Ambarella Inc (AMBA) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Ambarella's First Quarter Fiscal Year 2021 Earnings Conference Call. (Operator Instructions)

As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Louis Gerhardy, Corporate Development. Please go ahead, sir.

Thank you, Jonathan. Good afternoon, and thank you for joining our first quarter fiscal year 2021 financial results conference call. Our speakers will be Dr. Fermi Wang, President and CEO; and Casey Eichler, CFO. The primary purpose of today's call is to provide you with information regarding our results for the first quarter of our fiscal year 2021. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, 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're 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 filed on March 27, 2020, for fiscal year 2020 ending January 31, 2020. Access to our first quarter fiscal year 2021 results press release, historical results, SEC filings and a replay of today's call can be found on the Investor Relations portion of our website.

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

Thank you, Louis, and good afternoon. First and foremost, ensuring the safety and well-being of our global workforce has and will continue to be our highest priority. I am very proud of our 760 employees around the world and I thank them for their dedication and efforts to ensure their own safety, and that of fellow employees, their families, and the communities where we operate. The Ambarella team quickly implemented robust safety measures, modified work process, and operated as one team to execute to our business plan, a plan that benefits all stakeholders including employees, suppliers, customers and shareholders. I am confident that we will emerge from this difficult period more resilient and in a strong position to seize the opportunities that we believe remain firmly in place.

We are operating in the midst of an unprecedented period of uncertainty and volatility. Geopolitical risks remain high, with the dispute between China and the U.S. moving into the second year, and each round of foreign policy, trade and/or IP matters can bring new risks. The global health pandemic, COVID-19, reaching a massive amount, swept the world and brings another set of risks to consider. This combination of risks, geopolitical and pandemic, caused the duration, severity and the impact of associated economic downturn to be an unknown.

Despite the fluid environment and a full quarter of challenges, in Q1 we delivered results slightly above the mid-point of the guidance we offered three months ago. Q1 revenue of $54.6 million was down 4% sequentially and up 16% versus the same period a year ago. Our operations team and the supply chain performed admirably, maintaining the safety of employees yet quickly adapting to volatile order patterns and sustaining a high level of on-time deliveries for our customers. CV design activity in February and March remained at a high level although activity slowed in April and May as the customers altered work patterns for the pandemic. CV revenue momentum was strong in Q1 off a small base and CV represented a mid single digit percent of total revenue.

Despite many of our development sites having to work from home, we have remained highly effective in our continued development of chips and software. During the quarter, we successfully brought up and verified our new automotive functional safety SoCs, the Cv2FS and the Cv22FS, which were announced during CES. After initial hardware verification work in our labs in Taiwan and the U.S., the majority of the work has been in software development and our software engineers have become highly effective working from their homes. We are fully on schedule to sample the SoCs and their corresponding software development kits to customers and partners in the second half of the year.

Not to be outdone, our VLSI design team has also been very active during the quarter. We taped out our sixth 10nm SoC, a new member of our CVflow AI SoC family that we look forward to discussing with you later this year. And we also taped out a test chip in advanced 5nm process technology. The test chip will enable us to tape out future SoCs as this advanced process node, allows us to maintain our performance and power advantages in future generations of chips.

I will now talk about our markets and customers, including addressing the impact of COVID-19 virus.

In the professional security camera market, we are seeing some reduction in demand as a result of impact of the COVID-19 virus. A significant percentage of professional cameras are sold to integrators and installers who's ability to access buildings has been restricted, and this, in turn, has impacted the demand of cameras. Once the industry has recovered from the effect of the virus, however, we see upside opportunity for cameras in medical, educational, retail and access control applications, as well as new camera designs that include both thermal and video sensors, combined with advanced AI processing. The retail camera applications include people counting and distance monitoring, for intelligence access control solutions add live video monitoring and face recognition for contactless access.

Our design win pipeline remains extremely strong with camera makers continuing to develop cameras with advanced AI capability and this quarter saw a number of significant customer product introductions based on our CVflow AI SoC solutions.

During the quarter, Panasonic, Japan's leading provider of security services solutions, introduced ten new camera models based on Ambarella SoCs. The extensive new product line-up includes seven i-Pro series models based on our S3L H.265 SoCs and three AI network cameras based on our CV22, CVflow SoCs. The AI cameras come in box, bullet and dome configurations and leverage AI processing at the edge to detect and identify movement, capture human faces and optimize data compression.

In May, Motorola Solutions announced that it would offer Avigilon security cameras with software analytics to help organizations keep employees safe through the adherence of health guidelines around protective face masks and physical social distance. These solutions combined the power of video and intelligence of AI-powered analytics running on Ambarella AI SoCs. Also during the quarter, Motorola announced it was acquiring U.K.-based IndigoVision, an existing user of Ambarella-based cameras, to expand its video security and command center software product offering and European presence.

In May, European security leader, Axis Communications, entered the body work camera market with its first solution designed for use by law enforcement and private security. The body worn camera has been designed on an open system architecture to support a broad range of video management and evidence management systems. Based on Ambarella's S5L SoC, the camera capture 1080P video, offer wide dynamic range processing and operates a full 12 hours.

And also during the quarter, leading Korean video security company, Hanwha Techwin, introduced its WiseNet P Series IP camera based on Ambarella's CV2 SoC, offering the highest AI performance of our CVflow family. The series included the TNB9000 8K camera which can zoom into any area of an image while preserving details. They also include three 4K cameras in different form factors and featuring advanced AI-based video analytics including person/face/vehicle recognition, people counting, queue management and heatmap.

Also in April, March Networks introduced its ME6 Series 6-megapixel IP camera. Based on Ambarella's CV22 AI SoC, the camera uses Deep Neural Network processing power to accurately distinguish between people and vehicle, and combines next generation security analytics for accurate real-time detection and analysis of events.

In the home security camera market, we have also seen some impact on sales as a result of customer order push outs. Typically home security cameras are sold in retail or online, and the closure of retail stores has impacted demand. The majority of the cameras are manufactured by Taiwanese ODMs which have generally remained in production throughout the crisis. Beyond the pandemic crisis, we see continued growth in this segment including increasing demand for video doorbells and for cameras, including greater level of intelligence.

During the quarter, U.S. smart home company, Vivint, introduced its new video Doorbell Pro. Based on Ambarella's S5L, the doorbell camera offers 1080p video with a wide 180-degree field of view to let you see both the faces of visitors and the packages left on your doorstep. Advanced camera analytics detect and notify you of the arrival of people and package delivery, while 2-way audio enables conversations with visitors.

In May, Logitech unveiled its new version of its Circle View security camera, supporting Apple's HomeKit smartphone system. Based on Ambarella's S2LM SoC, the Circle View records 1080P video, 180-degree field of view, and you can capture infrared footage at night up to 15 feet away.

In the access control market, Lumi, one of the largest smart lock brands in China, announced Aqara P100 fingerprint smart lock with HomeKit support. The lock integrated S2LM-based viewing camera, offers 1080P video, ultrawide field of view and lurking detection feature.

In the automotive market, our current revenue is driven primarily by OEM car recorders integrated into new models in Asia, and after-market dash cameras sold in retail. Our OEM business has been affected by the temporary closure of automotive plants in Asia, while our U.S. and European dash cam market has been impacted by retail store closures. Additionally, the automotive market continued to remain weak, with many OEMs and Tier 1 suppliers shut down and decision on future product generations delayed.

Despite this, however, we have continued to make progress in our engagement for ADAS in electronic mirror applications.

In the electronic mirror segment, car manufacturers are currently making decision for single-channel electronic mirror solutions ahead of the three mirror designs that we have originally been targeting. Our SoCs provide an efficient and cost effective solution for single channel mirrors that also integrate other functions, for example video recording. As a result, we are seeing revenue opportunities for OEM car design with SOP expected to begin in the 2023 time frame.

Ambarella is working with Inceptio, a Chinese company funded in 2018 to build a nationwide freight network using autonomous driving trucks. Inceptio's goal is to achieve secure, efficient and economical transportation-AS-A-Service to logistics customers. This is to be achieved using Inceptio's automotive-grade L3/L4 autonomous driving software and hardware, working in collaboration with major automotive manufacturers. Inceptio is using Ambarella's CV2AQ AECQ100 and the CV2FS ASIL automotive SoC to enable advanced neural network based AD applications.

And in April, Korean dash cam leader Thinkware introduced its QXD5000 model, featuring 2-channel QXD plus QXD video, smart remote viewing, and remote alarm notification. Based on Ambarella's H22A SoC, the dash camera also includes ADAS functions including lane detection warning, forward collision warning and traffic light changing alarm.

As we have previously mentioned, we are continuing to win designs at customers that provide after-market fleet management solutions for commercial vehicles as well as solution for ride sharing and taxi services. In addition to video recording, the camera solution supports AI-based applications such as front ADAS, Active Driver Monitoring and Blind Spot Detection. The AEC-Q100 version of our CV22 and CV25 SoCs combine advanced imaging, powerful AI processing and low power, making them an ideal solution for AI camera operating in challenging automotive environments. We expect our customers to begin field trials and initial production in the fourth quarter of this year, deploying AI software solutions that are based both their own in-house models and for Ambarella's ecosystem partners.

In summary, as the environment around us is highly volatile and uncertain, we are fully committed to our strategy and the long-term secular trends we are addressing remain intact. Our strategy to leverage our successful video processor heritage into the development of a highly optimized visual AI computer vision platform has not changed. In essence, we are enabling higher level of automation in multiple industries, and as the industry emerges from the current crisis, demand for higher levels of automation should be more important than ever, driving the large new markets we have identified in the past. Furthermore, our operating cash-flow, financial discipline and liquidity and the strength of our balance sheet enables us to sustain our planned level of visual AI investment through these difficult times. With strong execution, we continue to expect our significant R&D investment to yield positive returns.

Our CV strategy continues to be validated with broad customer activity, an expanding list of customer in production, early CV revenue growth, and the new products and technology that expand the platform and our reach into new markets. For example, during Q1 five more customers entered production status with our CV SoCs, 3 in security camera market and 2 in the automotive market. In the next several months, we expect to begin to sample customers our first Automotive Safety Integrity Level (ASIL) SoCs, and the development of our new family of 5nm SoCs continue to move forward.

Finally, in response to the health pandemic, our corporate giving initiative, comprised of employee donation and the corporate match, raised more than three hundred thousand dollars for various aid organizations in the regions we operate. I thank Ambarella's employees for their response to this giving initiative, for managing their safety and safety of those around them, as well as for their strong execution to support to our customers and drive our own video AI initiatives.

I will now turn the call over to Casey, who will give you more details about what we are seeing and expect for the business.

Thank you, Fermi, and good afternoon, everyone. Today, I will review the financial highlights for the first quarter of FY21 ending April 30 and provide a financial outlook for our second quarter of FY21 ending July 31.

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, we have eliminated stock-based compensation expense adjusted for the impact of taxes.

We faced a full quarter of both public health and geopolitical challenges in Q1, and despite this, our revenue of $54.6 million was slightly above the midpoint of our original guidance. This represents a decrease of 4% from Q4 and an increase of 16% when compared to the same quarter of the prior year. In Q1, revenue declined sequentially in all end-markets, with automotive down in the very low double digits and security and "other" product revenue down slightly. Both the professional and smart home security business declined slightly sequentially.

Non-GAAP gross margin for Q1 was 59.1% compared to 58.7% in the preceding quarter and was close to the high-end of our guidance due to favorable mix in business.

Non-GAAP operating expense for the first quarter was $31.9 million compared to $30.5 million for the previous quarter. OPEX increased primarily due to an increase in payroll taxes and an increase in amortization expense for the tape-out of new 5nm and 10nm SoCs.

Other income of $1.3 million reflected the impact of lower interest rates.

The non-GAAP net income for Q1 was $1.3 million, or $0.04 per share compared to non-GAAP net income of $4.9 million or $0.14 per share in the fourth quarter. In the first quarter, the non-GAAP earnings per share were based on 35.2 million diluted shares as compared to 35.1 million diluted shares in the prior quarter.

The non-GAAP net income for the first quarter of fiscal year 2021 includes a change in the non-GAAP tax rate calculation to exclude losses from jurisdictions where there is no tax benefit associated. This was done to improve the alignment of the non-GAAP income tax to the non-GAAP profit before tax. Accordingly, non-GAAP net income and non-GAAP loss per share for the first quarter of FY20 ended April 30, 2019 have been adjusted for the change in non-GAAP income tax effect and presented consistent with the first quarter of FY21 presentation. A reconciliation of the GAAP to non-GAAP calculations is included in the financial statement portion of our press release.

Total headcount at the end of the fourth quarter was 760 with about 81% of our employees dedicated to engineering. Approximately 69% of total headcount is located in Asia. In Q1, we generated positive operating cash flow of $7.6 million. Cash and marketable securities were $411.3 million, up from $404.7 million at the end of the fourth quarter. We purchased 25,719 shares of common stock in the quarter for $1 million, representing an average price of about $39 per share. In May, Ambarella's Board of Directors approved an extension of the current $50 million repurchase program for an additional twelve months ending June 30, 2021. As of today, there remains $49 million available from the $50 million repurchase agreement authorized through June 30, 2021.

Total accounts receivable at the end of Q1 were $20.7 million or 34 days sales outstanding. This compares to accounts receivable of $18.5 million or 30 days sales outstanding at the end of the prior quarter. Net inventory at the end of the first quarter was $22 million compared to $23 million at the end of the previous quarter. Days of inventory increased to 91 days in Q1 from 82 days in Q4.

We had two 10% plus revenue customers in Q1. WT Microelectronics, a fulfillment partner in Taiwan, came in at 63% of revenue and Chicony, a Taiwanese ODM, who manufactures for multiple customers, came in at 15%.

I will now discuss the outlook for the second quarter of fiscal 2021.

The confluence of health pandemic and geopolitical factors has led to unprecedented volatility and continued uncertainty in forecasting.

The global health pandemic continues to disrupt demand. On our March 3 earnings call, we stated we were beginning to see order pushouts and cancellations. This trend, together with a slowdown in design activity, began in Q1 and we believe will continue in Q2.

Most importantly, the pandemic has put global economies in sharp contraction with unemployment rapidly rising and the impact of changes in government, business and consumer spending is significantly unknown at this time.

In addition to the health pandemic, as we have discussed for the last year, we continue to beat a wide variety of geopolitical risks and situations remaining very fluid. Geopolitical risk, including new U.S. export control on advanced technologies, the risk customers in China continue to take action to reduce their dependence on U.S. components that they believe may be subject to export control, changes in the entity list and/or tariffs, as well as market share shifts between our customers. We remain concerned about the dual China/non-China supply chain that is being created and how it impact our customers in China. The foreign direct product rule announced by the U.S. on May 15 and the addition of 33 companies to the Entity List on May 22, have further escalated tension which may lead to an adverse reaction from the government and/or our customers in China.

In our prior earnings calls, we estimated two professional security camera customers in China, had pulled in roughly $10 million of revenue from FY21 to FY20. We do not believe there has been a material change in the inventory of Ambarella SoCs carried by these two customers and we continue to anticipate weaker order patterns from both of these customers in the second half as they digest their safety-stock of inventory.

Based on these factors and our best judgment at the current time, we expect total revenue for the second quarter ending July 31, 2020 to be in the range of $50 million, plus or minus 6%. We anticipate the security market will be up sequentially, with automotive and "other" revenue expected to decline. With a very wide range of public health and geopolitical forces impacting the outlook, at this point of time, we are unable to forecast beyond the second quarter. We estimate Q2 non-GAAP gross margin to be between 59% and 60.5% compared to 59.1% in the first quarter, as a favorable customer mix brings gross margins back into our long-term model of 59% to 62%.

We expect non-GAAP OPEX in the second quarter to be between $31 million and $33 million due to increased engineering expenses including amortization for the tape-out of our first family of 5nm SoCs, as well as potential changes in our ability to continue to receive the engineering credit that we have talked about in the past.

Second quarter other income should be modeled around $1.0 million, reflecting lower interest rates on our net cash position.

The second quarter non-GAAP tax rate should be modeled in the 15% to 20% range.

We estimate our diluted share count for Q2 to be approximately 35.3 million shares.

Ambarella will be participating in the Bank of America virtual Global Technology Conference on June 3, the Stifel Cross Sector Insight virtual Conference on June 9 and the ROTH London virtual Conference on June 24. Please contact Louis for more details on these events.

Thank you for joining our call today, and with that, I'll turn it back over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Joe Moore from Morgan Stanley.

I think you guys said of the 5 CV customers that are in production, that 2 are in automotive, and I was a little surprised by that. I wonder if you could talk about what types of applications are already in production with CV. And then for my follow-up, just are you -- do you still think you're on track to be sort of 10% CV for the year?

Well, first of all, let me answer the 10%. I think although we have less visibility on the second half, we still continue to believe that we have a very good chance to deliver the 10% total CV revenue. And I think that's on track. We'll continue to report on the progress on that. So the 10% CV thing, I think it's definitely something that we think is important for a milestone. We continue to track on that. In terms of 5 customers, we didn't announce the name, but I think that auto revenue coming from most likely is in the commercial vehicle for ADAS and/or fleet management for ADAS or internal monitoring. So those kind of applications, because they don't need an ASIL application, so it's easier and faster to get into production. So I think that's the kind of automotive production we're talking about.

Our next question comes from the line of Tristan Gerra from Baird.

Could you remind us as of last quarter the percentage of your revenue coming from China customers and whether they started to diversify procurement away from U.S. vendors? I think the number was about 20% in the prior quarter. And also, any details that you could add in terms of the new restriction list and the potential impact that this has? And then at the same time, putting into the mix HiSilicon being eventually cut off from TSMC and what the preferred dynamics does that create later this year for the camera market in China?

So let me -- let Fermi answer the last question. But as far as geographic breakdown of revenue, we don't disclose specifically by country the geographic breakdown of revenue. A lot of our revenue in Asia and in China, in particular, goes through WT. So you can see that WT is a big part of our revenue, and a lot of that goes through WT as well as Chicony and others. But we don't specifically call out customers. I think people have made estimates as to what certain customers might be, for example, Hikvision or Dahua, but we don't call that out. We just call out our over 10% customers, which are WT and Chicony.

Right. So for the HiSilicon question, I think that -- first of all, I think that because the rule just came out and when we talked to our attorney, I think there is still a lot of details that -- which are not very well understood. We're trying to understand that. And we haven't seen how our customers react to that ruling yet. But however, like we said before, we knew that this is going to continue to help us outside China. I think outside China, we only reported like Panasonic, Hi-Contact, which used HiSilicon in the past. And you can see that from our earnings call this time, we do see that we're picking up design wins from that. Inside China, I think it's a different story because there are multiple different factors playing at the same time. While HiSilicon might not -- even TSMC cannot ship to HiSilicon. But however, at the same time, most of our Chinese customer are probably trying to avoid U.S. component at this point, and they probably will pick using other solutions if they have choice. But on the middle and high end, they have lesser choice. So there are so many uncertainty in China today and the rule is so new. We are still watching how this progress, and we are talking to our customer, particularly in China, to understand how they feel about it. So I would say if there's something for certain, I think outside China is definitely we see a positive for us. Inside China is still a no.

Okay. Great. That's very useful. And then just a quick follow-up. Are you seeing any lingering supply chain disruptions, including at your customers? And you've mentioned a significant rebound in your security-related revenue this quarter. Is that really backlog fill for what could not be built in Q1? Are you basically back in line with real end demand in Q2 in security?

First of all, from a supply chain point of view, I think our supply chain has seen very little impact from COVID-19. However, we do see very strange ordering pattern from our customer. And when we talk to them, they do mention disruptions in their supply chains, particularly in the auto space. Also, we see some disruption in the supply chain for our security customer also. However, I think security -- if you look at among all our -- our current market that we're trying to address, I will say the professional security camera is probably the least being impacted by COVID-19. And also, there are a lot of new demands like thermal sensor integrated with the cameras, like contactless cameras for sensing applications. So we do see opportunities for security -- for the professional security camera. So maybe that's the reason of that we are seeing a better result on the professional security side. But also -- however, I did point out on the consumer security side, ASIL is a retail product. And with other -- a lot of retail channels are shut down in the U.S. and Europe, we do see that supply chain problem is one thing, but the end demand is a different story. And when -- because the Q3 end demand is still unknown, we are working with our customers, trying to understand that as much as we can.

Our next question comes from the line of Tore Svanberg from Stifel.

Fermi, I had a question on the professional security market. You mentioned the integration of thermal sensors and so on and so forth. Is that something that you're already offering? And if not, when would you expect to start perhaps delivering SoCs that would include thermal sensors?

Well, first of all, we don't include the CMOS sensor or thermal sensor in our silicon, but we can interface easily with the CMOS -- thermal sensor just like we interface with our CMOS sensors. So in fact, several of our customers, for example, FLIR and as well as Avigilon, they already start shipping some thermal cameras with the traditional security camera by using our solution, which is -- although it's very small at this point, but that proof-of-concept that using our existing chip we can easily interface with thermal sensor. And in the future, we can even apply some kind of sensor fusion with our AI capability. So I think thermal sensor was a niche market in the past. But with the pandemic, you can see a strong demand. And in the future, this contactless and also trying to do a little bit of screening with the temperature, I think that definitely drives the demand for this. So I think the answer to your question is our existing solution can interface thermal sensor without any problems.

Very good. And as a follow-up on the automotive side of things, that market has been weak for you already for several months. Now that there's some production starting up again in that market, are you starting to see any positive signs or movements in the auto business at all?

Well, we see some positive sign in China, but not other places. For example, although I'm hoping that Japan can come back soon because a lot of our recorded business is in Japan, but the Japanese government has been on and off shutting down the cities in Japan. So it created an unknown to us. So I would say that from the automotive business, we see more positive signs in China, but not anywhere else.

Our next question comes from the line of Ross Seymore from Deutsche Bank.

Congrats on weathering all these storms simultaneously. I guess my first question would be for Casey. You talked about directionally up for IP security in your fiscal second quarter guide and then down for automotive and consumer. But as we've seen in the automotive market, down can be quite a severe magnitude. So any sort of quantification of that, even kind of ballpark ranges like you gave for what it actually did in the fiscal first quarter that you'd give us for your second quarter guide by segment?

Yes. So what I had said about the automotive and other is that we would expect that they would decline. To have an order of magnitude and visibility in this environment is pretty tough. I think I'm directionally correct that for me to try to put brackets on it more tightly than that, I think, would give you a sense that I have more visibility than I really do today, and that's really true for all of the markets. But because of some of the comments that Fermi just made, again directionally, I do think that the security market will be up. But again, to quantify that is really, really tough in this current environment. I mean we feel good and confident. And that's why we gave a guidance, although it'd be a little broader, that we have some visibility into Q2. To get too fine on it, I think, would be difficult.

Got it. And then, I guess, for my follow-up, when you talk about that $10 million that you expect the customers to burn off into the second half of the year, have you seen their behavior actually start to change? It doesn't sound like it has yet. It seems like you have this somewhat ironic combination that the longer that trade tensions stay elevated, the more likely those customers want to carry buffer. So has anything changed to give you belief that, that will be burnt down in the second half of this year? Or are you just basically sticking around waiting for that to happen just like the rest of us?

I think we are waiting, but also we see some signs. First of all, I think the ordering pattern suggests that this order impact that's slowing down basically suggests that they're burning off because, like you said, they continue shipping our cameras. But however, at the same time, the trade war now really shifting the gear towards how they're going to handle HiSilicon supply. So when they see our Chinese customer building out inventory, you should assume that they're probably building up a lot more HiSilicon supply and then they are building ours because we always said that we have no problem to continue to ship products to them at this point. So I think that's a difference. So we do see some indication that they are burning off the inventory gradually.

Got it. And I guess one final housekeeping one. Casey, how are you thinking about OpEx in the second half of this year? You did a good job in the first quarter. I assume a lot of the variable costs that you can keep tight are already. So is this kind of the run rate first quarter, second quarter, the $32 million, the run rate going into the second half? Or are there some items that we need to appreciate that would be a little more lumpier in nature?

Well, again, as we continue to push our road map forward aggressively not only in 10-nanometer but in 5-nanometer, as you can imagine, the tape-out costs, CAD tools, et cetera, although amortized, that pushes that amortization up. And so you do have some build from that as you go out into the year. But we don't have any other programs that are dramatic that I would say are going to change the OpEx one way or the other.

But I think another thing I'll add is, obviously, at this current difficult time, that watching our expense on other areas is very important for us. While we commit to continue to 5-nanometer and 10-nanometer silicon development, at the same time, we are very cautious in terms of hiring people, other expenses, including trade show travels, which naturally are being cut back. And so we are watching our expense area, but we continue to commit on R&D expenses, not hiring, but on the tape-out and silicon development.

And it's -- again, it's a little hard to tell when people are going to be able to feel comfortable traveling and these conferences are going to start to take place in person again in the second half. And so we'll have to watch that as well.

Our next question comes from the line of Adam Gonzalez from Bank of America Securities.

Apologies if this was addressed in the prepared remarks. My connection was a little bit spotty. But just wanted to know how the current pandemic and crisis has really impacted your design momentum and pipeline, particularly in CV for autos. Have your customer interactions changed at all?

Well, first of all, there are multiple different impacts. First of all, for example, because of working from home and some of the company or customer even only working 2 days a week, so definitely, the decision is being slowed down. And also there's some activity -- engineering activity got delayed. So I think that impact is clear. What we are trying to figure out is whether -- when they come back to the normal stage, whether they're going to review -- how they're going to review their current investment level and how they're going to invest on different projects. That's, I think, something that we really will try to understand whether how that impact us. We don't see a clear indication yet. But from an impact point of view, definitely, the current project working -- the activities slowed down and some projects got pushed out just because of working style.

Got it. And then on the per security side in response to an earlier question, I think you alluded to some risk of the China customers perhaps wanting to procure chips from non-U.S. customers moving forward. Outside of HiSilicon, who might be cut off from TSMC soon, what other options are there really in the per surveillance market?

Well, like we said before, on the low end side, there are quite a few in China and Taiwan. So that's definitely a concern. However, in the middle and high end, particularly on the CV, the mainstream like CV22, CV2 level chip, I don't think there's much choice. So that's why we continue to -- talking to our Chinese customers to understand it. But however, my gut feeling is that the U.S. and China situation continue to deteriorate really trigger our customer to have more concerns of using a U.S. component.

Our next question comes from the line of Jeff Kessler from Imperial Capital.

With regard to access control, a number of the integrators who have been able to get into closed schools, closed government facilities have been able to start, for the first time, getting involved, getting into empty spaces and beginning to install both access and video. And I'm wondering if you're seeing an uptick from your end markets in that area, particularly when it comes to some of the electronic network locks that integrate with video.

Right. So we do hear from our customers, they start reengaging with their end customer and start doing those kind of things. But we haven't seen an ordering pattern yet because there's obviously a delay. They need to empty -- their inventory level, they need to deal with, and they need to understand that. So from -- by talking to customers, we understand they already start reengaging. In fact, most of our U.S. customers on the professional security camera side told us they are reengaging with their current customers already. So that's a great sign. And that's another reason we believe that professional security has much less impact than the other market that we are dealing with. At the same time -- and I also believe when hopefully that when we go back to normal a little bit, and in fact, we believe that the contactless monitor camera as well as other AI trend will continue to help us to establish our AI solution to this kind of market and enabling even more AI application in the future.

One other quick question on Axis and their introduction of body-worn cameras. It appears that it isn't just Axis, but some other higher-end camera manufacturers are getting involved in trying to get more analytics on a mobile basis, getting mobile cameras out there, not just for police but for other uses as well. Are you seeing demand in -- obviously, you've mentioned Axis and their mobile camera. But are you seeing demand from Axis and other companies at the high end that are going to need AI for mobile applications?

Yes, the need is clear. And the challenge is how to do AI and video and streaming at the power consumption that can offer any -- that the camera can operate 12 hours in a row and offering all the capability you just talked about. So -- and with our solution, we are getting there. And also, we believe that our investment in the lower geometry process will definitely enable that. However, for this market, I want to point out, it's at the beginning of the demand because any wearable camera, if you use only for policemen or even for security guard, the market size is limited. However, when you start figuring out other usage that will require this kind of camera, that could be -- really increase our TAM. So I think the trend is there. But however, I think that because of technology limitation at this point, it gives us a road map that will continue to increase the performance, reduce power consumption, add more AI performance to there and enabling a much better customer usage and a better customer experience with this kind of wearable camera. That's what we're looking for.

Our next question comes from the line of Quinn Bolton from Needham.

Maybe first a clarification from Casey. On the second quarter outlook, did you say that the overall security market would be up? Or is that just the professional security? Just want to make sure I heard you right.

Yes. I said overall security.

Okay. Can you say whether that's both professional and consumer? Or just your comment is the overall bucket?

Yes. I think overall, we feel that is the right way to think about it. Again, because of the visibility that we've got, I don't want to get into specifics around what's going on. For me, again, we've talked about a lot of customers both professional and consumer that are moving forward, and we feel very good about. But I think I would keep it at just sequentially up for the overall security market.

Great. And then Fermi, you kind of mentioned the slowdown in design activity in April and May, and I assume it's too early in June to try to assess June trends. But what do you think it takes for those companies or customers to start to reengage? Does that -- they have to get folks back to the office? Is it that they just need time to figure out how to work and be effective working from home? Just wondering what your thoughts on kind of reengaging with those customers are.

I don't think it's required to go back to office 100%. It's really that, for example, some automotive customer, they -- not only working from home. They only work 2 days a week. So with that limitation, it really hurts the productivity. And I think even in California, people start talking about we opened in June gradually. I don't think we're going 100% into office immediately. But I do think that if -- we are going to plan a very slow but gradual progress by moving employees back to the office. So from my point of view, I think that the productive loss will be reduced. But I think the most important thing is really about there are some companies putting very strict rules about working hours for the employees, and that has to be removed for us to see back-to-normal working conditions.

Understood. And the last question, you guys had mentioned the e-mirror design win. I know it's a little ways out, but just wondering if you could give us any more detail. I think you said it was a single channel e-mirror. So just wondering, does that mean it's just like a rearview camera? Or do you have both sides and the rearview? Or maybe give us any sort of sense on the dollar content per vehicle for that win.

So in the past, we focused on 3 -- all 3 windows and -- but now 3 mirrors. But I think right now, what we add to it is we start doing a one-channel design. But the one-channel design, also with one channel plus some other function. For example, a lot of people trying to use one channel, but also add some other functions into their cameras. So I think the single-channel cameras, rear mirror. And -- but also, all the customers that we talk to, they need a road map to leverage single-mirror application as well as 2-mirror as well as 3-mirror. So when you have a road map that cover all of that makes it easier for customers to using one supplier to address all the needs of electronic mirror. So that's what we are talking about. So although we're talking about single-mirror design win this time, but I do believe that leveraging our experience on 3-channel in the past and then now we can offer the complete road map from 1-channel to 3-channel at an efficient cost, I think that's the reason we start winning those designs.

Our next question comes from the line of Suji Desilva from Roth Capital.

Can you just circle back to the consumer security market? Just I'm trying to put together the comments you made. You had momentum, I think, earlier in the year. And then the visibility is limited because of macro, but you said the security market overall will be up. Just want to understand the qualitative comments you're making on the consumer security market, particularly going into what it would normally be a holiday season, obviously, different year this year.

Right. So first of all, last time we had this conference call, we made it clear that consumer IP cam is a market that really help us to continue to grow our revenue. And we are saying that is -- in a long-term point of view, that didn't change. However, in a short-term point of view, that because a lot of retail store that our customers use to sell their consumer IP cams through, all those -- some of them -- we also got shut down and some of them even closed. So until those retail stores open, we have very little visibility of second half demand. That's what I'm trying to say. And right now, just because all the businesses just gradually reopen, I think it will take weeks for our customer to decide how they want to respond to the selling season. Because as you know, if there is a selling season this year, we need to stop, prepare products and they need to prepare their final systems and put into the channel. The stop -- we need to start right now. So we are waiting to see from our customers how they want to react to this reopening and how they forecast for the second half or particularly for the selling season.

As you know, Suji, last year, in the second half, we had the first wave of CV, which was in the professional security camera market. And we talked about the consumer being a similar type of second wave in the second half of this year. Clearly, with everything going on that we just talked about and Fermi's reference, it's a point in time where it's difficult to say or understand what, if any, impact is going to happen in the second half. Clearly, with the consumers staying at home and everything else, it's just put a big cloud that it's hard to get much visibility into it. But we still feel it's going to be the second wave of CV. And then some of the automotive and other areas, the access control and robotics forming up the next waves in CV. But it's just hard for us to continue to make that call as precisely as we were feeling a quarter or 2 ago because of what's going on.

Okay. That's helpful color. And then maybe a bit -- a higher-level question perhaps, Fermi. The product road map you have, the 10- and 5-nanometer products, can you talk about what the key vectors you're pushing on here and the road map are to stay competitive versus the GPUs and FPGAs in the markets that are -- you're competing with in the automotive market? Any color there would be helpful. I know -- we were all supposed to be in Italy fairly soon to see you guys live, but if you could kind of give us some color there would be helpful.

So first of all, I think that low power has -- is -- low power consumption has been one key area that we're trying to differentiate. And we said that many times before that our architecture give us -- our silicon architecture give us that low power consumption differentiation. But however, if we fall behind in 2 process node, we might lose that low power advantage totally. With our competitors, like in the auto space and even in the security space, there are big companies that are moving aggressively moving forward, and we have to do the same thing. So for 5-nanometer, it's across the board. For all the chips that we are doing for CV2 and CV22 and CV25, you should expect that the 5-nanometer, we have chips to address both security camera as well as for automotive. And at the same time, for automotive, if you want to address CV2 -- sorry, the Level 2+ solution that everybody is trying to design their design win, the performance requirements continue to increase. And to achieve appropriate power consumption, which is much lower than our competitors, that we need to not only leverage our silicon architecture but also move to 5 nanometers to keep our advantages.

Our next question comes from the line of Charlie Anderson from Colliers Securities.

Casey, just to start out with inventory came down a little bit in the quarter, you have a lot of variables to deal with the rest of the year. I wonder if you could just give us sort of your high-level overview of how you'll treat inventory in the rest of the year and I've got a follow-up.

Yes. As you know, we've, over the last 4 to 6 quarters, have brought inventory down and done a little bit more rigorous inventory management. I think that's been helpful and a good discipline for the business. At this point, we've kind of been hovering roughly in this area, and it just kind of depends on the orders we see, what's getting shipped at the beginning and ends of quarters, and there really isn't much to read into that. It was a $1 million change. So it really wasn't that much of a change. Most of our inventory and products are on high runners. And so we feel -- don't feel a lot of exposure to that long term. But we're managing inventory and trying to make sure that we stay in the right place. It's a little tricky like everything else right now with the visibility because you don't want to get caught with, all of a sudden, an upturn and you don't have product. And so we're trying to balance that in an appropriate way.

Okay. Great. And for my follow-up, just on the subject of thermal cameras. I think we're seeing the real pull in the market like immediately. So I'm sort of curious where things stand as far as your ability to serve that market. Is there a design activity that needs to take place? Or are there any existing models in the market with your silicon that can serve that need? Or is this more out in '21 and beyond?

Well, like I said, I believe that multiple professional security camera customers are working on that, and I believe you will see products coming out this year. And like you said, there's a high demand. And I think that -- I hope there's ongoing demand, but we should see. But we do believe that there will be solutions out this year. But however, I do believe that as soon as this trend started, when people realized that thermal can be easily integrated and the price come down from the current level, that will enable different -- totally different applications. For example, I can imagine that even for the home security camera, at the right price, a thermal camera can be very helpful from doing access control. And also, in fact, that if the price and the power is right, even for automotive business, you can use that to identify evidence of either person or animals that you want to avoid when you're driving. Those things become helpful. The biggest problem in the past was thermal sensor, usually very expensive, and is not well -- very easy to integrate. And very -- but with this new market opportunity, a lot of people are spending time finding a way to integrate with the security camera as well as developing algorithm software to do a sensor fusion between a thermal sensor as well as -- and a CMOS sensor together. And all of that effort will help the thermal sensor become more popular, in my opinion, for both -- for all of the applications that we're looking at right now.

Our next question comes from the line of Matt Ramsay from Cowen.

Obviously, a lot of uncertainty out there, but it was nice to hear , Fermi, that the ASIL products, it sounds like for the automotive industry, are ready to start rolling out. I just wonder if you might talk about programs that you've been working on in the automotive space that might have been waiting for ASIL-certified silicon and what your expectations are for growth of those products over the next 12, 18 months.

Right. So for these ASIL chips, CV2FS and CV22FS, they are designed mainly for ADAS application, although they can be used for the ADAS plus DMS or ADAS plus in-cabin monitoring. All of that, the combination with those 3 applications are the sweet spot for the design. And we are talking to multiple -- in fact, we announced one Chinese car guy already using -- planning to use CV2FS and what -- they will get sampled very soon. And plus, there are multiple customers are evaluating CV2 and CV22FS for their new programs. But I think the biggest opportunity for us in this space is trying to enable ADAS application with the chip and with our software partners. We talked about -- highlighted in the past there's a Korean StradVision in there and then there are other partners we are working with. So trying to make sure our partners can pull their software onto our platform, and we can sample this through Tier 1s on time. I think this is the key execution we have to do in the next several months.

Got it. And just a follow-up, I noticed that over the last, I don't know, 12 months or so, there's been a little bit more communication from the company about things that you're doing in the logistics and shipping, factory automation, those type markets with some contracts that you've won with some trucking companies for automating package delivery for, obviously, some things with your camera partners that may be in the Amazon Go store, and you've branded some software development stuff with Amazon in their cloud to work on your software stacks. It seems like that's a push that your product -- maybe your products overall might be well suited for those markets as they develop and something you're investing in. Just high-level thoughts how important/big an opportunity that might be and timing of such an opportunity when it happens.

First of all, we are continuing to invest in those areas. And we didn't mention this time because I think COVID-19 probably cloud every -- all the other discussion that we have. And this is -- like I said before, it's our midterm to long-term investment, and we are continuing to invest in this area because we think this is important for us. And also, we believe there's a big market opportunity in the mid and long term. So while we continue to work with all of the partners you mentioned, what you just said, and also, we continue to do business development over Zoom meetings, over a conference call to talk to them, making sure they are -- we support them properly. So all the projects are ongoing. However, at the same time, we do see some slowdown in some projects because of COVID-19 and things, but we expect all the projects were back to normal when the business reopened. Again, although we didn't talk much about that direction you mentioned, but that continues to be an area that we need to continue to invest and continue to work with our customer closely to introduce product.

Our final question for today comes from the line of Richard Shannon from Craig-Hallum.

Just 2 quick questions for me. Embedded in your guidance for the July quarter, you talked about security being up. Curious if you can kind of give us a geographic breakdown, your expectations there, specifically thinking about China versus rest of the world.

When you talk about China, basically 2 customers continue to digest their inventory. So I think that's an indication that probably they are slowing -- slower revenue in Q2 forecast. Other areas, we still think it's normal from the professional security camera side, and we talk about consumer IP cam. So overall, from the China side, I have to say, with the geopolitical situation and the trade war between U.S. and China, things become very, very uncertain, even more uncertain than the pandemic, in my opinion, because there's just too many factors to consider at this time. So the only thing we are doing is continue talking to our customer in a regular basis. We're talking about weekly, sometimes daily basis to understand the intention, understand the project, how much inventory they have and what should we do to help them to support them. All of that is happening in the meantime. But I said -- we have been saying many times that all of them showing concerns, not particularly targeting Ambarella, but they are all showing concerns in continuing to use the U.S. component. That, I think, is the biggest problem for all of us.

Okay. That's helpful. My follow-on question here. Just quickly on your CV revenues for this year here. You hit your kind of 10% revenues goal here for this year. Again, from a geographic point of view, how do you see that playing out here? Is it dominated or strong in China? Or do you kind of see a balance throughout the world?

I won't say it's dominant in China at all. I'd say it's very balanced. And I still think that we said that the goal of 10% CV revenue, I still think we have a pretty good chance to achieve that.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Fermi Wang for any further remarks. Please go ahead, sir.

Okay. Thank you all, and I'm looking forward to talk to you next time. Thank you. Talk to you later. Bye.

Thanks.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.