Ambarella Inc (AMBA) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to Ambarella's Q4 FY15 earnings call.

At this time all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Deb Stapleton.

Ma'am, you may begin.

Thank you.

Good afternoon and welcome to Ambarella's fourth fiscal quarter 2015 financial results conference call.

Thank you for joining us.

Our speakers today will be 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 fourth quarter and full fiscal year.

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 and 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, and for FY14, the Form 10-Qs filed on June 6, 2014; September 8, 2014; December 9, 2014; and the Form 10-K for the fiscal year ended January 31, 2015 that will be filed shortly.

Access to our fourth quarter results 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.

Thanks, Deb.

We're extremely pleased with our Q4 and FY15 financial results.

The revenue for the fourth quarter of FY15 was $64.7 million, up 61.9% from $40 million in the same period in FY14.

For the fiscal year ended January 31, 2015, revenue was $218.3 million, up 38.5% from $157.6 million for the year ending January 31, 2014.

In addition to the strong sales for our traditional markets including wearables, professional IP camera, and automotive aftermarket cameras, we continue to see growth opportunities in new camera applications.

During January's 2015 Consumer Electronics Show, Ambarella demonstrated the breadth of its product portfolio to address many of these new applications, including flying cameras, body-worn security cameras, and intelligent automotive cameras.

During the show, Ambarella introduced the H1 camera System-On-Chip, or SoC, for a new generation of action and quadcopter-based cameras or flying cameras.

The Ambarella H1 supports 4K Ultra HD H.264 video encoding at 60 frames per second for high-speed live action recording with smooth slow motion capabilities.

It also supports the new H.265 or high efficiency video encoding standard for 4K Ultra HD encoding at up to 30 frames per second, providing higher image quality at lower bitrates for faster video uploads, higher resolution video streaming, and reduced storage requirements.

The H1 includes advanced Electronic Image Stabilization for stable video recording during windy or high-motion conditions.

Also at CES, we announced availability of the Ambarella wearable security reference design kit, based on our new A12W SoC.

This enables the development of a new generation of compact ultra low-power body-worn HD video camera suitable for police and security applications.

The new A12W SoC can encode two video streams simultaneously for dual lens camera designs with wireless streaming.

The A12W also includes our advanced Electronic Image Stabilization for stable video recording during motion and high dynamic range processing for clear images in challenging light conditions.

Automotive applications, which were a major thing at CES, offer significant new opportunities for Ambarella.

In addition to demonstrating dash cameras with advanced analytics for the automotive aftermarket, we demonstrated solutions targeted toward the automotive OEMs, including 360-degree surround view cameras, and for the first time, electronic mirror solutions.

The electronic mirror is designed to replace conventional rear view or side mirrors in automobiles with externally mounted cameras and an LCD display.

This solution provides greater visibility for the driver with a wider, unobstructed field of view, and in the case of side mirrors, can also refuse the air resistance associated with large external mirrors.

Ambarella's electronic mirror solution is based on its A9 camera SoC, providing clear, high-resolution images even in low light conditions.

But A9's superior processing performance presents high-quality video to the driver without a perceptible delay.

In summary, we had an exciting CES show as we demonstrated our expanded product portfolio to a wider set of customers serving many new market opportunities.

During the fourth quarter we experienced continued revenue growth from our professional IP security camera business, with strong growth in China driven by market leaders HIKVision and Dahua.

In FY15, unit shipments roughly doubled from the previous year, and we expect growth to continue as traditional analog CCTV cameras continue to be replaced by high-definition digital IP cameras.

During the fourth quarter, we began volume shipments of our new S2L and S2LM SoC families as customers increasingly demand cameras with higher-megapixel resolution and wide-angle viewing capability.

In the consumer home security and [monitoring] IP camera markets, we enjoy strong Q4 demand from retail customers as well as the initial expansion into service provider channels.

We expect the market to transition from 720p to 1080p resolution as leading brands strive to differentiate their products based on video quality and advanced features such as analytics and wide-angle viewing.

During the quarter, a number of new retail customers entered the market with Ambarella-based products including Canary, Ion, and iLuv.

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

During Q4, revenue increased based on growth in China and Korea with increasing demand for our high-end products, including super HD high-resolution cameras.

Also during the quarter, Taiwan electronics giant Asus introduced its "Strix" car camcorder model based on Ambarella's A7L SoC, offering full HD recording, high-dynamic range image processing, and a wide 140-degree viewing angle.

We expect growth to continue in the automotive aftermarket this year, and we also see additional opportunities from car OEMs in Asia, Europe, and North America as they begin to integrate video recorders into new car models.

In Q4, we enjoyed strong sales in the wearable camera market led by GoPro, and a successful Hero, Hero4 Silver, and Ultra HD Hero4 models.

And yesterday, Chinese smartphone manufacturer Xiaomi launched its Xiaoyi sports camera based on Ambarella's A7L SOC.

The sports camera features 1080p 60 video recording, wide-angle video capture, and wireless connectivity to smartphones and applications.

Sales of our flying cameras also grew, driven by market leader DJI and its Phantom 2 and Inspire 1 models.

In FY16, we expect to see growth from both wearable and flying camera markets with increasing demand for 4K or Ultra HD models driven by the wider adoption of Ultra HD televisions.

In summary, Ambarella had an exciting and prosperous year, and we look forward to our continuing progress in 2016 and beyond.

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

Thank you Fermi, and good afternoon everyone.

I will start today with a discussion of the financial highlights for the fourth quarter and full year of FY15 ending on January 31, 2015.

I will then move onto the financial outlook for Q1 of FY16 that ends on April 30, 2015.

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 Q4 2015 revenue of $64.7 million represents an increase of 61.9% over the $40 million of revenue in the same period in the prior year.

Camera market revenue is estimated to be 95% of Q4 revenue, compared to 90% for the same period in the prior year.

The wearable market, led by GoPro cameras, demonstrated strong year-over-year growth but declined sequentially as expected.

The revenues associated with the successful launch of three new camera models from GoPro in the previous quarter continued into our fourth quarter, underpinning the overall strong camera build.

The professional IP security camera market demonstrated strong year-over-year growth in the quarter, with modest sequential growth.

Driven by strong results from Asia, our professional IP security revenues continued solid performance in the quarter, which is normally the beginning of a seasonal slowdown for the IP security market.

The year-over-year and sequential revenue growth in consumer IP security was strong, but remains a small percentage of our overall security market revenues.

Although IP security continued to have the highest unit shipments in the quarter, wearable cameras generated the highest revenue dollars, due to higher ASPs associated with product mix.

Q4 automotive market revenues increased both sequentially and year over year, reflecting growth in both Korea and China.

The automotive market in Russia, where higher-end dash cam products are more popular, remained soft in the quarter due to weak economic conditions in Russia.

Fourth quarter infrastructure revenues were down compared to the previous year, but finished above the previous quarter.

Infrastructure system manufacturers continued to experience soft markets in most regions.

Non-GAAP gross margin for Q4 of FY15 increased sequentially to 64.3% compared to 63.4% in the immediately proceeding quarter, and 64.1% in the fourth quarter of the prior year.

The sequential improvement in gross margin was due primarily to mix of products shipped in the quarter.

Non-GAAP operating expenses for the fourth quarter were $18.9 million, compared to $18.7 million for Q3 2015, and $17 million for Q4 the prior year.

This year's Q4 OpEx reflects the benefit of approximately $960,000 of payments for development work performed on behalf of customers.

Excluding the development payments received, OpEx increased due to higher chip development costs and employee compensation costs.

Non-GAAP net income for Q4 2015 was $22.6 million or $0.68 per diluted ordinary share, compared with non-GAAP net income of $8.2 million or $0.26 per diluted ordinary share for the same period in the previous year.

The non-GAAP effective tax rate in Q4 2015 was 0.7%.

The low tax rate resulted from recording the entire annual benefit of the R&D tax credit, approved retroactively for the entire year by the federal government in the fourth quarter.

In the fourth quarter, non-GAAP earnings per diluted ordinary share are based on 33.1 million diluted shares as compared to 31.4 million diluted shares for Q4 of 2014.

Looking at the full FY15, our revenues of $218.3 million represented a 38.5% increase over the $157.6 million in the prior fiscal year.

Non-GAAP net income increased to $64.4 million from $33.2 million in the prior year, representing an increase of 94%.

Total headcount at the end of Q4 2015 was 524, compared to 515 at the end of the previous quarter, with about 365 employees dedicated to engineering.

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

We ended Q4 with cash and marketable securities of $208 million, adding $16.5 million of cash from operations in the quarter.

For the full year of FY15, we generated $52.3 million of cash from operations, compared to $34.4 million in the previous fiscal year.

Total accounts receivable at the end of Q4 2015 were $40.2 million or about 57 days sales outstanding.

This compares to accounts receivable of $41 million or 57 day sales outstanding in the prior quarter.

Net inventory at the end of Q4 was $21.7 million or about 72 days, compared to $14.8 million or 53 days at the end of Q3.

During the quarter, the Company increased inventory levels in our high-volume parts to improved flexibility in support of anticipated customer product launches across multiple markets.

Accounts receivable and inventory remained in line with Company targets.

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

For the quarter ended January 31, 2015, sales to WT represented 51% of our revenue, compared to 64% 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 37% of revenue for Q4 of FY15, compared to 21% for the same period in the prior year.

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

I would now like to discuss the outlook for Q1 of FY16.

We expect revenues for the first quarter of FY16 ending April 30, 2015 to be between $64 million and $68 million.

This represents an increase of between 56% and 66% over Q1 of last year.

Q1 camera revenues are estimated to remain strong through the quarter, ending between 94% and 96% of total revenue compared to 90% in the first quarter of the prior year.

We expect Q1 revenues to be positively impacted by the launch of new products from existing customers, like the launch of our new S2Lm SoC in the security market, as well as introductory products from new customers as demonstrated yesterday with the new sports camera from Xiaomi.

As we have said in the past, we only discuss the specific details of customer product launches after our customers announce their products.

In addition to the new product introductions in the quarter, IP security and automotive aftermarket revenues in Taiwan and China are expected to remain strong in the quarter during a period when we normally experience seasonal declines.

We estimate Q1 non-GAAP gross margins to be between 62% and 64%, compared to 64.3% in Q4 of FY15 and 62.7% in Q1 of the prior year.

Camera margins are expected to remain strong in the quarter due to a favorable mix of products as well as product cost reductions received before scheduled customer ASP reductions.

We expect non-GAAP net income for the first quarter to be between $18 million and $20 million.

We are using an estimated non-GAAP annualized effective tax rate of 9% for net income amounts.

We estimate our diluted share count for Q1 to be approximately 33.7 million shares.

Our view of the strength in our existing markets has improved since our last earnings call, as reflected in our Q1 guidance.

Due to the expected market strength, the success of our low end products in the professional IP security market, as well as the projected growth in automotive aftermarket, we now anticipate the Company will exceed the long-term growth rate this year as presented in our target model on our last earnings call.

This year's annual growth rate is now expected to be between 27% and 30% from revenues associated with our current camera markets.

We believe our gross margins will settle into the target model range of 59% to 62% as the year progresses and the impact of our success in the low end the IP security market becomes a bigger part of our revenue.

As a result of the stronger revenues, we expect our FY16 operating margins to improve to the high 20% range.

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.

Thank you.

(Operator Instructions)

David Williams, Ascendiant Capital.

I guess my first question is, if we kind of think about the surprise in the quarter, what was the biggest surprise?

Was it more about the new products, maybe some launches that came in, or was it just better performing markets across the entire business?

Actually, in Q4 we felt strength across all our markets.

As we said in the script, the camera markets for our wearable cameras like GoPro were strong throughout the quarter.

We had a very good security quarter and automotive quarter.

So in all three of our core markets we felt that customer strength was there.

And then there was also an announcement this weeks, it looks like the Google Helpouts platform is being cancelled.

Just wondering if you had any thoughts on that.

I know there was some revenue potential for that falling into this year.

Has any of that changed?

Is there any type of, I guess, any of that in the guidance that we should be thinking about maybe not being there now?

Right.

First of all, we never factored that Helpout into our forecast of revenue in the past.

We have been continue saying that we believe consumer wearable camera market, people still looking for killer apps, and you can see that people trying out different ideas like Google Helpouts, one example.

And we believe that until people find the killer app, this market is going to continue to be in research level.

But, however, sometimes we believe the wearable camera market start become strong, particularly in the commercial area.

For example, for the policeman and security guard market we start seeing real demand and real revenue opportunity for us to grab wearable revenue.

So from our point of view, we're going to continue to invest technology for wearable camera, particularly right now for the commercial industry, but hopefully in the future when our customers figure out the killer app for the consumer market we hope that we can profit from it.

Thanks so much.

Matt Ramsay, Canaccord Genuity.

I'm over here in Barcelona and there was quite a bit of buzz around the launch Xiaomi launch yesterday so congratulations for winning that socket.

Fermi, if could you talk a little bit about the interactions with that customer, what, I guess -- what features they are really pushing for versus your traditional biggest customer that in market.

And also, maybe you could talk a little bit, either Fermi or George, about the market's perception that as your larger camera customers go down-market to chase price elastic demand there's worry of second sourcing but obviously Xiaomi's coming at a price point that is very, very aggressive and is still using their technology.

So anything you can give about how that relationship came together and how -- and those points would be really helpful.

Thank you.

Thank you.

So from the Xiaomi point of view, I think you can see that Xiaomi, in addition to their cell phone sales, they are trying to build a product portfolio surrounding their cell phones.

And I think, based on our conversation, they believe that sports camera is one of those device can leverage their current [howard and sulfur] they build for the cell phone infrastructure and provide a better experience for their customers.

So I think that's why they jumped into this opportunity.

And working with them is just like working with any big customers that we talk about the spec together and identify the potential components and how to implement this camera and working closely to make sure that this happened.

So from a design point of view it's just like any other customer we work with.

In terms of your second half of the question, I really think that we -- we didn't know the Xiaomi surprising structure until early this week and I think that keep that confidential.

So we are as surprised as everybody, but I think that's consistent with their pricing strategy with their other products.

I think that our pricing strategy for Xiaomi is the same as we apply to all the other customers that higher volume, get a better price.

That's really helpful.

And then as a follow-up from me, maybe you could just talk a little bit about the consumer IP camera market, not just the consumer retail channel sales but stuff you're doing with some service providers.

I know there was some announcements with AT&T and others and it seems like there's a pretty big magnitude on the revenue beat in the strong guidance there and how much that market, particularly the service provider side of it, contributed to the up side of the numbers.

Right.

So let me be clear.

I think that service providers side of consumer IP camera is still very little in terms of revenue on our forecast.

It may have a great potential, we believe they're going to grow fast but in terms of the total revenue, still a small percentage versus other market.

But hardware, you are right, we are very optimistic about this consumer IP security camera, particularly on the service provider side.

We announced AT&T last time, we have multiple design wins that we were working on.

We've seen a lot of activity from different service providers who want to come into this market.

So assuming that they continue to introduce successful products with great cloud service, then I think this -- I personally believe it is going to be a huge market opportunity for us [in anora].

And if I could just squeeze one more in for George, the gross margin was much -- was better in the quarter, well above the midpoint and the guidance is strong there as well, but you mentioned that seasonality in the sports camera market was as you expected and the IP camera market in China grew.

So what's sort of the missing factor there that drove the up side to gross margin?

Or is there something -- maybe you could walk us through that dynamic a bit.

Thank you.

It is purely mix and gross margin.

The high end of the product lines continued to be strong in the quarter.

We had a very good automotive quarter, which again is higher margin.

So the overall mix is what drove the margins to the high end of the range that we put out.

Thank you very much.

Congrats again.

Kevin Cassidy, Stifel.

You mentioned new opportunities or opportunities in new car models for Europe and North America.

Can you expand on that a little bit?

Is it just dash cams, or is there more functionality going into these?

I think before [short and taffy] dash cams we start seeing some of the US brand name stop trying to selling the dash cam into US market.

But I think that in the longer term, what I see with multiple technology targeting automotive OEM like I mentioned, surround view, electronic mirrors, and also video [ow techs] for dash cam.

All of that is designed for the OEM, but the design cycle is longer, as you know, so that I think there is short-term effect and there is long-term effect, and at Ambarella we continue to invest heavily into the automotive market in terms of technology and marketing and hopefully we can go to the OEM in the future.

Okay.

So you're saying that the new models might be two years out before we actually see it in the market?

I didn't say two years, but definitely longer-term than aftermarket business.

Okay, great.

And just to understand it a little better, are you dealing with subcontractors, or is the design with the automobile manufacturer themselves?

Well, we talk to the OEMs, but I think most of design will go through tier 1s.

But we do also have -- believe there's opportunity to go design win with the OEM directly, so it's a mix but I think the majority is with the tier 1 guys.

Okay, thank you very much.

Ross Seymore, Deutsche Bank.

Hey guys, this is actually [Matt Simon] calling in on Ross' behalf.

Great results here, I'll just add my congrats.

I want to ask about the inventory hike, and it was mentioned in the script but if you could shed a little more light on that is it more on the security side or the Xiaomi side?

A little more information there would be greatly appreciated.

As I said in the -- you might not have picked it up in the script but it's across all the markets.

First of all, the inventory levels have brought up the -- it really gives us flexibility with the number of new product announcements and ramps to give the customers the ability to adjust to their run rates as they understand the markets better.

So it is across all markets.

It is, as you saw yesterday with the Xiaomi announcement, there are product rollouts with our new S2Lm in the security marketplace.

That will be across both professional and consumer.

So inventory is really increased to help support those.

Okay.

And on the gross margin side of the equation, it looks like 59% to 62% for the year.

That's versus 62% to 54% for the first quarter.

With these low-end customers ramping up should we expect a gross margin decline in the second half of the year?

I think it was mentioned previously, but any walkthrough of gross margin for the year would be appreciated, too.

We continue, just as I'd said on the previous call, to forecast the margin coming into our range as the year progresses.

And that will really be directly related to the rollout in both consumer and in professional security in Asia at the low end.

So that's the S2Lm product line rollouts will have the biggest downward impact on margins.

So I think actual timing will depend on when the ramps occur, but you can expect that to happen sometime between now and the end of the year and we do believe second half will be within that range.

Okay, great, thanks.

Quinn Bolton, Needham & Company.

George, just wanted to come back to the new annual guidance of 27% to 30%.

If I understand it, it sounds like that is the forecast, capturing really just your core markets, and that upside from some of the new applications such as police or security guard cameras and/or flying cameras could put you at an even higher level, or is 27% to 30%, does that capture some of those new applications as well?

At the low end of that it would not capture the new applications.

It's really focused, those numbers, on our current markets.

The biggest change since last phone call is both the automotive market and the security market, at the low end, we are seeing a lot more activity there and we're probably more optimistic than we were there.

So I am comfortable with those ranges for the current marketplaces.

Again, though, in these new markets, the ramp of those and the size of these new opportunities is really difficult to forecast.

So we have not put a significant amount in for that at this time.

Got it, okay, great.

Just wanted to go back to the activity in the low end security market.

Two questions there, is that mostly China-based, and second, I think you said that the S2Lm and the ramp of that product is probably the biggest factor in driving down the margins, or I shouldn't say driving down the margins, but four-year forecast for the margin is to come back into the range in the second half of the year.

Is that right?

And am I reading that the S2Lm is tied into that low end security ramp?

Thanks.

Yes, you are correct.

They are both in the consumer security as well as at the low end of the professional.

And the low end of the professional security market is still being driven by China.

Great.

And then just one last one on the automotive business.

I think that would have been a business historically that I guess I would have thought might have carried lower than corporate gross margins.

You said earlier in the call that that is now better than corporate average gross margins.

Does that really just reflect the mix to higher-end applications within the dashboard camera market, are there dynamics in the dashboard camera market that have changed to drive better margins?

Thanks and that's it for me.

Yes, I think the higher end of the market we are selling into, and that is expanding in China now.

And that is our A7LA chip, which is being sold at above corporate margins on average.

So it's a combination of market expansion and people going after higher-resolution products and us being successful in winning those sockets.

Great.

Thank you.

Charlie Anderson, Dougherty & Company.

I wanted to ask about sports camera.

I heard you say auto will be up sequentially and IP security sort of bucking traditional seasonality.

Will sports camera as well?

And if it is, or if it's more modest decline, is it hyper-seasonal meaning you are doing a ramp with Xiaomi, and then it sort of cools off and it's less seasonal going forward?

Just help us walk through some of the ins and outs there.

The normal seasonality to our consumer-based products in the wearable area would be second half of our year.

We do have the launch in Q1 which is supporting revenue in our Q1 guidance.

Okay but do you expect it to be up sequentially, George?

It would be relatively consistent with Q4.

Okay.

Perfect.

And then Fermi, I had a question on R&D.

You guys mentioned you had the $900,000 of customer-funded R&D and it sounds like you're gaining operating leverage in the model, and I imagine R&D plays a part in that as well.

Are you guys still feeling like you're hiring constrained?

When I look at some of your larger customers they seem to be growing R&D faster than you are.

Do you feel like you're keeping pace with everyone?

Well I definitely think that R&D is not a limiting factor for us to grow.

We invest a lot and we continue to hire people in all of areas, but we focus more on the growing software engineering for the different applications, particularly in Asia, in China and Taiwan, where the cost base is lower than here, so that's why you can see the R&D [powder] change a lot.

But we don't believe that our R&D is limiting our growth in any way.

Perfect.

And then last one from me is, I wonder, we look at the drone market, I know it's a very new market, the flying camera market, and I think some of the smartphone SoC companies have started to express interest there.

You guys have done a great job of strictly staying out of markets competing against those types of companies.

I wonder, based on some of the rhetoric you are seeing, is that market still attractive to you, and do you think that they have particular advantages over them, significant advantages over them in a market like that?

Well, I've definitely seen that some of the [I processor] guys trying to go to the flying camera market.

I think the biggest limitation for that is their power and the cost.

If you look at it, the power difference and the [theta out turn] in terms of the total [balm] between the two solutions, quite dramatic.

So I think whether the I processor guy trying to sell is the program of architecture so people can add features easier to the drones, but I think at same time the power is critically important for drones, flying cameras, as well as everybody that we know of is trying to pushing the price lower so they can a keep bigger volume in the future.

I think that we're meant to be very competitive in this market space.

Ted Moreau, Barrington Research.

Given the Xiaomi win that you highlighted, can you talk about how you think your customer exposure will evolve in the wearable sports camera market outside of GoPro for FY16, be it with Xiaomi or any other camera customers?

Usually we don't talk about the customer that they have announced their products.

So right now you know GoPro, you know Xiaomi, in fact we also announced like iON, so much smaller brand.

But we haven't talked about any other people who hasn't announced their products yet.

Okay.

And then on the inventory bump, if I have it correctly, I believe you sell a lot of the same hardware chips across markets, and then just layer on software on top depending on the application, so do I have that correctly?

And if so, how challenging is it to move hardware inventory around within a quarter depending on demand fluctuations across end markets?

It's not difficult for us because it's in the final test process that we configure the chips.

So within a 15- to 20-day period, we can shift inventory between markets and part numbers.

Okay, sounds good.

Thank you so much.

Jay Srivatsa, Chardan Capital Markets.

Fermi, can you give us a sense of what the competitive landscape is in the IP camera market?

I know [ice licken] has been chomping at the bit.

Where are things at, what has shaken up in the last quarter or two?

Any update would be appreciated.

Right.

In fact, I think from a very high level I don't think the landscape change much.

But since we announced H2L and then H2Lm, I think we believe we get market share on the low-end side because the H2Lm presents a much better chip and also with better quality and features, so I think from a competitive landscape, in terms of the competitive point of view, ice licken is meant to be the biggest one, we haven't seen any newcomers trying to compete with us on the IP camera side.

There's still quite a lot Taiwan Chinese guys trying to compete but I don't think they -- they are very, very [fractious and from us and the ice licken] so from than point of view, I don't view that the competitive landscape changed.

Okay, and then turning to the automotive side, I know in the past it's kind of been lumpy, sometimes weaker.

The ability to reach a steady state of business on the automotive side or do you feel like the lumpiness persists going forward?

I think that first of all, until two quarters ago, it's bumpy because our biggest market was Russia, and I think everybody feels Russia economic situation, and but I think they [pucker] up, and I don't think the situation in Russia really improve a lot, but at the other market, like China, Korea, we made a lot of progress winning designs with our both low end, middle end, and high end products.

And especially in Korea, in the past we have zero penetration.

Now we are winning multiple design wins in there.

So I think all of that adds up together that Russia really stabilized, and also we're winning in China and Korea help us to us go back to growth and we continue to expect that the growth will continue this year.

Okay.

And then the last question from me, last year Google did a lot of work on the Helpouts and stuff.

I know you guys were involved in it.

We haven't heard much from them or yourselves.

Where are things at with the project, any updates there?

Which Google project is that?

Yes, the Google, they did the Helpouts.

Oh, the Google Helpouts project.

I think in the first question in the call covered that.

I think they only cancelled that project, and like I answered that question, we never put any revenue forecast into that project, and also for the wearable -- consumer wearable market, we believe that everybody, our customers are looking for killer app, and until they find it I think their market is going to continue to be in R&D mode.

But again I want to say that on the commercial business, the commercial wearable business is growing for the policemen, for the security guard, and we do see real revenue, and more revenue opportunity in the future.

Thank you very much.

[Al Freeman], Coyote Capital.

What's your -- where is your tax rate going longer term, what rate?

Right now we are forecasting high single digits.

Maybe two, three years down the road, any sense of where you would ultimately be or not really?

Well, right now, our US portion of our income has been declining so the rate has been coming down.

We can see the rate probably sliding a little bit in the next couple of years and after that it is a bit difficult to forecast.

And that's all contingent on no changes in the government's tax laws.

Got you.

So the rate we're seeing here is pretty sustainable for the foreseeable future.

That's correct.

Thank you.

Brad Erickson, Pacific Crest Securities.

Just a few follow-ups.

First, on the new launch you mentioned in IP security, was that a new vendor where you had displaced a competitor, or was that just a new ramp with an existing customer?

Well, I think, like I said in the past, you have a lot of interesting customers, so the H2L and H2Lm mainly ramping up with existing customer, but I would say that some of that is replacing our competitors' models.

So I think we will continue to gain market share a little bit with the new introduction.

Got it, that's great.

And then over the last few quarters you talked about that business, the IP security business, that is kind of continually bucking trends or benefiting from typical seasonality, and so now we've seen sequential increases here.

Is this something we could just continue to see sequentially increase here getting back to the back half of the year and stronger seasonality, or is it something that you guys have seen a lot of strength here near-term and may have to see a sequential decline at some point, albeit modest?

I think that for this year, I think that the IP security market going to continue to grow and we haven't seen any signs of slowdown any time soon.

Of course, you know, beyond this year it's everybody's guess, but I think that digital IP security camera continue to replace analog camera.

On top of that, the consumer IP camera really growing fast.

With these two drivers I think that in the near future we still believe that IP security camera going to be our strongest market in terms of growth for Ambarella.

Got it.

And then lastly, you mentioned in the -- I think George mentioned in the guidance that the automotive and the low end consumer IP markets had ticked up since the last conference call.

But gross margin targets effectively the same.

Did anything else improve around the gross margin profile of the business, or was that just because those are just too small to move the needle?

Just any help with sort of any of the other gross margin dynamics that are within the updated outlook.

I think the biggest gross margin driver is mix related to the high end marketplaces.

So we're seeing strength with the A9 across multiple markets, so that has probably been the biggest up side contributor.

If you look at, going forward, the low-end security market is what's going to offset the higher-end products and bring that back -- our overall gross margin back down into the range.

Got it.

That's great.

Thank you very much.

Thank you.

And I'm showing no further questions at this time.

I would like to turn the conference back over to Mr. Fermi Wang for any closing remarks.

Thank you.

I want to thank everybody for joining us today, and a special thanks to all our employees for their continued dedication and hard work.

And thank you and good day.

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

This does conclude today's program and you may all disconnect.

Have a great day, everyone.