Ambarella Inc (AMBA) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ambarella Q2 fiscal year 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, Deborah Stapleton.

Ma'am, you may begin.

Thank you, Sam.

Good afternoon, everyone, and welcome to Ambarella's second quarter FY15 financial results conference call.

Thank you for joining us today.

Our speakers are Dr. Fermi Wang, President and CEO, and George Laplante, CFO.

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

The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, market growth, and demand for our solutions among other things.

These statements are subject to risks, uncertainties, and assumptions.

Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements.

We are under no obligation to update these statements.

These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents that we file with the SEC, including the annual report on Form 10-K that we filed on April 4, 2014 for FY14, the Form 10-Q filed on June 6, 2014, and a Form 10-Q for the second quarter of FY15 that will be filed shortly.

Access to our second quarter press release, historical results, SEC filings, and a replay of today's call can all be found on the Investor Relations portion of our website.

I would now like to turn the call over to Dr. Fermi Wang.

Thank you, Deborah, and good afternoon, everyone.

We are very pleased with our fiscal Q2 2015 financial results.

Q2 revenue was $47 million, up 24.6% from the $37.7 million we reported in the second quarter a year go.

Second quarter non-GAAP net income was $11.9 million or $0.37 per diluted ordinary share.

This compares with non-GAAP net income of $7.7 million or $0.26 per diluted ordinary share for the same period in FY14.

I would like to discuss some of our product and market highlights.

Then I will turn it over to George, who will lead that discussion of our second quarter financial performance and our guidance for Q3.

We are continuing to see strong growth from IP security cameras, driven by increasing demand for higher resolution and higher feature cameras in the professional camera market, as well as increased demand for cloud-based home monitoring and security cameras.

Volume growth continues across all geographic regions, with strongest growth in China, driven by market leaders including [Hikvision], [Dahua] and the [Hitaka]

During the second quarter, many of our leading professional IP camera customers began volume commercial shipping of the 4K or Ultra HD cameras that were announced at the ISC West 2014 Security Exposition in April.

This cameras are based on our S2 camera SoC.

In addition to its 4K capabilities, the S2 ability to dewarp images to enable 180 degree or 360 degree panoramic viewing is proving very popular for the latest generation of the cameras.

For example, Bosch, a leading suppliers of IP surveillance camera based in Germany introduced its new DINION IP Ultra 8000 MP family of cameras featuring 4K Ultra HD, [200Mpixel], and high dynamic range capabilities.

Additionally, we are seeing strong interest in our new S2L IP camera SoC family, which was introduced during the ISC West exposition.

The S2L include wide-angle lens dewarping, high dynamic range processing, and Ambarella's smart-AVC low bitrate [streaming] technology.

During the second quarter, we extended the S2L product range with the new S2LM, a small form factor, low-power solution focused on home monitoring and security camera applications.

With the need for home monitoring and security IP camera applications continues to grow, enabled by cloud-based video storage and the remote viewing via smartphones or tablets, in addition to cameras already in the retail market, including those from [Dropcam], Phillips and Swann.

We continue to see new opportunities with service providers in the US and Europe.

This market is being driven by the requirements for HD video, remote monitoring via smartphones and advanced analytics, such as activity detection.

We are well-positioned to provide SoC solutions that meet all of these requirements.

In summary, we anticipate continued growth in the IP security cameras, from both professional and the consumer markets.

We expect that the transition from the older generation of [standard] definition analog cameras to HD IP security cameras to continue as prices converge.

Additionally, based on the strong demand for higher resolution and advanced features, we expect continued revenue growth for our S2 and new S2L camera SoCs that enable Ultra HD panoramic viewing and advanced analytics capabilities.

In the wearable sports camera market, our Q2 sales were driven by market-leader GoPro, with its highly successful White, Silver and Black KeO 3 Plus camera models.

We believe this market will continue to grow, as consumers discover more applications for hands-free cameras beyond just action sports.

In the UAV or quadcopter market, manufacturers are increasingly offering integrated high-definition cameras, as airborne video recording becomes the [key] app for these products.

During the quarter, Ambarella shipped both the A5S and A9 camera SoCs for the next-generation of HD and Ultra HD cameras.

Ambarella's A9 provides the [ultrapixel] resolution recording high frame rate and the wide-angle viewing required for outstanding media quality.

We are also seeing revenue growth opportunities in wearable police cameras.

This body-worn security camera support a continuous video recording of events, offering protection and documentation for both the police and the public.

Ambarella's A7LW SoC solution provides full HD recording with a clear images even in low light conditions, and low-power operation to enable extended battery life.

While volumes are initially dominated by sales into Asia markets, we expect wearable security cameras to provide additional opportunities for Ambarella in other regions including the US and Europe.

In the automotive aftermarket, Ambarella's provides camera SoC solutions for video camera recorders or dash cams.

These cameras have traditionally been sold primarily in Russia, China, Taiwan and South Korea, but we are now seeing additional opportunities with customers targeting US and the European markets.

Additionally, we are seeing the successful adoption of our A7LA automotive camera SoC in the new generation of dash cameras, that includes Wi-Fi connectivity, video analytics in the multi- camera viewing

During the second quarter, Chicago-based COBRA Electronics Corporation, a leading global designer and the marketer of mobile communications and navigation products introduced its CDR 900 drive HD dash cam with Wi-Fi.

Based on Ambarella's A7LA automotive camera SoC, the CDR 900 captures both super HD and the 1080P HD videos high-quality imaging even during the night time.

Its Wi-Fi functionality allows the user to connect and stream live and recorded footage directly to the user's iOS or Android device to instantly view and share video footage.

In Korea, Thinkware, a leading supplier of automotive camera recorders introduced its QXD900, new channel dash cameras.

Based on Ambarella's A7LA automotive camera SoC, the QXD900 supports a full 1080P resolution video recording, through both the windshield and the rear window.

It also supports an extensive set of advanced features including super night vision, lane departure warning system, voice recognition, and wide-angle video recording of up to 140 degrees.

Looking forward, we expect the automotive dash camera market to continue to face economic challenges in Russia, and the competitive price pressure in China.

However, with new opportunities in US, European and Japanese markets, as well as the successful adoption of our A7LA solution for cameras with more advanced features, we see opportunities for revenue growth in this market.

In conclusion, we are extremely pleased with our second quarter execution, and the financial results.

We plan to continue to invest [SoC] development of leading SoC, targeting both our traditional camera markets, and the new opportunities such as UAV, wearable cameras, and the home monitoring and the security IP cameras.

With that, I will hand it over to George to discuss our financials.

Thanks, Fermi, and good afternoon, everyone.

Today I will discuss the financial highlights for the second quarter of FY15 ending July 31, 2014.

I will then review the financial outlook for Q3 of FY15, which ends on October 31, 2014.

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, we have eliminated stock-based compensation expense, as adjusted for income taxes.

As we have discussed in the past, the Company has seasonality to both its revenue and gross margin.

So I will include year-over-year comparisons for certain key operating metrics to assist in the understanding of changes in our business.

Our Q2 2015 revenue of $47 million represents an increase of 24.6% over the $37.7 million of revenue in the same period in the prior year.

Camera market revenue is estimated to be 93% of Q2 revenue, compared to 90% for the same period in the prior year.

Our professional IP security market, along with the continued development of the consumer IP security market, combined to be the largest driver of year-over-year revenue growth, once again ending the quarter as the largest camera segment based on both revenue and units.

Overall, the IP security market revenues were sequentially flat, with professional IP security down moderately, due to some inventory balancing in Asia, offset by increases in professional security in Korea, and consumer IP security revenues overall.

Although we are seeing competition at the low end of the Asia IP security market, our A5S and S2 products continued to support growth in expanding mid- and high-end of the market.

The wearable sports camera market increased both sequentially and year-over-year, reflecting initial orders for the holiday season camera builds.

In addition, higher shipment forecasted into the UAV or quadcopter market benefited revenues in the quarter.

Q2 automotive market revenues increased sequentially, but remain below Q2 of the preceding year.

The automotive market in Russia, where higher end products are more popular, is experiencing softness, which we believe is the result of weakening economic conditions in Russia.

Second quarter infrastructure revenues were flat compared to the previous year, and remain below the preceding quarter as system manufacturers continued to experience soft markets in most regions.

Non-GAAP gross margins for Q2 of 2015 increased to 65.1%, compared to 62.7% in the immediately preceding quarter, and 61.9% in the second quarter of the prior year.

Compared with Q1, gross margins improved primarily due to the increase in revenues associated with shipments of our 4K versions of the S2 and the A9 chips into the security and UAV or quadcopter markets.

Non-GAAP operating expenses for the second quarter were $17.5 million, compared to $16.9 million for Q1 2015, and $14.8 million for Q2 of the prior year.

The increase in OpEx from the previous quarter reflects the ramp of the 14-nanometer chip development projects, as well as an increase in investment in our [SoC] compliance program.

This was offset by approximately $300,000 in benefits received for custom development work that reduced R&D expense in the period.

Non-GAAP net income for Q2 2015 was $11.9 million or $0.37 per diluted ordinary share, compared with non-GAAP net income of $7.7 million or $0.26 per diluted ordinary share for the same period in previous year.

The non-GAAP effective tax rate in Q2 2015 was 9.2%.

As the federal government has not renewed the R&D tax credit for 2014, we are forecasting our effective tax rate to be between 10% and 11% for the year.

In the second quarter, the non-GAAP earnings per ordinary share are based on 31.9 million diluted shares, as compared to 29.8 million diluted shares for Q2 2014.

Looking at the first half of FY15, our revenues of $87.9 million and non-GAAP net income of $19.8 million represent increase of 22.7% and 42.4%, respectively, over the results of the same period in the prior year.

Total headcount at the end of Q2 2015 was 507, compared to 501 at the end of the previous quarter, with about 352 employees dedicated to engineering.

Approximately 76% of our total headcount is located in Asia, primarily in Taiwan and China.

We ended Q2 with cash and marketable securities of $166.5 million, adding $8.6 million of cash from operations in the quarter.

Total accounts receivable at the end of Q2 2015 were $26.8 million, or about 63 days sales outstanding.

This compares to accounts receivable of $21.3 million, or 46 days sales outstanding in the prior quarter.

Net inventory at the end of Q2 was $13 million or about 64 days, compared to $10 million or 61 days at the end of Q1.

Inventory levels increased in preparation for the normal seasonal increase in Q3 shipments.

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

Ambarella uses WT Microelectronics as its logistics supplier for distribution to the majority of our OEM and LEM customers.

For the quarter ended July 31, 2014, sales to WT represented 65% of our revenue, compared to 59% for the same period in the previous year.

Chicony Electronics Company, a manufacturer of camera products for multiple OEM customers as well as for their own distribution, represented 24% of revenue for Q2 of FY15, compared to 28% for the same periods in the prior year.

WT and Chicony were the Company's only 10% customers.

I would now like to discuss the outlook for Q3 of FY15.

We expect revenues for the third quarter of FY15 ending October 31, 2014 to be between $60 million and $64 million.

This represents an increase of 31% and 39% over Q3 of last year.

Q3 camera revenues are estimated to be between 94% and 96% of total revenue for the quarter, compared to 87% in the same period in the prior year.

Q3 revenues reflect the seasonal ramp of consumer camera production for the holiday season, improvement in ASPs due to the transition to new product families, as well as an increase in professional IP security globally.

Our wearable sports camera and IP security markets, both professional and consumer, are expected to increase both sequentially and year-over-year.

We expect automotive revenues to increase both sequentially and year-over-year in Q3.

The automotive -- the automobile market revenues reflects increases in Korea and China, partially offset by softness in the Russian market as we have discussed earlier.

Infrastructure will be down sequentially and year-over-year.

We continue to see softness in the infrastructure market at least through the first half of our FY16.

Our third quarter forecast reflects high demand from our customers for consumer-based products, in anticipation of strong sales during the holiday season.

Depending on the success of holiday sell-through, we could see inventory balancing at customers during Q4 and Q1.

We estimate Q3 non-GAAP gross margins to be between 60% and 62%, compared to 65.1% in Q2 of FY15, and 63.8% in Q3 of the prior year.

Camera market gross margins are expected to be lower compared to the previous quarter, as consumer-based products become a larger portion of Q3 revenue.

As compared to the previous year, gross margin has declined, primarily as a result of the reduction of infrastructure revenue as a percent of total revenue.

We expect non-GAAP net income for the quarter to be between $16 million and $18 million.

We are using an estimated non-GAAP annualized effective tax rate of 11% for net income amounts.

We estimate our diluted share count for Q3 to be approximately 32.2 million shares.

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

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

Operator?

(Operator Instructions)

Jay Srivatsa, Chardan Capital.

Thanks for taking my question.

Congratulations on the results and the guidance.

In terms of the margins that you have guided for, could you address whether it is all from the consumer business?

Or is there any impact on competitive price pressure in the IP security market?

This, the margins in Q3 are normally lower, and it is really from two things.

First of all, the mix of products heavily towards consumer business, as well as the lower percentage of infrastructure business this year as compared to the previous year.

Okay.

Fermi, in the past you have talked about competition in the low end of the market.

What has changed in the last quarter?

Can you give us an update in terms of where things are, in terms of HiSilicon and some of the other guys, and how you are positioning yourself looking forward, in the IP security market in China?

Well, from that point of view, I don't think -- not much changed from the last report.

We continue to see HiSilicon being aggressive on the pricing side.

And there will be -- in fact, there are a lot of smaller competitors coming out.

But I think at this point, I still feel that HiSilicon is the main competitor to us.

And from our strategy point of view, that didn't change either.

We continue to believe that we want to continue to ship better featured and better performance products than our competitors.

And so, that we can grab the shares on the high-end and on the mainstream side, and continue to use that leverage to a -- providing a competitive price, which will allow the customer on the low-end products.

And I think from the point of view, nothing but -- nothing changed much.

Thank you.

I will get back in queue.

Thanks.

Suji De Silva, Topeka.

Hello, nice job on the quarter.

A couple questions.

First of all, on the 4K products.

What percentage of the revenue or unit mix, do you think those can become exiting the fiscal year?

And do you think there is channel fill going on in these two quarters, which would kind of off -- kind of make the ramp of those front-end loaded?

Well, first of all, I think that 4K video will become more and more popular, and we believe that over time, all our [older] markets will move to 4K.

In fact, we will start shipping 4K [reset] to a professional IP security, and we are going to start shipping to UAV.

And we believe that in the short term, you are going to see other market pick up.

In fact, the funny part is the infrastructure will be the last one to pick it up, unlike before.

But I think overall over time, 4K will be the mainstream product for all of us.

And we have a breakout from the 4K product alone, in terms of percentage of revenue.

But I think it will become higher ship -- a higher percentage of our product in the future.

And the channel fill aspect, do you think there is an initial channel fill here, that makes the build front-end loaded here?

Well, I don't know if it is necessarily associated with 4K, but we have seen a lot more optimism, than we saw four months ago in the consumer spaces.

And so, there is a lot of product going into the channel for seasonal builds.

So depending on how the sell-through is during the holidays, I think there is the potential for inventory adjustments in Q4 and Q1, as the manufacturers adjust based on holiday sell-through.

So I think that is a potential issue to watch.

Okay.

And then one other question, the auto and police safety areas, it sounds like you are strong in Asia and growing into US and Europe today, correct me if that is wrong.

And if so, will it be less or more competitive than the US Europe markets versus Asia?

This is automotive, you are saying?

Automotive and police safety, they sound like they both (Multiple Speakers).

I think the majority of the automotive markets, that are happening in the US and Europe today, it is basically [ODM] from China, and from Russia areas.

So I think you are going to continue to see, there is a product in the high-end to the low-end.

So we believe that we are very competitive in terms of performance feature on the mix in the high-end and mainstream.

But on the low end side, but we also believe that the price pressure is there.

It doesn't matter whether it is in US or Europe.

Okay.

Great.

Thank you.

Kevin Cassidy, Stifel.

Yes, thanks for taking my question.

I wondered if you could give us a little more update on your 14-nanometer process development?

When do you expect that to come out, and is it on schedule with your expectations, and what kind of demand are you looking for?

Right.

First of all, 14-nanometer is still one of the -- our main focus on the R&D side this year.

And it is essential to us, because we believe -- we think the 14-nanometer products for our next-generation of camera products will help us continue to improve our performance, and also increase the gap between us and competitors in terms of both consumption and video performance.

And the current schedule, we are still on track, and we believe that we will have a product coming out next year.

Okay.

Great.

And also in the last conference call, you had talked about some of the quarter would be dependent on ramping of the A9 and S2 products.

Is this --is the ramp as expected or better than expected?

It seems it was better than expected.

Yes, we were at the high-end of our hopes there.

We did sell the A9 and S2 in the quarter.

The S2 is into the security business, and the A9 volume is into the quadcopter marketplace, as well is the A5S.

So we did meet our expectations.

Okay.

And do you expect that to continue to be stronger gross margins than your older products?

Yes, as we introduce -- normally our new products have a higher gross margins on the front-end, yes.

Okay, great.

Thanks.

I will go back in the queue also.

Quinn Bolton, Needham & Company.

Hello.

I just wanted to ask a clarification on the sort of consumer build.

Was that across both sports cameras and quadcopters, where you are seeing that better enthusiasm than three or four months ago?

Or is it specific to one or the other areas?

It is across all the consumer products, including automobile in certain regions.

So I think you can look at home security, you can look at quadcopters.

I think the sports camera is normal build for the holiday season, so I think it is across multiple markets.

Okay.

And the other clarification was, was the A9 shipping only into quadcopter, or have you started to ship that also into sports cameras?

We are shipping it across multiple markets now.

Okay.

And then just lastly, I think you referenced some better ASPs, as being one of the reasons behind the better gross margins.

As you look forward, you have the consumer ramp for the holiday.

I imagine that that 4K product, especially A9 to become a richer part of the mix.

Do you think that leads to just general better pricing across the sports camera and quadcopter markets?

Or do you think pricing across all the products are likely to be more flattish, despite kind of the ramp of 4K solutions at the high-end?

Well, we are also seeing a transition from the A5S to the A7L.

So we are seeing multiple product families transition.

So I would expect ASPs in Q3 to be higher than Q2.

Is that, does that answer your question Quinn?

That does.

Thank you.

David Williams, Ascendiant capital.

Hey, good afternoon, and congrats on a great quarter.

A couple of quick things real quick.

I wanted to kind of get your take, as we start thinking about in the sports camera market, and maybe a potential upgrade cycle or refresh cycle that many expect to happen next year, and kind of how we would expect that revenue to begin to full flow-through?

Would we be seeing any of that maybe this quarter next quarter, or is this really just more about the seasonal inventory builds, than it is maybe a refresh cycle here?

Well, we don't discuss our customers launch cycles across any of the product lines, but you can assume we are having our normal seasonal build cycle for Q3.

Very good.

Any thoughts on when and how -- can you kind of walk us through how that revenue might flow in, if we were talking about a refresh cycle that happened in let's say, 3Q?

When would you start seeing that benefit?

Would that be a 2Q event, or maybe a 1Q event?

Again, we really don't talk too much about how the products go out to our customers in preparation for their launch.

It ends up to be pre-announcing our customer products, so we tend not to discuss that.

Sure, I understand.

And then secondly, I wanted to think maybe on a longer-term basis here, as we think about the infrastructure part of your business really starting to I think pick up maybe in the second half of next year.

And what are those, those margin trends look like, thinking about the consumer and the drag that those maybe placing on margins?

And then, of course, the higher margin infrastructure business -- if we think about this maybe four to six quarters out, how do you think margins, or what kind of benefit could we see as we get into maybe to middle to end of part of next year?

Yes, I think that it is the timing of the 4K upgrade, in [ATVC] upgrade in infrastructure.

When that starts, we would see similar margins that we have seen in the past.

When that starts though, and how that matches against the ramp in the consumer businesses, is difficult to say.

So for instance, we have said that, in a very high ramp in consumer business, that obviously would pull down margins, but that could be offset by infrastructure ramp.

So we haven't talked too much yet about next year's margins.

But at this point, we don't see a significant change in the first half.

And I would say, depending on the timing of the holiday seasons, and consumer products against infrastructure, we may see second half deterioration.

Very good.

Thanks for the time.

Joe Moore, Morgan Stanley.

Great.

Thank you.

Historically, you have talked about quadcopters kind of part of another segment, and it seems like it has become pretty prominent.

Can you give us an idea of -- talk about that market a little bit and the size, and maybe if you can potential customers, we should look to as being important?

Right.

I think in the probably last quarter, we talked about we start shipping A5S solution to TGI.

I believe, they are one of the leading suppliers on the quadcopter side.

And from there, we had multiple design wins, that we haven't talked about based on A7L and A9 solutions.

Overall, we believe we are -- we think this market has interesting application, because we start seeing the quadcopter invention, many different type of applications from commercial to consumer.

And also the importance of that is, video is really the [key] app on the quadcopters.

Without video, the quadcopter is just a toy.

With it, quadcopter becomes a very useful tool for many different reasons.

And on top of that, the video requirement on the quadcopter requires high-resolution and a very high frame rate.

Because you are thinking about the speed of the quadcopter, and how high altitude they have to fly at, it really requires a high-performance video.

So with that, it really positions us very well in that market.

And we believe based on the [current ramp up] of our current customers, we are very optimistic about how this market continues to develop.

And although, the volume is still not as big as other markets, but we think that is a market we are going to continue to watch and continue to invest.

Great.

Thank you.

And then, in the auto and security markets, when you talk about lower end competition coming in, how do you balance out where you are willing to let those margins go, because you are obviously seeing a lot of margin upside from the higher-end product?

Is there any thought of kind of using that to be more aggressive in the low-end?

Just how do you make those decisions about, what is something you want to pursue and what you don't, in the lower end of the market?

Right.

Sure.

I think it is a very good question.

I think, we continue to compete on price on lower end, but not to all the customers.

We only offer very, very competitive price for our key customers, that really give us the -- for the high to low end of products.

So for the customers, we are ready work with high-end to mainstream to lower end products, we are willing to give them a very competitive price, so that they can compete with products, with our competitor's products.

So from based on that, we, really very selective on the customers we want to offering those.

But at the same time, really help us build a stronger partnership with our customers.

Great.

Thank you very much.

Charlie Anderson, Dougherty & Company.

Yes.

Thanks for taking my question, and congrats on the strong results and guidance.

My suspicion with the gross margin was that, ASPs were up on -- in the camera business on a year-over-year basis.

Was that true, and if so, can you maybe help us qualitatively with how much?

We don't give exact numbers on ASPs.

And actually in Q2, ASPs were reasonably flat year-on-year.

We expect to see stronger ASPs from a mix of new products in Q3.

So if that is the case, maybe help us with where you are getting the benefit on maybe the cost line, on the -- in terms of generating these higher margins?

It is primarily from a mix of products, so the mix of higher end versus lower end products.

Got you.

Mix for us, mix can have a pretty dramatic impact.

Got you.

Okay, good.

And then, on the -- maybe more of the auto OEM market, I wonder if you can talk what are some of the opportunities there, and sort of the time frame when the realization of some of those opportunities are for you on the OEM side of the house?

Right.

Like we said before, OEM is still a long-term project for us.

I think there are multiple things happening right now.

First of all, we started seeing that OEM started demanding, really recording associated with us as a solution.

So I think that as those things require recording, really help us position ourselves in the OEM business.

We start seeing people building dash cams into OEM business in Europe and in Asia.

Although it is a small volume, but I think that is very encouraging news to us.

At the same time, we still believe that we want to target automotive OEM -- a very long term project for us.

For that market, video has to be a surround video, like you have a multiple camera, we put a multiple camera together.

And in addition, to just capturing video and recording video, we believe you need to provide the video analytic application on top of that.

And the reason, that I think it is going to be a multiple year project -- and to not only put design in, but also get to [MP].

And then last one for me real quick, I think you made a reference in the script to sort wearable security, and how that is a more interesting market for you.

Obviously, there is a lot of enthusiasm in the market for these so-called [cop] cameras.

I wonder if you could talk about maybe what kept you out of the market to date, and if you have specific products to address that type of a market going forward?

Right.

Interestingly, we start seeing this market popping up, not in the US, but in Asia a couple quarters ago.

In fact, we have a multiple [OE] who is in Asia building this kind of cop cameras and selling them quite well, and but we start seeing traction in US and Europe just recently.

So I think -- and we are starting, a lot of people, a lot of [OE] in US asking for [ODM] and solutions for Asia.

They would like to speed up their third generation products.

So I think that momentum is there.

We start seeing a lot of interest, I think hopefully with working with our ODMs, we can provide some solution quickly for those US and European ODMs.

Thanks so much.

Ross Seymore, Deutsche Bank.

Hello.

Congrats on the good results and guide.

If you can help a little bit on the magnitude in the guidance for the third quarter, you talked about the sports camera, the auto, pretty much everything but infrastructure being up.

Any sort of hierarchy on what you think is going to grow faster or slower, and what the drivers are behind that would be helpful?

Thanks.

Yes, I think in the quarter we are seeing a couple things.

We are seeing all the consumer based products, so you are looking at the normal growth for sports cameras.

We are also seeing consumer IP security growth.

In addition, we are seeing a significant increase in the professional IP security from Q2 to Q3 globally.

I think those are the main drivers for the revenue increase.

And if I look at the gross margin side of things.

I know you talked to -- just in the answer to a previous question about the ASP rising in the third quarter, are higher ASPs in most cases in your business model equivalent to higher gross margins?

Or is that a connection that we shouldn't necessarily make?

We have said in the past, that connection could be made on new product launches.

So normally, we would launch with higher ASPs at the initial stage of a product, because we give price discounts based on volume over its lifecycle.

So on most new products we would have higher ASPs, would match with higher margins.

And in this quarter, we have several product families going out, transitioning to new products.

So we are getting a positive impact from that.

And then, the last one for me.

The OpEx side of the equation, it seems like you are implying somewhere around $19 million or so.

Am I doing the math right, and how should we think about how that number grows for the rest of the year?

Yes, I think it is pretty much the way we left it last time.

We are expecting to exit the year around the $19 million run rate.

If you take out the $300,000 upside we got, we are at about $17.8 million in Q2.

So we will see a ramp between now and the end of the year to around that number.

Great.

Thank you.

Kevin Cassidy, Stifel Nicolaus.

Kevin, please check your mute button.

And we will move on to our next question.

Our next question comes from Jay Srivasta of Chardan Capital.

Yes.

Thanks for taking my follow-up.

Fermi, earlier this year at the Consumer Electronic Show, you had a demo of with -- a partnership with Google and [help outs].

Can you give us an update on where things are there?

And then also, can you comment on the recent acquisition of Google of Dropcam, and what that does to your participation in the security business?

Right.

First of all, on the wearable camera, so that was Google, I think that the development continues.

And there is -- until Google can announce a product, I don't think we can really talk about their plans, and how fast we can see revenue.

But I don't think that the -- by the end of the year, we will see anything from that front.

But on the -- net acquiring the Dropcam, I think the older current product is going to unchange -- is going to continue on the plans.

I don't see any reason that that will change.

And we are talking to the [Mass] management, as well as the Dropcam management on the new product line, and [it will map].

And hopefully, there we can develop a new product in the future with them.

And we are definitely looking forward to the opportunity to work with them.

And from a financial point of view, I don't think there is -- anything to change.

Thank you.

Thank you.

And at this time, I am showing no further questions.

I would like to turn the call back to management for any closing comments.

Okay.

Thanks for everyone who joined us today.

But I want to send a special thanks to all our employees for their continued dedication, how to deliver such a outstanding performance.

Thank you.

Goodbye for now.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program.

You may all disconnect.

Everyone have a wonderful day.