Ambarella Inc (AMBA) 2016 Q1 法說會逐字稿

Welcome to Ambarella's Q1 FY16 earnings call.

(Operator Instructions)

As reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Deborah Stapleton.

Thank you.

Good afternoon, and welcome to Ambarella's first fiscal quarter 2016 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 information regarding our first fiscal 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 March 30, 2015 for the FY15.

Access to our first-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 will now turn the call to Dr. Fermi Wang.

Thank you, Deborah.

Good afternoon, everyone.

We are extremely pleased with our Q1 2016 financial results.

Our revenue was $71 million, representing an increase of 73.5% over the revenue in the same period in the prior year.

Revenue was strong in all our existing camera markets, including professional IP cameras, wearable, and automotive dash cameras.

We continue to make progress in new markets, including consumer home monitoring] cameras, and drones, or flying cameras.

In the professional security camera market, increasing demand for cameras with higher mega-pixel resolution and the wide-angle viewing capability continues to drive sales of our IP camera SoC families.

During the first quarter we saw strong revenue growth driven by China security leaders HIKVision and Dahua, and the significant volume shipments of our new S2LM camera SoCs.

At the April ISC West Security Conference and Exposition, many of the world's leading camera makers demonstrated 4K or Ultra HD cameras based on Ambarella's S2 SoC.

Ambarella also demonstrated its new S3 IPcamera SoC, the first to support the new H.265 video standard at 4K or ultra HD resolution.

Also during the show, Ambarella announced availability of its S2LM-based battery-powered IP camera reference design.

The reference design enables fast developments of a new generation of a small high-quality battery-powered full HD security cameras, suitable for both professional and home monitoring security locations.

The reference design enables cameras that can start recording full HD 1080p30 video in less than 0.5 seconds from wake-up, and provides up to six months of battery life.

In the consumer home security and monitoring IP camera market, we are enjoying strong demand from our retail customers as well as continued expansion into service provider channels.

In this market segment, Ambarella's highly efficient video encoding enables very low bitrates rates to minimize network bandwidth requirements and reduce cloud storage costs.

During the first quarter, FLIR System announced the availability of a FLIR FX, a compact versatile WiFi-enabled HD camera that integrates unique cloud-based analytics in flexible application-specific amounts.

Based on Ambarella's A7L camera SoC, the FLIR FX provides fulltime 1080p30 HD video with wide,160-degree photo view, Smartzone motion triggers, and the ability to review a day's worth of events in a single minute through its RapidRecap feature.

And US service providers are interested in offering home monitoring cameras as part of their services.

And during the first quarter, Comcast began shipping its high-definition Xfinity home camera based on Ambarella's S2LM camera SoC, a weather-resistant camera can be used either indoors or outdoors to enable complete home monitoring, including doors, backyard and pools.

It includes a wide-angle field of view and a night vision to enable monitoring in the dark.

The camera supports viewing of live video streams on any Internet-connected smartphone, tablet or computer while an enhanced video monitoring service provides video clip storage and video alerts.

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

During Q1, revenue increased based on primary outgrowth from both China and Korea.

At the Hong Kong Sourcing Fair in April, Ambarella demonstrated its new dash-cam reference platform based on the latest A12A camera family of SoCs.

The A12A family provides improvements in image quality in low-light conditions, which support a full high dynamic image processing.

It also includes a powerful ARM A9 Cortex CPU to run more advanced ADAS algorithms and a dual camera input with two channel dash-cam configurations.

In April, Garmin International announced its nuviCam LMTHD, an all-in-one six-inch premium navigator with a built-in dash-cam and event alerts to enhance drivers' awareness on the road, incorporating Ambarella's AL7lA camera SoC, the integrated dash-cam continuously records and automatically save files on impact, offering the protection of having an eyewitness that records exactly where and when events occurred.

The nuviCam also includes forward collision warning and lane departure warning driver assistance.

Also during the quarter, Qihoo 360 Technology, a leading Chinese Internet security company, announced its first connected dash-camera product.

The device includes super HD resolution, 160-degree viewing angle and WiFi connectivity for convenient video streaming to iOS or Android handsets.

Qihoo 360's dash-camera is based on Ambarella's A7LA camera SoC.

For flying camera or drone application, we saw significantly increased activity in Q1.

The market leader DJI introduces new Phantom 3 models.

The new models capture professional quality footage from a new perspective with camera mounted on 3 axis cables, real-time HD video display, and intuitive flight control.

The Phantom 3 professional model features a 4K Ultra HD camera with 12 megapixel of photos, while the Phantom 3 advanced model features a 1080p60 HD camera, also with 12 megapixel photos.

Both models are based on Ambarella's A9 camera SoC family.

And in Q1 we continue to enjoying strong sales in the wearable camera market led by GoPro, as well as our new market entrant Xiaomi.

At the end of May, GoPro announced its new Hero Plus LCD camera featuring an LCD touchscreen, WiFi and Bluetooth connectivity, 1080p60 video recording and eight megapixel photos.

The Hero Plus LCD is based on Ambarella's A7L family.

In April [Garmin] also announced it next-generation of HD action cameras, the Virb X and Virb XE.

The cameras combines HD video with data for sensors for speed, altitude, g-force and GPS position and include both WiFi and the Bluetooth connectivity, as well as electronic image stabilization.

The Virb XE supports 1080p60 HD video recording with 12 megapixel stills at up to 30 frames per second, while the Virb X supports 1080p30 video and 12 megapixel still at 10 frames per second.

Both models are based on Ambarella's A7L camera SoC family.

In conclusion, we are very pleased with our Q1 results and our continued progress in our various markets.

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

Thank you Fermi, and good afternoon everyone.

I'll start today with a discussion of the financial highlights for the first quarter of FY16 ending April 30, 2015.

I will then move into -- onto the financial outlook for Q2 of FY16 that ends on July 31, 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 Q1 2016 revenue of $71 million represents an increase of 73.5% over the $40.9 million of revenue in the same period in prior year.

Camera market revenue is estimated to be 96% of Q1 revenue compared to 90% for the same period in the prior year.

The wearable market, led by GoPro and the launch of the new Xiaomi camera, demonstrated strong year-over-year growth and, as expected, was flat sequentially.

The year-over-year growth numbers were bolstered by the soft Q1 revenue in the wearable market last year.

The professional IP security camera market demonstrated solid year-over-year and sequential growth in the quarter.

Our Asia customers continue to drive growth in IP security revenues, led by market-leading customers Hikvision and Dahua.

The year-over-year and sequential revenue growth in the consumer IP security reflects continued traction in the retail markets and initial penetration into the service provider channels.

Q1 automotive market revenues continued the positive trend, with both sequential and year-over-year growth led by customers in Korea and China.

The automotive market in Russia remained soft with the weak economic conditions in the country.

First-quarter infrastructure revenues were down compared to the previous year and quarter.

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

Non-GAAP gross margin for Q1 of FY16 was 64.8% compared to 64.3% in the immediately preceding quarter and 62.7% in the first quarter of the prior year.

Gross margin in the quarter was positively impacted by favorable product mix resulting from solid penetration of our high margin A7L SoC in the automotive after-market and wearable camera markets.

Non-GAAP operating expenses for the first quarter were $20.2 million compared to $18.9 million for Q4 of 2015 and $16.9 million for Q1 in the prior year.

This year's Q1 OpEx reflects the benefit of approximately $935,000 of payments for development work performed on behalf of customers.

Excluding the development payments received, OpEx increased through -- into higher chip development costs and employee compensation cost.

Non-GAAP net income for Q1 2016 was $23.7 million, or $0.71 per diluted ordinary share, compared to -- compared with non-GAAP net income of $7.8 million, or $0.25 per diluted ordinary share for the same period in the previous year.

The non-GAAP effective tax rate in Q1 2016 was 8.4%.

In the first quarter, the non-GAAP earnings per diluted ordinary share are based on 33.5 million diluted shares as compared to 31.8 million diluted shares for Q1 of FY15.

Total headcount at the end of Q1 2016 was 543 compared to 524 at the end of the previous quarter, with about 81% of our employees dedicated to engineering.

Approximately 75% of our total headcount is located in Asia, primarily in Taiwan and China.

We ended Q1 with cash and marketable securities of $235.2 million, adding $24.8 million of cash from operations in the quarter.

Total accounts receivable at the end of Q1 2016 was $39.2 million, or about 50 days sales outstanding.

This compares to accounts receivable of $40.2 million, or 57 day sales outstanding in the prior quarter.

Net inventory at the end of Q1 was $25.8 million, or about 86 days, compared to $21.7 million, or 72 days at the end of Q4.

During the quarter the Company continued to increase inventory levels in our high volume parts to support anticipated customer product launches across multiple markets.

In addition, we began volume production of our new S2L and S2LM SoCs in support of multiple new product launches in Q2 in the security market.

Accounts receivable and Inventory remain in line with customer targets.

WT Microelectronics, our Asia logistics supplier, represented 64% of our revenue in the quarter compared to 69% for the same period in the previous year.

Chicony Electronics, a manufacturer of camera products for multiple OEM customers as well as for their own distribution, represented 27% of revenue for Q1 of FY16 compared to 17% for the same period in the prior year.

WT and Chicony are our only 10% customers.

I would now like to discuss the outlook for Q2 of FY16.

We expect revenues for the second quarter of FY16 ending July 31, 2015 to be between $79 million and $83 million.

This represents an increase of between 68% and 77% over Q2 of last year.

We expect Q2 revenues to be strong across both new and established camera markets due to the initial ramp of products from a wide range of customers.

New product introductions such as wearable cameras from GoPro and Xiaomi, two new flying camera models from DJI, as well as a broad-based launch of products incorporating our new S2LM SoC in the professional and consumer security markets are expected to accelerate growth in the quarter.

In Q2 we are forecasting meaningful revenue contributions, both -- from both the consumer IP security and flying camera markets, with initial launches of drones with integrated cameras expected to push Q2 flying camera revenues over 10% of our total revenues for the first time.

The unusual high number of new product launches we are experiencing in Q2 have historically occurred in our third fiscal quarter.

Therefore, we anticipate that our second-half quarterly growth profile will more closely follow our historical seasonal trends and year-over-year growth will moderate.

As we have said in the past, the initial ramp of products may not necessarily be indicative of the sustained run rate for the products, as it takes several quarters to determine market acceptance.

We estimate Q2 non-GAAP gross margins to be between 63.5% and 65% compared to 64.8% in Q1 of this fiscal year and 65.1% in Q2 of the prior year.

Margin from camera products are expected to remains strong as increased sales in the lower margin S2LM-based security business are offset by the increase in flying camera revenues and the continued transition to the A7L SoC in the auto after-market.

We expect non-GAAP net income for the second quarter to be between $26 million and $28 million.

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

We estimate our diluted share count for Q2 to be approximately 33.9 million shares.

I'd like to thank everybody for joining our call today.

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

(Operator Instructions)

Matt Ramsay with Canaccord Genuity.

Yes.

Thank you very much.

Good afternoon guys, and good morning from Taiwan.

Congratulations, obviously on the strong results, and particular the guidance.

I guess from me, George, you gave some very good color on the end markets that are driving not just the strong Q1 results, but the Q2 guidance.

Maybe you could give an update on your view of the full-year top-line growth rate, because I know that is something that you have discussed in the past relative to your comments for some moderate end growth in the back half off the year off the very strong first half?

Thanks.

Yes, I think the best way to look at the second half is probably moving closer to our traditional seasonality.

And that would be Q3 increasing over Q2 in the low teens and then Q4 dropping in the mid-teens.

And that would give you, based off my guidance, an indication what the full-year revenue number should look like.

Great, that is helpful.

Fermi, obviously there are some new markets that are taking a pretty quickly here, particularly drones.

But I wanted to see if you could talk about the security camera market a little bit in detail.

I think that market, if I am correct, was up over 100% year over year the last two years.

Maybe you could talk about what you expect from a growth for your security camera business.

That's number one.

And number two, I noticed you announced that the Comcast camera in addition to AT&T.

Are there other ones in the pipeline, and maybe in regions outside of the United States?

Thanks.

First of all, you are right that for the last two years our professional IP security camera revenue has grown more than 100% year over year.

And for this year we continue to see strong growth from our big customers, from Hikvision, Dahua.

And from that point of view, we still think that professional IP security camera will continue to provide growth for us, and from above our Company growth rate.

But I think the biggest growth for [public] security camera point of view is going to come consumer side, although the revenue number is low at this point, but I do believe that the potential growth rate from that market is going to be big, considering that we'll [lease up] AT&T and Comcast, and also we have some of the retail channels going, for example, FLIR we mentioned.

We have Dropcam in the past and continued shipping to Dropcam.

Now it's part of (inaudible).

And also channel guys also doing well.

So I think from a security camera point of view, I still think this market going to continue give us strong growth, particularly in the consumer side.

Great, thank you.

Let me sneak one more in for George and I will jump back in the queue.

I think, George, when you started in giving your initial FY16 guidance, I think it implied operating expenses in the $88 million-ish range.

I wonder if you have an update to that, because I think your Q1 number came in a little lower than I would have expected, given some costs that were covered by partners.

Maybe you could talk about the OpEx rates that we could expect for the rest of the year relative to the leverage in your model?

Thanks.

I think my previous forecast for OpEx is probably still valid.

We are slightly behind in hiring, but I would expect us to catch up as the year progresses.

And we will continue to invest at similar levels that I had forecasted for the new chip development.

So I am still comfortable with the annual OpEx number.

All right.

Thanks very much guys.

Congrats again, and I will get back in queue.

Thank you.

Quinn Bolton with Needham.

Hey, guys.

Let me add my congratulations to the strong numbers and outlook.

Question for you, Fermi.

Last year I think you saw a nice uptick in the drone market in the July quarter.

Certainly sounds like you are seeing that again with drones revenue, such that exceed 10% of sales in the July quarter.

Can you give us some sense what seasonality is like in that market?

Especially since drones carry such rich gross margins.

Is Q2, do you think that is going to tend to be the peak, just given the build ahead of the holiday season?

Or do think you can see continued sequential growth, and then the second half of the fiscal year?

And I have a couple of follow-up questions.

Okay.

So for the flying camera market, last year Q2 was definitely, because our DJI was [renting] out quickly to prepare for the selling season.

However, this year I think it's a sustainable business.

Whether the Q3/Q4 will have a continued high growth rate remains to be seen, because this is really (inaudible) on their new model, Phantom3, with professional [advanced].

We are eagerly waiting to see whether they can -- they are a sell-through number, we haven't got that.

But right now we are optimistic.

The whole market going to continue to grow based on few facts.

The first fact is that we continue to see a lot of these activities with different customers, but more importantly I think DJI has shown strong growth year to year based on our shipment.

So I think based on the information, I think I am confident that this whole market will continue to grow for us.

Great.

And just shifting over to the sports camera market, historically GoPro has been the vast majority of that revenue stream for you.

You have announced a number of new cameras, including Xiaomi and Garmin.

I was wondering as you look forward, do you see that business becoming more diverse across the customer set, or does GoPro continue to represent the vast majority of that business going forward?

In the past GoPro was the majority of business, and I think it was the Xiaomi ramping up, I definitely think Xiaomi shipping very good volumes.

And we like to see the sell-through number before we make a comment about your question, but I think for this particular quarter we do see Xiaomi start become a bigger percentage of our sports camera.

Great.

Thank you very much.

Thank you.

David Williams with Ascendiant Capital Markets.

Hey, good afternoon, guys.

And again, let me add my congratulations on the quarter.

I wanted to see if maybe we could think about your roadmap.

And as we think about the generational performance enhancements that we see with each new iteration of your chips, when do you get to a point maybe along that curve that you start really pushing up against an inability to further progress the chip, and maybe where you start seeing some competitors catching up to you?

Is there something up the roadmap, perhaps, say, with analytics or something that we can look at that helps you in the longer term stave off the competition that is surely to come over the next couple of years?

Right.

So yes, you are right.

Of course, in the past we are continue pushing on the envelope on (inaudible) rate.

I think that there are other angles you need to look at.

For example, there's a huge transition from 8.264 compression to HEVC, which HEVC provides 50% compression efficiency improvement.

Our estimation the die size on the encoder side is five times more complicated.

So after that, if you want to continue improve performance based on HEVC and the very high resolution, you really create another barrier to entry, especially if you want to maintain the power number and the reasonable numbers where our portable camera customer can fit.

HEVC, say full HD camera, into a (inaudible) form factor.

So there are multiple angle that we are addressing right now.

In addition to that, there are many features that we talk about has been popular on cameras.

We talk about high (inaudible) twice higher performance resolution compared to low dynamic range (inaudible) solution.

We talk about low light performance.

We talk about video analytics.

In fact, video analytics in my opinion go together bigger and bigger.

In fact, we did a quick estimation about the performance required to implement all of the video analytics feature that we need to implement in the last few years.

The number is mind-boggling.

So I think there are many other ways in addition to just the (inaudible) rate and the resolution that we can continue to push performance.

And so that we can continue to introduce higher-end products in the future.

Thanks.

And then if we think about maybe these new growth vectors that have come in, the flying drones and some of this wearable cameras products, how big do think that can be as a percentage of your overall revenue?

If we think about the newer stuff that's been -- that has come up in the last two to three quarters, how big do you think that can become as part of your business, say, in the next year?

First of all, I think George just gave guidance for Q2.

We believe the drones going to be more than 10% of total revenue.

And I think that will stay there, if not bigger.

My personal opinion, because the market is just start developing.

There's a lot of [height] behind it, and there a lot of activity.

[Actually] there'll be a lot of consolidation in the near future, but I think -- let me put a comment on the market side.

I really think the market can be -- as potentially can be as big as wearable sports cameras.

All right.

Thanks again, guys.

Appreciate the time.

Thank you.

Ross Seymour with Deutsche Bank.

Hi, guys.

Throwing in my congratulations as well.

George, when you talked about in the past what the gross margin might do in the second half of the year, and you -- the confidence that you had that it might fall.

It sure doesn't sound like that is coming into the mix.

Can you talk us through, similar to the rough guidance you gave for revenues in the second half, what you now expect the gross margin to do?

Yes.

I would anticipate now with the change in mix with drones, as well as the step increase in the A7L products which is ramping faster than we originally anticipated, I would expect the margins, although they will still decline some, I would expect them to be stronger than my earlier guidance.

We are looking probably at the high end of my target model, or slightly above now, I think for the second half.

Just to confirm, that the old target was 59% to 62%.

So you're saying at or slightly above the 62%?

Yes.

Great.

And then a longer-term question, Fermi, for you on the infrastructure side.

Obviously it is not the sexy market now but it does carry really, really nice margins for you.

When do you expect HEVC 8.265, all of the 4K transition in general to start showing in the infrastructure line?

That's a cool question, I think, because every time I talk about this I mentioned 18 months.

I still think 18 months away.

I think that this partition of work has the industry -- hasn't made enough investment to push this format forward, because it basically involve a lot of set-top box infrastructure change.

There's huge money investment to get HEVC and 4K in place.

So sometimes I think that the Internet, which is (inaudible) Netflix start talking about HEVC and 4K.

I expect that will happen first instead of traditional broadcasting customers.

Great.

And if I can sneak one last one.

The answer to this always in the past has been that you haven't seen anybody but Hisilicon, but given the success you've had in these explosive end markets that you're doing such a great job of addressing, have you seen any emerging competition coming into the equation?

In fact, when you talk about (inaudible) the market, if you go to see it, you see a lot of [at] processor guys start talking about they want to participate in the strong market because it is only the high-end solution, the last CPU performance.

You can say that if you can talk to [Incho] or CoreComm, they all say they are going to come into the drones.

So I think because, like you said, this market become very visible, especially flying camera drone market become so much visible.

So that I won't be surprised that those people who has video solutions on the at processor guys, like we talked about before, start having interest in this market.

Great.

Congrats again.

Thank you.

Thank you.

Ted Moreau with Barrington Research.

Thanks for taking my questions, and I offer my congratulations again.

Guys, the stock has risen strongly, particularly in the last couple of weeks.

How do you think about potentially using your stock, maybe either to raise capital, if that's something that you have an interest in doing?

Or even for M&A, and maybe even trying to expand your R&D expertise into the software and analytics that you have been talking about.

It's George.

We have said in the past that we are definitely interested in M&A activity, primarily around key areas like analytics, algorithm development.

We continue to search for good opportunities.

And yes, we would be open to using stock in one of those transactions.

We also have significant cash on the balance sheet which is also available for this type of transaction.

So we would either, depending on the size, it could be cash plus stock or just cash.

This is Fermi, because I want to add one more comment.

You see, we have a (inaudible) headcount growth and the headcount growth is definitely target to speed up our internal video analytics development in terms of software and algorithms.

Okay.

And then separately, thanks for breaking out the drone opportunity for fiscal Q2 and sounds like for the rest of the year.

I am wondering, if you step back and think about maybe over the next 12, 24 months timeframe, what do you think like on the camera side, what do you think -- how could your mix -- how do think your mix ends up shaking out across the various markets?

I think our current markets are still growing.

Our core markets are growing well.

We are adding, at least in the next 12 months we hope to add volume from both drones and home security.

Therefore I would see those as a percentage of the sales continue to increase, and probably a small decline as a percentage of sales in the wearable area as well as potentially in the professional security.

So you will see the mix change more towards some of the new markets.

And this is pretty much in line with what we had forecasted.

That is helpful.

And then is it more these newer markets are just growing that much faster, or do you see a slowing of the growth rates of the more traditional wearables and IP security, professional IP security markets?

I think the current markets are growing pretty much in line with what we had said earlier in the 20% to 30% range, depending on which market.

One market, the auto after-market, has been growing above that.

So of our traditional markets, that's probably one of the fastest-growing markets, but it is off a small base.

Great.

Thanks for taking my questions.

Jay Srivatsa with Chardan Capital Mark.

Yes.

Thanks for taking my questions, and congrats on a good quarter and guidance.

Fermi, on the automotive side, in the past it's tends to be lumpy and somewhat unpredictable.

How do you see the pattern going forward?

And do you have enough visibility in how that will play out for the rest of the year?

Yes.

Thank you, Jay.

I think that we are now seeing a clear market growth in China, and also we are taking market shares in Korea, which is probably also a very large [batch] camera market.

And just that the Chinese market is growing fast.

And we mentioned Qihoo 360, which is large, a very large Internet security company in China.

So starting in to build a batch camera.

When we expect to feel more company, we'll start doing that.

And with that, we believe that batch camera will continue to provide us growth in the long run.

And I think the (inaudible) that you saw in the past is mainly because the Russian market was weak for the last 18 months.

And that continue to be the case.

But however the growth on the China and Korea, overcome it.

All right.

And then back to competitive dynamics related to Hisilicon specifically.

They had been playing in the low-end market, but they've entered some solutions targeting the mid-end and to a certain extent the high-end.

How do you see the dynamic between the two of you as you look at the rest of the year, especially in the China market?

I think that the dynamic hasn't changed.

In fact, they still continue to be very aggressive on pricing on low-end side.

In fact, we saw H2LM, we can be very aggressive on low-end side too, but we leverage our strength on high-end, middle-end, and continue to compete with them.

I don't think this balance will change because I think that we can continue to invest, Not only the resolution and (inaudible) rate but also the quality on the features, on the video analytics.

So all of that combined, I think gives me confidence that we are going to continue to occupy the midstream and the high-end and continue to fight Hisilicon on low-end side.

Thank you very much.

Charlie Anderson with Dougherty & Company.

Thanks for taking my questions, and my congrats as well.

Fermi, I wonder if you can give us a high-level view of the drone quadcopter market and also the home security market?

How big is that market size at this point on an annual basis?

I'm not speaking to your units, but the total market as you see it between those two right now?

We don't have any market data with those two markets.

But they definitely grow fast.

Let's talk about drones first.

We don't have any data, but I won't be surprised that this market grow beyond 1 million units this year, easily.

And then they'll continue growth on there.

When I say drones, means the drones with camera.

There is a lot of drone without camera with tactical events as a total (inaudible) but we only focus on drones with cameras.

On the consumer camera side, consumer IP security camera side, we really don't have data because there are a lot of the players out there.

And we do have some success with service providers in US and in Europe.

And also we have successes in channel.

But we really don't have any market data to indicate how big it is We would love to actually see that.

I won't be surprised that there are many, many players in there.

And I have to believe that we are the -- on of leader, if not the leader.

Great.

And then I have a few housekeeping questions for George.

George, could you speak to what you're seeing sequentially in sports camera July versus April, if that is going to be up, down or flat?

And then I also wonder if you could address inventory?

I think you're up 2.5 times year over year.

I mean, clearly you're building for these new markets, but at a faster rate than revenue growth.

So if you could address what is happening there.

And then last one on that is on the customer-funded R&D, I wonder if you could speak to what end market that is in?

Let's go in reverse order.

First on the customer R&D, it's actually across all our core markets.

We've had multiple projects running at this time.

On the inventory.

The growth of the inventory is pretty much in line with our launch plans and new products.

We're comfortable with the S2LM ramp, as well as the ramp in support of A7L automotive and wearable devices.

We will see the inventory probably increase a little bit over this quarter and then start to decline as we go into Q3.

On the wearable side, across let's call it -- you want it specifically on sports cameras.

We would see Q1 to Q2, actually an increase.

You saw the GoPro launch a couple of days ago, which has a significant impact, as well as the ramp of the Xiaomi camera.

Perfect.

Thank you so much.

Joe Moore with Morgan Stanley.

Great, thank you.

I'm curious when you guys talk about wanting to build out your analytical capabilities.

Where do you stand now, not comparing to your traditional camera competitors but comparing to companies like Mobileye?

Do you have the kind of expertise that they have, and is that the ultimate goal, is to develop that?

Joe, I think (inaudible) definitely for the automotive OEM is one (inaudible) video analytics technology.

But at same time, the video analytic technology that we are developing also apply to across-the-board all our current markets including wearable, including IP security, including drones.

And so that in terms of engineering development, we are ongoing with the development.

We haven't comment about the schedule that we going to deliver the first product.

This is absolutely one of the first priorities in terms of engineering (inaudible) in the Company.

We believe we can monetize this technology on other market first, then moving to automotive when become more mature to compete with a big company like Mobileye.

Great, thank you.

And then separately, can you give us an update on 14-nanometer?

Are you going to be able to have those products out next year and into consumer markets?

Our 14-nanometer schedule hasn't changed since we talk last time.

Great.

Thank you very much.

Great quarter.

Thank you.

Kevin Cassidy with Stifel.

Thank you for taking my question.

On the wearable cameras, I am thinking of the market for police forces.

Have you been involved with any contract bids or any new developments there?

Maybe if you could say what markets are most interesting to you?

Sure.

We are involving a lot of these [ongoing] activities.

And we are shipping continue growing volume into Asia, particularly China.

If you go to China, a lot of Chinese policemen's wearing HD camera which is based on our [IP] solution today.

We also involve on a lot of these ongoing discussion with US and European customers.

And we usually don't talk about the customers before they announce it.

Okay, great.

And battery life is a key factor in there.

And I believe your latest products support eight-hour battery life.

Would the 14-nanometer extend that even further than eight hours?

14-nanometer is so expensive, I think it will go to other high-end markets first before it go to wearable.

But yes, if people can afford the price that the 14-nanometer will make the battery life even longer.

However, there is a trade-off between the price and the feature set.

And that is something balance.

So we believe even with our current technology, we can help the current wearable camera go to eight hours already.

Okay great.

Congratulations again on these great results.

Thank you.

Brad Erickson with Pacific Crest Securities.

Great, thanks for taking my questions.

Just a few follow-ups from earlier.

First, just want to make sure I'm understanding correctly.

When you talk about the July quarter relative to the guidance, historically I think the July quarter's been flattish, sometimes up, sometimes down.

You mentioned the consumer IP market.

You mentioned drones.

When you think about the other contributors to the sequential increase, how would you rank order between action cameras, IP surveillance and then automotive?

I don't think I've really rank them in the past, but there is a contribution in Q2 from a lot of new customer launches, and it is actually across all the markets.

You have heard me talk about the S2LM in home and professional security.

You have seen GoPro and Xiaomi ramps taking place.

There's significant number of A7L-based product ramps across Asia in the auto after-market, as well as the two new drones.

I don't normally rank those, but you can see it's a pretty broad-based revenue -- there's support for revenue across all the markets.

Great, that is super helpful.

And just on the 8S product, I think people generally understand design cycles in automotive being somewhat longer, in some cases three to five years.

As you start to work with some Tier 1 auto suppliers, where do think you are in terms of the validation and testing time lines that inevitably are involved with winning OEM-embedded business?

And I guess along those lines, are we three to five years out potentially from meaningful revenue in that segment, or could it potentially be longer if there were further validation and testing necessary?

Brad, in the automotive OEM business we talk about we have the three opportunities to penetrate.

(inaudible) is one, which will the longest to get there.

But we also talk about we have technology like electronic views, and also we have surround view technology.

And for the electronic view and surround view, I think we have a solution and we're talking to customers.

I think both the (inaudible) technology, and we are [either] designing activity, talking to them.

So I will be hoping that those two markets will give us to the OEM faster than the (inaudible).

For (inaudible) you are right, is going to be a full five years out there.

Got it.

That's great.

Thank you.

Suji Desilva with Topeka.

Hi Fermi, hi George.

George, nice job on the quarter.

Can you talk about -- Fermi, you talked a lot about the drone market.

Can you talk about why you are optimistic about the demand opportunity there, just to have some color.

Obviously, you're seeing a lot of customers.

I think why drones made me excited because the first I saw it, I saw video was total different perspective.

That is very rare, because I've been working on video for 30, 35 years.

So you see a video being shot by a consumer that is not (inaudible) in the path, and you realize that there are many, many different applications can pop off on this one.

And I think that DJI has prove that's the case.

And I think all DJI is selling the cameras through the retail channel to consumers, but I wouldn't be surprised, there are many other applications.

You're just buying DJI drones and using for their other vertical business.

From my point of view, I think they're a tremendous opportunity for us to get proving forward, because also I optimistic because that for a drone to work properly, they need a very clear video.

And that means they need to push not only the resolution and the (inaudible) rate, but also they are going to need better video processing, better lowlight performance, better HDR, better (inaudible) in the future.

That give us a very consistent with our roadmap, ) and I will put on a table.

So not only just because the market we believe going to continue grow fast, but also it going to continue to consume the (inaudible) we're going to develop.

And that's why I felt very excited about this opportunity.

Okay.

And my other question on Hikvision and Dahua, your customers there.

Is that business mostly government, or is it corporate as well?

What's the runway for that left?

Is there still a large underpenetrated opportunity there?

We don't clearly know here Hikvision and Dahua sell their camera to, but I think 70% of their camera going to the China internally and 30% are exported.

And I think [internally] is, like you say, it's going to be in the government buildings, in the casinos or banks, also enterprise implementation.

So if you look at the total security camera market, still more than 50% is [aerial] camera.

And I expect that by the end of the year is going to be 50/50 split between aerial camera and IP security.

And so from there -- that's why I still believe there is some growth for us in the next couple of years.

Last quick question.

You mentioned the battery-powered camera that can go six months and wake up on event.

Is that a niche market, is that a high-volume market?

What do you think that opportunity [is versus] the other one?

It's a question we debate in-house.

I do have -- my personal opinion is I think there is a lot of applications can be used.

One most popular use case we have people talking about is using as a doorbell.

So that when you ring the door, the camera pop up, captures video and send the video through the WiFi connectivity to your cellphone so even if you're not home, you know exactly who shows up at your home.

So that is one beautiful application.

I think if that happens, it could be a huge opportunity for us.

There's a lot of doorbells out there.

Thanks, guys.

Thank you.

I'm showing no further questions or comments at this time.

With that said, I would like to turn the conference over to Dr. Fermi Wang for any further remarks.

Thanks to all of you for joining us today.

And we really appreciate your support.

And I would like to say a special thanks to all our employees for their continued hard work and the dedication to Ambarella.

Thank you, and goodbye.

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

This concludes the program.

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