Ambarella Inc (AMBA) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen, and thank you for your patience. You have joined the Ambarella fiscal Q3 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Ms. Deborah Stapleton.

Thank you.

Good afternoon and welcome to Ambarella's third fiscal quarter 2016 financial results conference call. We 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 fiscal third 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 and the Form 10-Q filed on September 8, 2015 the second fiscal quarter of 2016. Access to our third 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'll now turn the call over to Dr. Fermi Wang.

Thank you, Deb. Good afternoon everyone. We are pleased with our Q3 FY16 financial results. Our Q3 revenue was $93.2 million, representing an increase of 41.9% over the $65.7 million of revenue in the same period in the prior year.

During the quarter, we saw strong sales from our existing markets including professional IP security cameras and the automotive aftermarket dash cameras, as well as for new markets including flying cameras and home monitoring cameras. This growth has partially offset by the expected headwinds in our wearables sports camera market due to high inventory levels at the customers.

We continue to enjoy strong design momentum and the quarter saw the introduction of our significant number of new cameras, many from customers new to Ambarella. The introduction of three new SoC families during the quarter is also helping to drive new design wins across all market segments.

In the drone, or flying camera market, we are enjoying significant revenue increases driven primarily by sales of our 4K or Ultra HD camera SoCs. We expect that flying camera will be a popular gift item for the holiday season. During October, Ambarella extended the industry-widest range of flying camera SoC for solutions is the introduction of its new a A12S and A9SE camera SoC families, delivering full HD and Ultra HD video with advanced image stabilization.

The full HD A12S SoC family enables a new generation of flying camera, including small phone factory design, racing drones and a sub $199 entry-level models. The 4K Ultra HD A9SE SoC family is ideal for mid and high-end design. Both SoCs deliver outstanding high-resolution video, DSLR quality photography and the low delay live video streaming. A comprehensive flying camera software developer's kit gives developers the ability to differentiate to their products with advanced camera, flight control and the networking features.

In September, drone market leader, DJI, introduced its Zenmuse X5 and X5R series of aerial cameras. The world's first set of a mirrorless compact Micro Four Thirds camera built specifically for aerial photography and cinematography. The Zenmuse X5 includes three access gimbal stabilization and interchangeable lens mounts and the full wireless remote control of the camera settings, including focus and aperture. While Zenmuse X5 supports a 4K video recording and a 16 mega-pixel photos, while the Zenmuse X5R also adds supports for lossless cinema 4K RAW video. Both cameras use Ambarella's A9 SoC.

During the 2015 Hong Kong Electronics Fair in October, China-based AEE demonstrated its new TORUK AP12 drone based on Ambarella's A7L SoC. The ap12 features a 10 app 60 video camera with a three access gimble and supports advanced flight control including automatic landing and the take-off and the return to home.

In the professional wearable market, Taser, a global leader in full and body-worn police cameras and evidence management technology announced its HD AXOM body 2 camera. The camera is part of the AXOM platform that connects cloud, mobile and the wearable technologies. The camera is based on Ambarella's A7L SoC and it includes excellent low-light sensitivity and the ability to record up to 12 hours of video on a single battery charge. In late November, Taser announced they won a major bid to outfit 22,000 London metropolitan police officers with its AXOM Body 2 cameras.

In September, wearable camera market leader, GoPro, introduced its Hero+ camera, a $199 waterproof and mountable model with Wi-Fi and the Bluetooth connectivity. The Hero+ captures 1080p60 video and 8 mega-pixel still images and includes voice time lapse and burst photography. Hero+ is based on Ambarella's A7L SoC.

After the China Security Show in October, Ambarella demonstrated its new S3L IP camera SoC family delivering the benefit of H.265 or high-efficiency video encoding for home monitoring and the mainstream professional IP cameras. The S3L provides up to twice the video compression of Ambarella's H.264 encoding technology, enabling cost saving from reduced storage requirements and the ability to stream higher quality video over bandwidths-restricted networks. S3L also includes high dynamic range imaging, 180-degree fisheye lens correction, and the high-performance CPU for intelligent video analytics.

During the third quarter, a number of leading consumer brands introduced new home monitoring cameras and the innovative IoT devices based on Ambarella solution for the first time. For example, in November, D-Link announced its Komfy Switch with camera, a new Smart Light switch for homeowners looking to create a smarter and a safer home. Built to replace a standard light switch, it combines a 1080p camera with ability to monitor a range of environmental changes, including temperature, humidity and air quality.

Also in November, Netgear announced its Arlo Q wi-fi home monitoring camera. The Arlo Q features 1080-p HD video, wide 130-degree field of view, four megapixel sensor and advanced night vision. It includes ability to create customized activity zones with specific alerts and also features talk and latent capability, a built-in microphone and a speaker.

The quarter also saw the introduction of the Samsung Smartcam 6414 wi-fi home monitoring camera. The camera features a full HD 1080p video, advanced motion detection, night vision and local recording to memory card.

In the automotive aftermarket, Ambarella provides camera SoC solutions for video camera recorders or dash cams. We are continuing to see strong market growth for dash cameras, especially in China, and now anticipate that our total unit shipments this year will approximately double from the previous fiscal year.

Recently, Chinese Internet leader, Qihoo 360, featured its Ambarella-based connected dash camera during the recent November 11, or "single's day" e-commerce event in China and they reported the sales of over 200,000 units during that day.

We're also seeing new opportunities for dash cameras outside of China with US-based Garmin International and the Korea-based Thinkware promoting new models into the US and other regions. In November, Garmin international announced its Dashcam 30 and Dashcam 35 with HD standalone driving recorders based on Ambarella's AL7A SoC. The Dashcam 35 includes advanced alerts to enhance driver awareness including forward collision, red lights and the speed camera warning.

In addition to new product introductions in our existing markets, our customers are creating a number of innovative new camera categories based on our 4K ultra HD SoCs. For example, in October, DJI introduced its Osmo camera, leveraging its strength in drone camera stabilization to create a new category of a hand-held camera. Osmo integrates a three axis stabilization system to enable a fully stabilized camera with 4K Ultra HD video and 12 megapixel photography. Its automatic panorama mode captures 360 degree images. Also the camera rotates while staying completely level. It also takes low exposure shots without a need for a tripod supporting nighttime photography.

In November, US-based Soloshot, announced its Soloshot3 personal cameraman. It automatically tracks subjects up to 2,000 feet away so user can film themselves from a specific perspective and without the help of another person. Its 4K camera includes 65 times optical zoom and supports automatic editing and the live video streaming capability.

We are also continuing to make a great progress in developing the new technologies that will differentiate future generations of Ambarella SoCs. During the quarter, we successfully taped out our first 14-nanometer SoC which will provide significant power and performance advantages. Additionally, the acquisition of VisLab, an Italian pioneer in perception assistance and autonomous vehicle research is helping us to define and develop future generations of a computer vision solutions.

In summary, we are pleased with our Q3 financial results and by the wide range of new cameras introduced by both new and existing customers in the quarter. The introduction of our new a A12S, A9SE and the S3L SoCs will continue to drive the next generation of innovative products in the months ahead.

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

Thank you, Fermi, and good afternoon, everyone.

Today, I will start with a review of the financial highlights for the third quarter of FY16 ending on October 31, 2015, and then, move onto the financial outlook for Q4 of FY16 that ends on January 31, 2016. During the call, I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting for Q3, we have eliminated stock-based compensation expense as adjusted for income taxes.

Our Q3 of 2016 revenue of $93.2 million represents an increase of 41.9% over the $65.7 million of revenue in the same period of the prior year. Camera market revenue was estimated to be 98% of Q3 revenue compared to 96% for the same period in the prior year. In the third quarter, we had strong year-over-year and sequential growth in IP security, flying camera and auto aftermarket revenues.

As noted on our Q2 earnings call in September, third quarter revenues from the wearable market did decline both sequentially and year-over-year. Lower results in the wearable market reflect the earlier than usual launch in inventory buildup of wearable sports cameras in our Q2 rather than the usual Q3 seasonal manufacturing cycle.

In the IP security market, total revenue was up both sequentially and year-over-year but some softness in China continued in the quarter partially offsetting strong results in other geographic regions. In the US consumer IP security market, we saw solid revenue growth from both retail and service provider channels, most likely driven by production for the holiday season. Other than in US market, it is difficult to distinguish the split between consumer and professional IP security market revenues as the OEMs and ODMs do not make this information available to us.

Flying camera revenues sustained a strong revenue growth experience in the previous quarter as customers increased production for the holiday selling season in North America and Europe. Q3 automotive aftermarket revenues continued their recent positive trend with solid year-over-year and sequential growth. Despite the recent uncertain economic conditions in China, the automotive aftermarket in China continue to grow along with Taiwan and Korea. We believe this is the result of increased demand from customers for future rich products which aligns very well with our product offerings.

Non-GAAP gross margin for Q3 of FY16, was 65.9% compared to 65.3% in the immediately preceding quarter and 63.4% in the third quarter of the prior year. Gross margin in the quarter remained strong due to an increase in flying camera and auto aftermarket revenues as a percent of overall revenues as well as softer revenues from the lower margin China IP security market.

Non-GAAP operating expenses for the third quarter were $23.1 million compared to $22.7 million for Q2 2016 and $18.7 million for Q3 of the prior year. This year's Q3 OpEx increased due to higher chip development and employee compensation costs plus the first full quarter of operating expenses of the VisLab operations, our June of 2015 acquisition.

Non-GAAP net income for Q3 2016, was $36.6 million, or $1.08 per diluted ordinary share. Compared with non-GAAP net income of $22.1 million, or $0.68 per diluted ordinary share for the same period in the previous year. The non-GAAP effective tax rate in Q3 2016 was 4.7%. The lower tax rate in the quarter reflects a year-to-date adjustment for an expected lower annual rate of 7.5%, which resulted from a more favorable mix in profits within our geographic regions.

In the third quarter, the non-GAAP earnings per diluted ordinary share are based on 33.9 million diluted shares as compared to 32.4 million diluted shares for Q3 of FY15. Total headcount at the end of Q3 2016, was 627 compared to 614 at the end of the previous quarter with about 83% of employees dedicated to engineering. Approximately 72% of our total headcount is located in Asia, primarily in Taiwan and China.

We ended Q3 with cash and marketable securities of $276.7 million, adding $36 million of cash from operations in the quarter. Total accounts receivable at the end of Q3 2016, were $46.3 million, or about 45 days sales outstanding. This compares to accounts receivable of $42.1 million, or 45 days sales outstanding in the prior quarter. Net inventory at the end of Q3 was $22.8 million, or about 72 days, compared to $27.8 million, or 83 days at the end of Q2. Accounts receivable and inventory remain in line with Company targets.

WT Microelectronics, our Asia logistics supplier, represented 68% of our revenue in the quarter compared to 51% 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 21% of revenue for Q3 of FY16, compared to 41% 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 Q4 of FY16. We expect revenues for the fourth quarter of FY16 ending January 31, 2016, to be between $65 million and $67.5 million, representing an increase of 0% to 4% respectively over Q4 of last year. We expect solid year-over-year growth in our Q4 IP security, flying camera and auto aftermarket revenues. The Company also expects that Q4 growth in these markets will be offset by a substantial decline in year-over-year revenues from the wearable sports camera market

In the wearable sports camera market, high customer inventory levels at the end of calendar Q3 are expected to have a substantial impact on our shipments in Q4 extending into Q1 of FY17. Although we continue to monitor the China IP security market, we expect Q4 revenues to increase as major manufacturers increase promotional activity, both within China and for export, leading into the end of their financial years.

We estimate Q4 non-GAAP gross margins to be between 63% and 64.5% compared to 65.9% in Q3 of this fiscal year and 64.3% in Q4 of the prior year. Margins from camera products are expected to decline from Q3 primarily due to an increase in lower margin IP security revenues from China.

We expect non-GAAP net income for the fourth quarter to be between $15 million and $17 million. We're using an estimated non-GAAP annualized effective tax rate of 7.5% for net income amounts. We estimate our diluted share count for Q4 to be approximately 34 million shares. For the FY17, we expect to see revenue growth between 15% and 20%, which is somewhat lower than our target model of 20% to 25%.

We expect strong annual growth to continue in all key markets with the exception of wearable sports camera where we expect customer inventory reductions to continue into the early part of the year. The year-over-year decline in wearable sports market in Q1 is expected to result in a moderate decline in Q1 2017 revenue as compared to the same period in the prior year. As we move beyond the difficult first half year-over-year comparisons, we would expect growth in all markets.

Gross margins should move into our target model 59% to 62%, as the year progresses as China IP security market improves and consumer IP security business continues to grow as a percent of overall revenue. Operating margins are expected to be in the high 20s and low 30s as a percent of revenue for the year.

I would like to thank everyone for joining our call today. Now, I will turn it back to the operator to manage the Q&A session. Operator?

(Operator Instructions)

Kevin Cassidy, Stifel.

Thanks for taking my questions and congratulations on the strong quarter. As we look at the sports camera market, I know you can't pre-announce your customer's product builds, but is there some opportunity for new design in FY17? Coming from the sports camera market?

Well, Kevin, I do believe all our customers are going to introduce new products in 2017, but we should not discuss the details in this call.

If we just bring it to the three new SoCs that you announced this quarter, when do think we'll see revenue from those products?

A9SE, A12S, as well A3L, we expect all of their launching revenue starting next year.

So, a typically a 12-month window from the time you introduce the product to seeing revenue?

We are talking about the calendar year 2016 that we shall see revenue from all the three product lines.

Right. You introduced new SoCs is in the first quarter of this year as I remember. At CES, you announced new products. Those products are ramping into production today?

Yes.

Okay. So it's typically, we'll say 9 to 12 months for new products to come to the market?

When we announced A9SE and H1, we have that shipped for a while. We just think of the timing, but in fact we have A9SE and H1 in our lab for a while. I think we fully expect A9SE will be in production first half of next year and A12 probably second half of next year and S3L, we also expect probably a Q2, Q3 next year.

Okay. I will let others ask questions.

Ted Moreau, Barrington Research.

I was wondering on the three new SoCs that you introduced. Are those ASPs in line with the general ASP trends that you've experienced? What are you expecting out of ASP trends generally over the coming year?

I think the ASP trends will be similar. We are offering products at the high-end, midrange and low-end, so you will see a wide range of ASP's. But they should be in line with previous years both from an ASP standpoint and a margin standpoint.

More specifically in drones, do you see any shifting ASPs in drones? Can you comment on that at all?

All of our drones are using our chip at this stage. I always use A9 with their high-end drones. The ASP there is pretty stable and it was a good gross margin. But with A12, we introduced A12 asus for the lower end drone while the ASP in gross market will be lower. But I think we expect that the gross margin profile will be similar to our Company gross margin.

We'll have a complete mix from low-end to high-end next year in the drone market from an ASP standpoint.

Then in drones, do you expect with the Chinese New Year coming up, middle of the next calendar quarter, or the next fiscal quarter, do you expect -- how do you think seasonality plays out, and will impact that market? And that is it for me. Thanks.

Based on our understanding, most of our customers are selling their drones outside China. I don't think Chinese New Year is a factor at this point for this year because it is not there.

Thank you very much.

Suji De Silva, Topeka.

Nice job on the quarter here. Could you repeat, George, the FY17 revenue guidance? I think you said up 15 % to 20%. That's for the full-year? And if so, which segments do you expect to contribute strongest to that?

I think 15% to 20% is what we're talking about. We are looking at strong performances year-over-year from security, automotive and from drones. Those will be the three main drivers. We had a little bit of a year-over-year comparison issue in the first half and once we get through that, we should feel comfortable on the year-over-year growth for all the markets.

In the sports wearable market, can you quantify perhaps if it helps the customer's inventory levels today versus where they would typically be and understand how long this work down will take? I think you said it'll go into the first quarter. But any metrics there will be helpful?

It's difficult for us to quantify actual inventory levels. If you go back to GoPro's announcement they had at the end of September, they had I think over 100 days of inventory. That's the only data point that is out in the marketplace at this point.

The professional security market particularly in China, last quarter you had told me that there was an inventory effort to reduce inventories there and the end demand was not as much at issue. What are you seeing at this point in time with customer's inventory willingness in professional security? And then the end demand, you talked about promotional activity. I'm curious about the dynamic there of sell-in versus sell-through?

I think in the last few weeks we start seeing some signs of recovery in China. That may be related to some year end push for our customers. We tend to be conservative to monitor China very carefully. But we do see some signs of recovery.

And Fermi, their inventory levels, they've been leaned down? They're keeping them lean? Is that the way to think about it?

Yes, that is one way to look at it.

Great, thanks.

Matt Ramsay, Canaccord Genuity.

Thank you. Good afternoon, gentlemen. Fermi, I wonder if you could comment a little bit. Obviously, there's been hyper growth in the sports camera market and now, there's a big correction in that space from a sell-through and inventory perspective. And there's a lot of things going on. But maybe you could talk to us a little bit about the type of innovations that Ambarella is putting into its chips and into its software and what types of innovation that you are pushing into that space to potentially rekindle some growth there given the importance of that end market?

I do think there's still innovation available in that particular market. Of course, that means in addition to the tradition of frame rate and the resolution. We believe that 4K P30 is a mainstream right now and we also believe 4K P60 is going to be a very important format for the sports camera because the frame rate is very very important for the high motion sports type of video.

In addition to that, there are multiple things that we are doing. It's become very clear to us that when you go to this kind of resolution, any kind of stabilization system is very helpful for the quality of the end video. We're spending a lot of time to deliver a stabilization system. We're love using gimbal. But within our system, our chip, we can provide a stabilization system to improve the video quality on the camera, that is one thing.

The other thing I think there's a, throughout the industry there's a new trend talking about high dynamic range. If you look at all of 4K TV, probably people talking about 10 bits being every color of every pixel using 10 bits instead of traditional eight bits. That basically means we improve your dynamic by about 25%. That also means it requires a huge amount of performance and also changes total infrastructure of the capturing system. And with that, we also believe that will improve the experience of video, the sports camera.

On top of that, how to do the transcoding and other things better on our chip so that our customers can provide a better user experience is always things that we are looking at. I think there are multiple directions we are looking at continue to provide innovation for our key customers.

That's helpful. Maybe if we could talk a little bit, you mentioned the first design win with Taser. I know you last year at CES introduced the reference design platform for wearable cameras. Is that potentially an important market, and the timing of that being material to the revenue and what the opportunity set looks like outside of just law enforcement?

I do believe this becomes more and more important because now, when we talk about wearable in the past, we always said we need end to end solution. Meaning that just by wearable camera by itself is not enough. You need to have a backend system so that you can easily to add it, easy to watch, easy to search. I think Taser is doing that and doing a great job on that.

When this kind of end to end system becomes more mature and more easily available and become cheaper, we do believe this type of camera will enable different type of a market? For example, security guard. For example, the firefighters. Our application will start picking it up but it will take time.

From the technology development point of view, it's very important for us to continue to focus on those areas. I will not hunker down for revenue improvement in the near-term. In the long-term, we do see this as an important trend for us to continue to spend our R&D dollar on.

Thanks and I'll sneak one in for George. The $8 plus net cash per share now and a reasonable portion of the market cap in cash given all the stock volatility, any new comments or new considerations we should think about for uses of cash as you generate quite a lot? Thanks.

Not at this time. We have continuing discussions at the Board level about use of cash, including share buybacks, dividends, et cetera. We are focusing on expanding the Company and we're still looking for M&A opportunities. For the time being, I think M&A is really the only significant use of cash that we have publicly talked about and it's probably going to continue that way at least in the near-term.

Thanks very much. Have a good afternoon.

Ross Seymore, Deutsche Bank.

Hello. Thanks for letting me ask a question. Just wanted to make sure I understood, George, in your comments on the April quarter, did I hear right that you said that the year-over-year revenues would be down moderately?

Yes, that's correct.

And the cause of that is continued inventory burn in the sports side or the are there other either seasonal dynamics or cyclical dynamics?

Just the sports inventory correction. We expect that to continue into our Q1.

That is relatively flat sequentially or down say 5% or so year-over-year versus what you guided, is the biggest improvement thereafter to get to your 15% to 20% range just the end of the inventory burn in the sports side in addition to the drones and the auto aftermarket, et cetera, the more secular drivers?

We feel we have strong growth in the other three markets. We would expect after the inventory correction to get to a more normalized sports camera revenue level.

My last question for you George, is on the gross margin side of things. Can you remind us in your full-year guidance the trajectory of that? Because I think this year, you also had guided the 59% to 62% and to your credit, you did significantly better than that. I wanted to make sure I understood the past from the high number you are at now to the more normalized target that you just gave?

As you know, our spread between the high-end and the low end of the margin is quite wide. Therefore, mix really drives the overall blended margin. This year, as I said earlier, the fact that the drone business, which is a higher margin business for us, actually expanded much higher than anticipated. That has offset some of the lower margin business we had so we really overachieved.

Next year though, we see the professional security business and the home monitoring business, particularly in China, growing much faster, therefore putting downward pressure on the margins. With that said, if drones and the auto aftermarket do overachieve, we do have the opportunity to beat the margin profile. At this point, the China market looks to be very strong moving out of Q2 into Q3 and therefore, we are projecting to be moving into that upper range of the target model during that period.

Thank you.

Daniel Amir, Ladenburg.

Question here on the automotive side, I was wondering if you could expand what you are seeing on the automotive space, and when should we see the next generation products coming out of that? And then I have one follow-up. Thanks.

Point-of-sale automotive, we have two different markets. One is aftermarket. For the aftermarket business, we continue to see strength and also we are continuing to offer new solutions coming out. For example, that A12S product, we also have a similar powerful A12A which is for automotive aftermarket. So, we do have a next-generation aftermarket solution and rating to be introduced.

But, if you are talking about the OEM business. That's where our acquisition from VisLab is helping us to deliver a computer vision technology, that will go into our first computer vision chip and we're doing internal development. We continue to believe that the first chip will be about the second half next year.

Okay, and the follow-up on the action camera market, given the issues that you faced here in the past quarter, has your visibility changed in that market versus two, three quarters ago? Or you feel you have the same visibility that you have? It's just now you're of course facing an inventory correction?

Our visibility is pretty similar quarter to quarter. Our relationships are pretty much the same there.

The last question on the action camera, on the drone market, excuse me. Any comments or changes on the competitive front there in terms of other chip providers entering the space?

Yes. In fact, the last conference call that we talked about (technical difficulties) announced their true [reference] design to three months ago. Since then, we spent time to understand their product offering and also try to collect the feedback from the market.

With that, we still believe that their current processor-based solution is quite behind on video quality, compression efficiency, power consumption and video feature and performance. With our announcement of A12S and A9SE, we have a complete road map on the offering for our customer for the sub $199 drone to all the way to $1000 drone. I think we have a complete solution. We are very comfortable with this market with our product offering at this point.

Thanks a lot.

Jagadish Iyer, Redstone Technology.

Thanks so much for taking my question. I just wanted to drill down a little bit more on the gross margins, George. If the variables are going to decline at least for the next say, maybe two quarters, you guided gross margins a little bit tad lower. I was thinking that maybe it should be probably at similar levels to what you achieved in the most recent quarter.

Can you talk about some puts and takes in terms of the gross margin? And if you think the sports market is not going to be improving at least towards the latter part of 2016, should we expect that you could be at the top end of the 59% to 65% range? Thanks.

I think the two biggest puts and takes there on the downside is the China security business. That's significantly lower than our corporate margins. So growth there does pull the blended margin down. That is offset by our higher margin business, which is really now driven primarily by the drone business. It's the mix of those two markets that I have to deal with as far as forecasting the blended margin over a longer period of time. And those are difficult markets to forecast exactly. I still believe we can be in the high end of my target range through at least Q2 and Q3 and we're comfortable with that for now.

Just a question for Fermi then. I just had one thing on the competitive dynamics. Can you talk about what is going on in the automotive side, as well as the dash cam side and also on the professional IP security in China? Do you see some new players coming into the marketplace or do you see so many pricing pressure in that segment? Thank you.

I think, actually I'll do IP security first. I think in that market, we still view the hisilicon as our main competitor in there. In fact, price pressure has been there for three years and the talent we had in China. Last year, had something happen focusing on introducing HEVC solutions. We announced our 4K S3 HEVC SoC in late 2014.

Also we announced our new S3L SoC in China security shield just now in October. And with this high-end OM chip, with this true chip, we believe that we have a complete HEVC format and also, it's a sellable advantage in terms of video quality, compression efficiency, power and the CPU performance over hisilicon. From that point of view, although price is always a big issue in China, but we continue to offer solutions and a road map to compete with that.

There are many other smaller vendors going in. QUALCOMM also introduced a platform for IP security camera, but I think their solution is not mature yet. The other smaller guys, I don't think that's put a huge impact on the market yet. On the auto side, it's really a wide range of low-income customer, low price tag AIT. Korea, there's a few other companies that trying to compete purely on the price. So pressure is always there. We also heard hisilicon is trying to go to dashcam. That market is very competitive for the Chinese and Taiwanese SoC vendors.

That is helpful, thanks so much.

Charlie Anderson, Dougherty & Company.

Thanks for taking my questions. I wondered if you could help us with the magnitude of the sports camera down tech on a percentage? What percent are they in October versus January or any context you could give there would be helpful, George?

Let's just do it in general terms first. They'll be substantially down in Q4 and Q1, both from a revenue and a percent of revenue standpoint.

Okay, got it. For Q1, do you expect quad copter to be up or down sequentially or flat?

Right now, we think it may be up a bit from Q4. But Q4 will probably be down a bit from Q3. That is the current thinking.

A question Fermi, on the quad copter market in general. I'm wondering how you expect the market to evolve in calendar 2016, in terms of the units that are selling now, will the mix considerably change in your mind on the price points? I also wonder now as you are starting to get design wins in for next year, where is the demand coming from in terms of the computer vision that I know it's very important to you? Do you feel like the demand is there for that, or are some of the drone makers looking at doing part of that stuff themselves? Any color there would be helpful.

First of all, let's talk about the quad copter market. That market continues to grow fast and in grow in all the price range. For example, the current Phantom 3 is at $699, or it's $1200. I think they are doing very well. But, we also start seeing a huge number of companies trying to do a lower end anywhere from $100 to $400 drones. Some of them with cameras. Some of them without camera.

We only focus on the drones with cameras and we are trying to provide the best solution. With A12S and also some A9 solution, we will be able to provide not only the beautiful video quality, but also we're going to show a very good video image stabilization system. That will be a unique feature that very few people has and that will be one of the major feature that will differentiate. We fully expect that we'll continue to have design wins from a low end to a high in the drone market and also that we're going to see many many different type of drones coming out next year. And it's going to put a lot of pressure on the price for everybody.

In terms of the computer region, everybody in the drone market knows that without a computer vision, that if you count down menu control of the drones, it's prone to the problem. So, a computer vision is a Holy Grail of the solution. However, there's no solution out there that can deliver a workable computer vision solution to solve all the computer vision problems for drones. We do believe that when we introduce our CV solution, our solution will be not only applied to the automotive market but also apply to the drone market. Again, we believe our chip will come out second half next year for our customers.

Great. Thank you so much.

Brad Erickson, Pacific Crest Securities.

Thanks for taking my questions. Just a couple of follow-ups. First, on the IP security market, I think you mentioned certain geographies came in better than expected, but it seems like China remains a bit soft. Apologies, you may have commented already on this, but just wanted to clarify. Are you saying effectively the pause that you were seeing as of last quarter is persistent in China?

What we're saying is that we do start seeing recovery from China. However, we also said that we believe some of the recovery is because our Chinese customers are doing some year-end push. If the year-end push is successful, that will help. But if not, then there could be another problem that we need to take care of. The conclusion is we're optimistic but we're still continuing to watch China very closely

In terms of the sports camera, I think that's still roughly, call it, 35% maybe even 40% of revenue. Given the outlook, what is a base level assumption for the percentage of revenue that could be next year in light of your updated target model commentary?

We haven't really said anything publicly about the percentage. All that we've said is we think it will be substantially down in the early part of the year as both from a dollar and a percent.

Finally, on the drone customers, can you remind us how many drone customers you currently work with, and as we think out towards next year, where that number could go roughly?

We already announced three customers; DJI, Unique and AEE. And we are also engaging with several other drone makers worldwide. Also, we talked to a lot more than that because this is a hot area. There are a lot of easy money got pulled in and for those who are a small startup company, we are trying to using our OD and to support it and we don't engage directly. It's hard for us to say how many customers we have. But overall, I think we are seeing a lot. We believe there are many many customers all coming to this drone space.

With our solution or without our solution, either way, they're going to compete. But I think the most important thing that we are trying to say is, we believe we now have the best solution but we also have the most complete road map from that low end to a high-end forecast.

Got it. That's helpful. Thank you.

Quinn Bolton, Needham & Company.

Just wanted to come back to the October results. Obviously you came in slightly ahead of the high-end of your guidance. As you look at the revenues splits by segments, did the revenue splits come out as you expected back when you gave guidance? Or were flying cameras, security, especially on the consumer side of security, a little bit stronger and perhaps you already started to see wearable cameras weaken from what you might have guided to 90 days ago?

No, actually the quarter came in pretty much in line with our guidance across the board. We did say that wearable would be down year-over-year and sequentially we said China would be soft. That pretty much came to pass across the markets. We were pretty much on target I would say for our guidance as far as mix in Q3.

You have clearly been, or wearable cameras have been dominated by your largest customer. You'd announced the Xiaomi camera a few quarters ago. Can you give us any sense whether with Xiaomi and perhaps other customers, are you starting to see better diversification, or is your largest customer there still the vast majority of that business?

We work with many different sports camera customers. The Xiaomi is the only one that generates enough volume for us to talk about. Because they are still far away from GoPro number but I think Xiaomi's number, that only is bigger than any other people we've seen. But, given that, our understanding is Xiaomi many sell their cameras in China. So, the overlap between GoPro sales and Xiaomi sales probably is little from the geographic point of view. Any other customer, I don't think they generate meaningful revenue against this.

Lastly, you have seen pretty strong sequential growth in the flying cameras over the last couple of quarters. Wondering if you have any estimates you might be able to share what you think the total unit tam is of flying cameras in calendar 2015, and where do you think that could go in 2016? I know it's a pretty small base, but I think you get good ASPs and you clearly get the best margins out of that segment.

It's hard for us to make a judgement for 2016. The only thing I can say is I think that growth is going to continue. For 2015, I wouldn't be surprised that we sell more than one million units total market.

Thank you very much.

At this time, I'd like to turn the call back over to Dr. Fermi Wang for any closing remark.

Thanks everybody and thank you for joining us today. And also a special thanks to all our employees for their continued dedication and hard work. Goodbye for now.

Thank you, Mr. Wang, and thank you ladies and gentlemen for your participation. That does conclude Ambarella's fiscal Q3 2016 earnings conference. You may disconnect your lines at this time. Have a wonderful day.