SoC to provide users with the convenience of gesture control.

Also in the quarter, LeTV, a leading Chinese television and technology and company, launched its Le 1S dash camera, based on Ambarella's A12 SoC.

The camera captures video in super HD resolution, with 44% more pixels than traditional full HD dash cameras.

Le 1S features lane departure warnings, forward collision warning, and front vehicle movement detection, enhancing driver safety and convenience.

Pricing for the camera starts at under $50.

Additionally, Japan-based JVC Kenwood introduced its DVR-610 dash camera.

Based on the A12 SoC, the camera features 3 megapixels Super-HD recording, high-dynamic range video processing, and a full set of driver assistance features.

In addition to new product introduction in our existing markets, we are seeing interest in virtual reality, or VR cameras, which are increasingly targeting semi-professional and consumer price points.

The cameras typically enable full 360-degree video capture by combining images from multiple sensors.

In 2015, Google announced Jump, cameras and the software to make producing VR video simple.

At the recent Google I/O event held in May, Google announced that it will expand its Jump ecosystem by working with Yi Technology on a VR camera, based on Yi's new 4K action camera.

The camera uses Ambarella's A9SE SoC.

Also during the quarter, Isreal-based HumanEyes introduced its "Vuze" 3D, 360-degree VR camera targeting consumer VR movie production.

Featuring 4 full HD stereo camera pairs, and based on Ambarella's A9SE camera SoCs, the camera enables users to capture, import and share 4K 3D 360-degree virtual reality video and stills.

And in May, Chinese VR pioneer, Wushilan, announced its "Insta360 Nano" VR camera.

Based on Ambarella's A12 SoC, the Nano offers 360-degree video recording in a very small form factor, allowing easy, direct connection with smartphones.

In summary, we are pleased with our execution during the first fiscal quarter of 2017, as we introduced our first 14nm IP camera SoC, and we continue to see strong design-win momentum for our new SoC families across all market segments.

While near-term headwinds remain in the wearable sports camera market and there is some supply disruption of Sony image sensors as a result of the April earthquake, we remain confident of renewed revenue growth based on our technology leadership, product road map, and the potential of our current and future markets.

I will now turn the call over to George for details of our financial results.

Thanks, Fermi, and good afternoon, everyone.

Today I will start with a review of the financial highlights for the first quarter of FY17 ending April 30, 2016, and then move on to the financial outlook for Q2 of FY17 that ends on July 31, 2016.

During the call, I will discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results.

For non-GAAP reporting for Q1, we have eliminated stock-based compensation expense adjusted for income taxes.

Our Q1 2017 revenue of $57.2 million represents a decrease of 19.5% from the $71 million of revenue in the same period in the prior year.

In the first quarter, we had strong year-over-year growth in flying camera and home security revenues.

In professional security, Europe was stronger than expected, while China was weaker than forecast.

The total Q1 revenues ending with a moderate year-over-year decline.

As forecasted on our Q4 earnings call in March, first-quarter revenues from the wearable market were down substantially from the previous year, finishing the quarter at about 15% of total revenue, due primarily to the significant decline in revenues from GoPro.

The Q1 auto after-market revenues had a year-over-year decline, but were in line with our expectations, as the market continues to consolidate around the major manufacturers.

Non-GAAP gross margin for Q1 of FY17 was 64.6%, compared to 64.1% in the immediately preceding quarter and 64.8% in the first quarter of the prior year.

Gross margin in the quarter was higher than anticipated, due to strength in the drone market and less-than-expected revenues from the lower-margin China security markets.

Non-GAAP operating expenses for the first quarter were $24.3 million, compared to $22.9 million for Q4 2016 and $20.2 million for Q1 of the prior year.

This year's Q1 OpEx increased from the previous quarter primarily due to higher chip development costs, and employer payroll taxes relating to our annual bonus payments.

As we expense the chip development costs, including take-out fees, over the development period, fluctuations occur based on the timing of the engineering effort and the number of chips we are working on.

Non-GAAP net income for Q1 2017 was $11.4 million, or $0.34 per diluted ordinary share, compared with non-GAAP net income $23.7 million, or $0.71 per diluted ordinary share for the same period in the previous year.

The non-GAAP effective tax rate in Q1 2017 was 9.8%.

The increase in the tax rate from the previous year is a result of an expected geographical change in the mix of our profits.

In the first quarter the non-GAAP earnings per diluted ordinary share are based on 34 million diluted shares, as compared to 33.5 million diluted shares for Q1 of 2016.

Total headcount at the end of Q1 2017 was 638, compared to 640 at the end of the previous quarter, with about 82% of employees dedicated to engineering.

Approximately 78% of our total headcount is located in Asia, primarily in Taiwan and China.

We ended Q1 with cash and marketable securities of $323.8 million, adding [$15.5] million (corrected by company after the call) of cash from operations in the quarter.

Total accounts receivable at the end of Q1 2017 were $30.5 million, or about 48 days sales outstanding.

This compares to accounts receivable of $39.4 million, or 52 days sales outstanding in the prior quarter.

Net inventory at the end of Q1 was $17.9 million, or about 81 days, compared to $18.2 million, or 76 days at the end of Q4.

Accounts receivable and inventory remain in line with our Company targets.

WT Microelectronics, our Asian logistics supplier, represented approximately 74% of our revenue in the quarter, compared to 64% for the same period in the previous year.

Ciccone Electronics Company, a manufacturer of camera products for multiple OEM customers, as well as for their own distribution, declined to below 10% of our revenue in Q1 of FY17, compared to 27% for the same period in the prior year.

WT was the Company's only 10% customer for the quarter.

I would now like to discuss the outlook for Q2 of FY17.

We expect revenues for the second quarter of FY17 ending July 31, 2016 to be between $60 million and $66 million, representing a decrease of 29% and 22%, respectively, from Q2 of last year.

Due to the disruption in supply of Sony sensors to our customers as a result of the April earthquake, we have removed potential revenue from the guidance for projects already experiencing Sony sensor shortages, and widening the range to reflect projects at risk.

By way of background, as you may have read, the April 14, 2016 earthquake in Japan damaged the primary Sony factory that produces Sony image sensors used in non-cell phone video-capture devices, causing the facility to halt production.

Sony is one of the leading suppliers of image sensors for mainstream and high-end video-capture devices.

And we estimate that approximately 40% to 40% of our total revenue in each of the next two quarters is dependent on our customers acquiring adequate inventory of Sony sensors, but with the impact varying across both markets and customers.

Although Sony sensor product shortage have begun to impact our customers, the impact is not uniformly distributed across customers due to uneven inventory levels at Sony, in the channel and at customers', for the different sensor models.

Sony sensor product shortages have and will continue to impact our customers' ability to build cameras, and as a result, impact the timing and scope of demand for our chips.

The Sony facility started limited operations on May 21, but does not expect to be fully operational until the end of August.

Based on discussions with our customers, we understand that Sony will not be able to deliver 100% of our customers' demands, depending on the sensor model, for the remainder of the year.

Although Sony is working hard to bring their facilities to full production, our customers' disability as to the timing, their priority in Sony's recovery plan, and their supply volumes of some sensors, remains unclear at this time.

The impact to our customers, and therefore Ambarella, is expected to spread across Q2 and Q3, but it is difficult, based on our current information, to be more specific as to the timing in individual projects impacted.

For the full-year revenues, the impact of the first-half wearables shortfall, as well as the availability of Sony sensor products, will likely dampen the outlook, with total revenue for the year flat to down 5% compared to the previous fiscal year.

Setting aside the Sony sensor issue, from a marketing customer standpoint, we continue to see growth consistent with our expectations in drones, home security and auto after-market businesses.

We expect to have some strengthening of the China IP security market in Q2, after the soft Q1.

And we continue to see a recovery of the wearable market, though this will most likely be seen in the second half of the year.

We estimate Q2 non-GAAP gross margins to be between 60.5% and 63.5%, compared to 64.6% in Q1 of this fiscal year and 65.3% in Q2 of the prior year.

With the uncertainty as to both market and product mix in Q2 due to the Sony sensor shortage, it is difficult to be more specific on the margin.

From my perspective, the margins from our individual products within all markets should be consistent with Q1 results.

But determining the mix is difficult due to the lack of visibility as to Sony sensor delivery schedules.

Due to the wide range of potential outcomes for the quarter, we are not forecasting Q2 net income.

But we expect non-GAAP OpEx in the second quarter to be between $24.5 million and $26 million.

We expect the non-GAAP effective tax rate to be approximately 11% in the quarter, and estimate our diluted share count for Q2 to be approximately 34.2 million shares.

Finally, Ambarella announced that its Board of Directors has authorized the repurchase of up to 75 million of ordinary shares over the next six months.

Repurchase under the program may be made through open market purchases or through other structured purchase programs.

The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and it may be suspended at any time at the Company's discretion.

The repurchase program will be funded using Ambarella's working capital.

I would like to thank everyone for joining our call today.

And now we will turn it back to the operator to manage the Q&A session.

(Operator Instructions)

Matt Ramsey, Canaccord Genuity.

Yes, thank you very much.

Good afternoon, guys, and thanks for taking my questions.

Obviously a lot of moving parts in the outlook.

George, maybe I would ask you to clarify or add any detail that you can to some of the commentary you gave there, just to make sure that all of us got all those numbers right.

I guess maybe the sensitivity of the Sony -- I think you mentioned 40% to 44% of revenue, is that right?

And then if you can help us maybe quantify for the July quarter and for the full year any sort of explicit numbers that you guys maybe have excluded from the revenue line as regard to the Sony shortages?

Thanks.

It is -- 40% to 45% of our revenue is directly connected to delivery of Sony sensors.

We have not quantified in enough detail to actually give what lost businesses at this time.

As we move forward and get more data, and as Sony is able to develop their delivery plans, it may become clearer as to what specific projects cannot go forward.

But at this time, we have not estimated those amounts for external consumption.

Got it.

Maybe just a follow-up to that.

Is there any way to think about the gross margin profile of the camera that use the Sony sensors, just to ballpark it for us a little bit?

There is about a 30-point spread between the different projects that use Sony sensors, all the way from the low-end security, all the way through high-end cameras, 4K cameras for drones and other markets.

That was one of the reasons why I gave such a wide range on the gross margin going forward.

Because the delivery schedule from Sony and the mix that results really could impact on margins.

But saying that, I'm fairly comfortable that, with the range that I gave of 60.5% to 63.5%, we should be able to maintain that range.

Got it, guys.

That's helpful, and I appreciate the uncertainly there, so thanks for the additional details.

Fermi, maybe if I could step back a little bit, just a couple of questions for you at the high level, I guess the first one being -- and maybe it's better to let your customers speak to this a bit.

But I guess how hard is it or difficult would it be for customers to multi-source or switch sources from the image [system] perspective, given the uncertainty of Sony?

That's question one.

And then number two, obviously your primary competitor has been [while-wade] for some time, High [Solution].

Maybe you could give us an update on the competitive dynamics in your business, particularly in Asia, around some folks like Qualcomm are trying to get in the high end, but folks licensing IP-based ESPs and going at lower end of the market.

So I think you guys are quite differentiated.

But any update in the competitive landscape would be helpful.

Thank you.

Okay.

First of all, getting a second source for our customers.

Obviously all of our customers probably want to look for a second source today, but if the fact that you are looking over projects with a different sensor, at this point, usually three to four months of a project.

Because we need to redesign how we get a new sensor, new lens.

And after we get one, we have to go in there to retune the video quality for that particular set.

So that's three or four months delay.

I really don't think at this point, getting a second source will improve this short-term problem.

I think moving forward, will our customers demand a second source, is a different question.

But I do say that Sony provides probably the best solution, especially for the high-end sensors.

If you look at all of the high-resolution 4K sensors that our customers are using, the maturity of them are Sony-based.

So it's going to be an ongoing topic, we're going to continue to talk to our customer.

But to solve this short-term project, changing essentially is not really an option here.

In terms of competition, I think in general, in the last three months, we do not see the competitive landscape change at all.

For high silicon, we still see them as our major competitor in [IP] camera.

And the one thing we did is, after we introduced our H3L and H3L MATV solution, we have a lot of designing momentum, and that is why we believe that we have strong ATV [oil] map for our customer for IP security camera now.

In terms of [core product], the competitive landscape did not change that much either, although they continue to try to approach our customer on the drone side.

But I think they still either focus on the high-end drone for the fly control portion, not the video portion, or for low-end drone, they try to do a total solution.

But in out current latest road map to customers that we show A12 and [A9C] and H2 [could you cover] from the low end to medium to high end.

We have a complete road map to go against our competitors.

So in quick summary, in the last three months, we do not see the competition landscape changed.

Thank you very much for the color.

I will get back in the queue.

Good luck, guys.

Ross Seymore, Deutsche Bank.

Hey, good afternoon, guys.

This is actually Matt Diamond on Ross's behalf.

I know that you stepped away from the former 15% to 20%, and replaced it with a flat to down 5%.

The flat year-over-year growth would imply a big second half.

Is that solely a function of a GoPro rebound, or was there anything else to consider in that potential second half?

It's obviously -- we are expecting the wearable market to return to somewhat normal levels in the second half.

So that is the biggest impact.

But we are also looking at the other consumer markets.

The drones, we feel, will be solid.

Our home security business will continue to grow, as well as professional security, particularly in China, having some rebound for us.

So I think it is a combination of multiple markets, but with wearable being the biggest impact.

Okay.

And I want to ask a question that was asked, a little bit differently, by the last questioner.

What exactly would the fiscal 2Q guide have been without the Japan earthquake?

We haven't given a number there.

And at this point, we feel t is way too early to disclose that type of data.

Understood.

Thanks so much, guys.

Quinn Bolton, Needham and Company.

Just trying to get a sense -- on the Sony impact, obviously you guys don't have perfect visibility.

But George, you described, I think, the production schedule.

Sony just started to get online here in late May, and won't be up to full production until the end of August, if I heard you right.

I just kind of wondering, do you think the impact of the Sony shortage is greater in fiscal Q2 or fiscal Q3?

I mean your guidance for the full year being flat to down 5% doesn't sound like you're going to see much of an impact in Q3 or the second half of the year, just because it implies a pretty big step up in the quarterly revenues.

But would seem to me, in the near-term, guys can pull Sony sensor out of inventory and that the shortage may have a bigger impact a couple months down the road.

Just wondering if you could give us some sense in terms of timing of when you think the impact would be greatest on your business?

If you look at a very high level, the impact is the end of Q2 and into Q3.

So it's sort of the tail-end of Q2, with the majority probably hitting Q3, as we see it today.

The thing you have to really be careful about though, it is wildly different impact customer to customer.

So this is not a -- let's call it a flat impact across every customer.

Some customers have high level of inventories and are able to bridge the gap.

Other customers may be short.

Some customers have delayed projects.

So it is a mixture of impacts, and you have to look customer by customer.

But you can assume Q3 impact is higher than Q2, with both quarters having impact.

Okay.

And even with that impact, the flat to down 5% guidance still holds, and so obviously it's -- if I read between the lines, without the impact, you probably would have been better than flat to down 5%?

Yes.

Got it, great.

And then just, you talked a little bit about weakness in the April quarter for the low-end China.

They came in a little bit below your expectations.

Was that just that there were seasonal factors around Lunar New Year?

Was it inventory digestion from the more aggressive buying patterns into the year-end for those Chinese customers?

Or was there another reason you thought that, that business was a little weaker than expected in the April quarter?

No, I think of was primarily just market-driven.

First of all, it wasn't that significant.

So I think probably burning off inventory due to market conditions is probably the best guess we have now.

There is no major announcements and no major changes in market mix or dynamics out there, competitive dynamics, that would indicate that kind of decline.

And we see it really sequentially coming back in Q2.

So that is probably more market-driven.

Great.

And then just, it sounds like it's not having a big impact, given your outlook for the business to come back in the second quarter.

But just wondering if you had any comment on the mix between IP cameras and analog cameras?

It sounds like the analog HD cameras continue to ship and there is a good upgrade market from FD cameras to HD cameras on the analog side.

And just wondering if you had any thoughts on where the mix was between the analog cameras versus IP cameras in that security business?

Yes, I think your observation is right.

In fact, the analog camera continues to be strong in the last 12 months.

And our latest guess is that this year, it's going to be 50/50 between analog and IP.

That is our best guess, but there is no marketing data of research to support that yet.

But I think if we talk to our customers, they all believe that, because of infrastructure, all the people who use analog cameras is leveraging the existing analog cable they already have.

So moving forward, they [only using] Sony will use IP infrastructure.

In the long term, we still believe IP security camera will be continue to grow.

But the short-term strategy is that the analog camera continues to have strong position in the security market.

Great.

Thanks, George; thanks, Fermi.

Thank you.

Kevin Cassidy, Stifel.

Hi, yes, thanks for taking my question.

Fermi, it seems you got a lot of design activity going on.

And wonder if you could give us a comparison of your 14-nanometer products and the design activity versus some of your past product introductions?

Any type of order of magnitude difference that you are seeing in the design activity?

Well, first of all, I think from a customer interest point of view, I think the 14-nanometer product is -- we would have to say is probably one of the best we have ever seen.

Because not only we upgraded the performance and features and the quality, but at the same time, we reduced the power consumption dramatically.

So I think we got very good feedback from the customers for [this athletic]; and we can see that from design momentum.

But from an engineering execution point of view, this project definitely is more challenging than our previous projects also.

But are we really over the first hump, which is taking our 14-nanometer chip a very healthy way.

And we are confident that we are going to take all of our first [table] into mass production, which is the very high volume for the quality our [VRNS] engineering team to take out a very complicated shipment, and make it right in the first time.

Okay, great.

And could you give us an update on the computer vision, and some of your VisLab opportunity?

Yes.

In fact, like we reported last time, I think that integration went very well, and were happy with the technology and the engineers with regard from VisLab.

And today, I think we are continuing to making very good progress on a computer vision technology.

For example, today our teams is really focused on engineering execution to deliver the [take-out] our first computer vision chip.

And the issue happened before the end of the year.

During the meantime, we are ramping up our software team for different applications.

Like we said before, this chip is not just for automotive.

It is also for drones, it's also for IP cam, also for other possible applications.

So we expect that the software team going to continue to ramp up in the next several months.

So today, that's over execution, and I think that's under our control.

And we are also marketing [to invisibility wellment].

But it's early-stage, we don't have any comment on that yet.

Okay, great.

And maybe just to ask one other question that there seems to be constant concern in the market -- are you seeing any unusual price pressures?

No.

Well, I know a lot of people are trying to compete with us on the price.

No comment -- low inside price pressure is always there.

So we move up to 4K and 4K level, or [you're going to take between] 60 level, we do not feel too much price pressure yet.

Okay, great.

Congratulations on a good quarter.

Thank you.

Charlie Anderson, Dougherty & Company.

Good afternoon, and thanks for taking my questions.

As I'm thinking about this second half that's going to be pretty big compared to the first half, I think usually you are down in Q4 seasonally.

But if I think about the impacts in Q3 of Sony, and maybe a restocking affect in Q4, and then also I think some of the 14-nanometers [something] sampling more availability by then.

Is a possible that we're a little bit smoother up in Q4, and that is kind of what we are thinking in terms of getting to the numbers?

Yes, I would agree with that.

I think the impact to Sony might delay some buying decisions, and Q3 to Q4 will probably be smoother than it has been in the past.

Got it.

And then you guys mentioned really good consumer security expectations in the back half.

I wonder if you could speak to some of the underlying drivers there?

I think in the past, we talked about a percent of overall security revenue, and if you could give us any update on where that is trending, that would be helpful.

I think that the momentum is very good because -- a few things.

First of all, we have been talking about [compact] AT&T, and AT&T service providers continue to ramp up their projects -- they are doing multiple projects with us, and that helps.

But at the same time, we start seeing new applications.

In this announcement, we mentioned two doorbell applications, which I think is going to be a big market or a different market.

And we have design wins with several major customers, and we announced two of them at this conference call.

Beyond that, the traditional home IP camera, home security camera continue grow well.

And overall, I think that the home security camera become a very healthy business for us.

I'll leave that percentage of total revenue to George to talk about.

I think, as we've said in the past, it has been in the mid- to high-single-digits.

And I think as we go into the second half, it probably should be in the high end of that range.

Great.

Thanks so much, guys.

Joe Moore, Morgan Stanley.

Great, thank you.

I wonder on this image sensor issue, I know there's some big smartphone players that are dependent on the same image sensors, and we haven't heard the same concern out of that.

Does a smartphone use a different image sensor?

Are they ahead of your customers in the queue?

What's the dynamics of that?

Right, thank you.

First of all, they are using totally different image sensor.

Our customer is typically using a much bigger obstacle-sized sensor.

For example, the small size we use is well over 2.3, and most of the cell phone guys use a one-third inch sensor, which is much smaller sensor.

So it's totally different.

But more importantly, the majority of Sony cell phone sensor is manufactured in a totally different factory.

The fact that Sony has multiple sensor factories, the one got impacted the most, the one closest to the earthquake manufacture a majority of those high-end sensors.

That's why we see a lot more impact than the cell phone guys.

As a matter of fact, the sensor factories that delivers into our markets was the only one that shut down.

All of the other factories which were delivering into the cell phone market actually kept production running.

Okay, that's very helpful.

And then with regards to the drone market, several questions.

Can you talk about the breadth that you're seeing there?

And obviously a couple of your customers are prominently doing very well.

We have seen others parrot your customer, maybe with a little less revenue growth.

Can you talk about how many vendors are going to be relevant over the course of the rest of the rest of this year?

And how many launches are in the pipeline and how broad do you think that business is going to be?

Okay.

So for drone market, I think you're going to see many customers coming up.

We do not know who is going to [win] or who going to stay, but we tried to [bear down] several customer that we think has the best chance.

In fact that we talk DGI, we talk about [Shellme] design, and we talk about unique.

And we have strong design win momentum that coming.

We're going to a very wide range, from the low end to the high end.

But we also believe that the consolidation will happen very quickly.

Just look at the price point drop, that with Shellme announcing a fully drone at $450, I would say that will push -- will speed up the consolidation on the drone manufacturing side.

So our approach is, we're going to continue to work with the customer we think that has a differentiation, has the capability to push volumes.

And hopefully, they will be the one that stay at the end.

Great.

Thanks so much.

Richard Shannon, Craig-Hallum.

Hi, Ferma and George.

Thank you for taking my questions.

Maybe I'll follow up on that last question here on the drone market, just very kind of high-level for me.

Where do you see the growth for the parts of the market that you are addressing or are addressing better than others here?

If you can talk about it either in percentage terms or absolute units, would be great to get your latest views there, please?

Right.

So today, if you look at a majority [owl ship] in the [2O2] market is all [color-dated] to high-end [Italy], is a [tie-specific] video for 4K video solution, with very good image [improvisation] and the very good flight control.

So that's a market that is existing today.

And also, [Arid], using their own chip solution that enable probably 299 to 499, using smaller drone, but also a strong product.

With these two basically are the two existing markets.

But I -- for example, what we are seeing right now is, the price point of the current high-end drone, like for the 4K drone, is pushing so low, is going down to the -- below 499 and probably 399 range.

And that will push everybody down.

And we have low-end solution like A12, that we think we can enable any flying drone with a very good quality video at 199.

So today we are dominating on the 4K drone, but we do have a road map to circle all the way to the low end in the near future.

And Fermi, when do you see the impact of some of these lower-priced solutions that you are selling into, in terms of your revenue streams?

Do you see it in the second half of the year, or is it going to be later than that?

I think second half of year, you're going to start seeing it, but I think the volume ramping up will be next year.

Okay, that's great.

I'm sorry, Fermi, I didn't mean to interrupt you there.

Okay.

So I'll just add one more comment, is, I think that from a revenue point of view, I think that the low-end drone is going to give us the volume and the revenue growth.

Although that gross margin might be a little lower than our other drone markets, but still probably at the [operate] gross margin range.

Okay, perfect.

My last question, Fermi, again for you.

You talked about -- as well as mentioning in your press release -- about seeing some great interest level and having success with 4K across all of your segments.

I wonder if you can give us your thoughts on where the trends are most dramatic in terms of adopting 4K?

It seems like drones is an obvious one.

If you can talk about that, maybe compare it to other markets here and give us a sense of adoption rates and trajectories of 4K versus HD?

I think drone is obvious.

I think that for sports camera, it's obvious.

I think that for sports camera, all the cameras coming out will have 4K in the near future.

And even on the high-end professional security camera, we start seeing momentum on the 4K.

Maybe not for 4K p30, but a lower [fare] rate.

But the 4K resolution definitely helps our high-end security camera business.

And also, the other market that really requires 4K is virtual reality cameras.

In fact, if you look at most the virtual reality content out there, the one with the biggest problem they are facing is that lack of resolution.

Because there are so many cameras, you need to put them together, and [raffa] resolution means not only the content is not clear, but also probably causing other viewing problems.

So we have seen a lot of interest having 4K, having our VR cameras.

So I think that is basically the momentum on the 4K side.

Okay, that's helpful.

Maybe just a quick follow-up on to that last comment on VR, Fermi.

Is VR a category that can be a meaningful one that you call out in some sort of percentage or relative terms here within, say, the next year?

Can it grow that fast?

As an example, a year ago, drones really seemed to accelerate from nowhere to a meaningful amount.

Does VR have the capability of doing the same thing?

Well, I have to say that I believe VR is more hype than the reality at this point.

So I won't say that a VR camera won't give us meaningful revenue as quickly as drone has done for us.

However, we do see that we have chips that already build for our application.

By changing software, we can really deliver a very good VR camera.

And we want to be a supplier in that business if the market become meaningful for us.

So our approach is, you're going to start seeing multiple companies using our chip to do a 4K VR camera.

But I will not say that they will become meaningful revenue for us in the near future.

Okay.

Thank you for that perspective, Fermi.

That is all the questions for me.

Thank you.

Brad Erickson, Pacific Crest Securities.

Hi, thanks for taking my questions.

Just a couple of follow-ups.

When you look at action cameras through the second half -- or sports cameras, I guess, as you label them -- I guess the early outlook implies you will be up fairly significantly.

Is that basically all coming from GoPro, or is it broader based from other customers gearing up for the holidays?

I think definitely GoPro has continued to be an important part of it.

But we do see that very broad customer base.

Shellme already announced their 4K camera based on [NIC].

And also we do believe there are multiple other customers that are going to announce their product, including GoPro.

So I think that wearable sports, we're going to see a broad base of customers.

Got it, that's helpful.

And then just a clarification.

Within the new guided range for flat to down 5% for the year, is it fair to say drones will be more than 20% of total revenue now?

Or is the 20% still the bogey for the year, for the drone portion of the business?

I think in the second half, we would expect drones to remain strong, and potentially could go up above our previous guidance.

Got it.

And then finally, regarding the automotive OEM win you mentioned in the prepared remarks, can you just compare the ASP margin profile between that solution and the dash cam, if there is any?

And then just I'm curious where that mix of that business -- given, being an incremental win -- where the mix of that business in automotive goes in the next couple years between OEM versus dash cam?

Thank you.

First of all, the ASP side, that OEM ASP is higher, mainly because that OEM has a very high demand on the temperature range of our chip.

And we need to do a special screening, and also to guarantee the quality.

So that makes the ASP better for the OEM business.

And also, we view that strength of our business that we do [our chip] to scale up from the temperature range, which is important for the OEM business.

From a mix point of view, that's still very -- OEM business still very small for us.

But we do believe in that the momentum we are seeing, our OEM business is going to continue to grow.

It is not we're just going to record dash cams have a recorder -- but also for the owl application that we talk about in the past, the mirrors, the electronic mirrors, the surround views.

And hopefully, eventually, years down the road, that we can do a [conference driving].

So that has been our OEM road map, and that is exactly went with the very important direction that we're putting together for the Company right now.

So although the mix is low right now, but we hope that it will continue to grow in the near future.

Very helpful.

Thanks.

Thank you

Ross Seymore, Deutsche Bank.

Hey, guys, apologies.

Just one housekeeping follow-up question.

There's usually a breakout given between the camera revenues and the infrastructure revenues.

I'm curious.

That wasn't given in the script, from what I can see.

Can you provide that for us?

Sure.

You can expect camera revenues to be 98% -- in that range.

Okay.

Is for the guide for the quarter?

Yes.

I haven't guided for the year on that.

But it is ranging in that consistent 1.5% to 2% of revenue now, at least in the near term.

Got it.

Thanks much.

Okay.

Thank you.

This does conclude the question-and-answer session of today's program.

I would like to hand the program back to CEO Fermi Wang.

Yes, thanks for joining us today.

And I want to have a special thanks to all our colleagues for their continued dedication and hard work.

Thank you [baqua na].

Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.