Ambarella Inc (AMBA) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Ambarella's Q3 Fiscal Year 2020 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Louis Gerhardy, Corporate Development.

Thank you.

Please go ahead, sir.

Thank you, Gigi.

Good afternoon, and thank you for joining our third quarter fiscal 2020 financial results conference call.

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 the results for the third quarter of our fiscal 2020.

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 we file with the SEC, including annual report on Form 10-K filed on March 29, 2019 for fiscal 2019 ending January 31, 2019; and the Form 10-Qs filed on June 7, 2019 and on September 6, 2019 for the fiscal year 2020 ending January 31, 2020.

Access to our third quarter fiscal 2020 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'll now turn the call over to Dr. Fermi Wang.

Thank you, Louis, and good afternoon, everyone.

Before I discuss our results, I will provide an update on geopolitical factors that may continue to impact our business.

During the quarter, we provided an update on the impact to our business from Entity List published on October 9. While this put clarity to some trade issues, we continue to see a wide variety of geopolitical risk outstanding, including foreign policy, trade and IP matters.

Factors potentially disruptive to our business include changes to tariffs and/or the Entity List, market share shifts between our customers, supply chain issues, potential export regulations on advanced technologies, and the potential for customers in China to take actions to reduce their dependency on U.S. components.

On the other hand, our largest competitor in the security camera SoC market, HiSilicon, a unit of Huawei, is facing challenges that are helping us gain shares outside of China.

As you can see, multiple factors, both positive and negative, are contributing to a wide range of potential outcomes for us.

We continue to demonstrate strong progress toward our strategy to transform from a pure video processing company to an AI and computer vision company.

During Q2, all of our CV family contributed to the early ramp in our CV revenue, with mass production shipments continuing in the automotive and security camera markets.

CV design-in activity remains strong; in Q3 we generated pre-production CV revenue, including engineering parts, evaluation kits and/or development boards for more than 50 customers across all applications and geographies.

Our Q3 fiscal year 2020 revenue of $67.9 million was above the high-end of our guidance range and the revenue increased 20% from the $56.4 million in the prior quarter, with strength for our traditional video processor in all markets, led by our automotive business.

Security camera revenue was driven by strong underlying consumption, as recently reported by several of our largest customers, as well as inventory restocking at our customers in China and share gains.

I will now talk about our progress in our target markets, starting with security.

In the China's Public Security Expo held in October, we demonstrated a number of advanced imaging and AI technologies aimed at enabling the next-generation IP security and the robotics applications.

These included using a single RGB-IR sensor with sensor fusion software to eliminate the mechanical IP filters and preserve color information under near IR illumination.

We also demonstrated a rapid person detection using AI algorithms running on CV25 SoCs to enable fast system boot and reduce power consumption in battery powered applications.

We also demonstrated our new robotics SDK, running multiple neural networks and stereo processing concurrently on a single CV2 SoC to, provide a full frame rate object detection, classification and tracking, with depth measurement and segmentation.

We believe the new SDK will enable our customers to develop solutions for a wide range of new machine learning applications spanning logistics, Industry 4.0, new retail and both consumer and industrial robots.

At the GSX 2019 Security show held in September, Hanhwa Techwin, a leading supplier of IP video security solution, announced its new PNO series of AI cameras based on Ambarella's CV22 CVflow SoCs.

The new cameras run neural-network based algorithms to recognize different types of vehicles, faces, license plates and other objects.

Offering greatly enhanced video analytics accuracy versus the previous generations, the cameras are available in both 4K and 5 megapixel resolution models.

Also at the GSX show, Bosch introduced multiple new IP cameras based on Ambarella SoC solutions.

These included its intelligent "I" series cameras, including new FLEXIDOME and DINION camera models with built-in Video Analytics as standard.

And the new AUTODOME starlight 7000i cameras that include intelligent video analytics, the ability to track and zoom in on moving objects, 4K resolutions and advanced H.265 video compression, making the ideal for applications such as city and highway surveillance.

During our last earnings call we discussed Motorola Avigilon's introduction of the H5A AI camera line based on our CVflow SoCs.

During the current quarter, Avigilon further extended its portfolio with the introduction of its new H5SL camera line based on Ambarella's S5L SoCs.

Focusing on simplicity, flexibility and cost-effectiveness, the new cameras come in multiple resolutions and incorporate Avigilon's Unusual Motion Detection, and advanced AI technology that can notify operators the unusual events that might otherwise have been missed.

In November, security start-up Verkada announces a new Dome Series comprising eight new cameras, including both indoor and outdoor models, with a range of resolutions up to 4K.

The Ambarella-based Dome Series is eight times more powerful than the previous generation, enabling industry-leading edge-based analytics including advanced vehicle and person detection.

In the home monitoring segment, market leader Ring introduced its indoor Camera, a compact plug-in design that lets you see, hear and speak to people and pets from your phone, tablet or echo device.

Based on Ambarella's H2LM SoC and priced at under $60, the cameras provide notifications whenever motion is detected based on customized motion zones.

Multiple indoor cameras can be connected via the Ring app to provide complete home coverage.

And in China, Hikvision's consumer division, EZVIZ, introduced its "Lookout" DP1 HD video smart home door viewer based on Ambarella's S3LM SoC.

Replacing the peephole in the door, the battery powered camera allow the homeowner to view visitors remotely on a touchscreen display and communicate using 2-way audio.

And in police camera category, Motorola Solutions announced its new WatchGuard V300 body-worn camera, the first in the law enforcement industry to remain operational beyond a 12-hour shift.

Featuring Ambarella's low power of S5LM SoC, the camera includes 4K sensor and a full HD recording and also be integrated with WatchGuard in-car video systems.

Now I will update you on our progress in automotive markets.

Ambarella is working with Mercedes Benz to develop its edge platform for their Cargo Recognition and Organization System called CoROS.

The newly developed CoROS system actively supports parcel delivery drivers with camera-based object tracking and machine learning software.

A camera system in the cargo space automatically recognize and registers parcels using bar codes and symbols on the outside of parcels.

This is done in fractions of a second, replacing manual, time-consuming scanning and sorting of each shipment.

Ambarella's CV2 was chosen due to its excellent imaging, monocular and stereovision processing options, and powerful AI processing [performance] (corrected by company after the call).

We are seeing strong interest in Ambarella's CVflow AI chip from companies that provide after-market fleet management solutions for commercial vehicles.

Traditionally, video solution from a commercial vehicle comprised of cameras with limited or no active driver assistance or monitoring features.

With Ambarella's portfolio of the CVflow AI chips, fleet management solution providers can now deploy AI-based applications such as front ADAS, Active Driver Monitoring Systems and Blind Spot Detection.

The CVflow solution has been chosen by multiple providers in Asia and U.S.A.

and are expected to go into production in 2020.

During the AutoSens Brussels 2019 Automotive Conference held in September, Ambarella partnered with ONSemi and AI software start-up company Eyeris to demonstrate a fully-integrated in-cabin monitoring system including both driver and occupancy monitoring functions.

The multi-camera system utilized Ambarella's CV2AQ CVflow SoC to process real-time, high-quality RGB-IR video and ONSemi Global Shutter and RGB-IR image sensors.

The Eyeris' AI software performed complex body and facial analytics, passenger activity monitoring, and object detection, all running concurrently on the CV2AQ.

The demonstration won awards for the "Best Automotive Safety System" and "Most Innovative In-Cabin Application".

And during the Tokyo Motor Show held in September, Ambarella partnered with a leading Japanese car manufacturer and the Sony Sensor Group to demonstrate an electronic mirror system.

Based on Ambarella's CV22, CVflow SoC and Sony's IMX490 image sensor, the electronic mirror demonstrated outstanding image quality under a number of challenging lowlight and high contrast lighting conditions.

In automotive OEMs, Chinese automaker Chery introduced its Tiggo 8 SUV featuring an integrated digital video recorder.

Supplied by Chinese Tier 1 supplier Skyworth the recorder is based on Ambarella's A12A automotive SoC and support full HD video recording.

In consumer market, we also enjoyed a couple of interesting product introductions during the quarter.

In October, drone market leader DJI introduced its lightest and smallest model ever, the Mavic Mini.

Weighing just 249 grams, the $399 drone does not require FAA registration and achieves over 30 minutes' flying time.

Its camera is based on Ambarella's H22 SoC, providing 2.7K video at 30 frames per second and 12 megapixel photos, higher than the full HD video of the previous Mavic spark model.

Also during the quarter, Insta360 introduced its GO camera, a tiny form-factor wearable model weighing only 20 grams and offering full HD video recording.

Based on Ambarella's A12 SoC, the camera includes video stabilization to keep footage steady and use AI-powered FlashCut to find your best shot and edit them automatically.

In summary, despite the geopolitical and the economy headwinds, we remain highly confident we are making the right decision with more than $350 million invested-to-date into video-based AI.

We remain fully committed to driving our CV solution into expanding case of edge-endpoint devices.

We are leveraging our video processing expertise as well as our established base of customers to serve not only the traditional human viewing market but also the machine-based market, a large incremental opportunity.

The multi-billion-dollar expansion in our SAM originates not only from the new product cycles in our existing markets, like security camera, but also by these new machine vision markets including vehicle, smart cities, Industry 4.0, logistics, robots and more.

As we approach the end of the year, we are looking forward to the Consumer Electronics Show in January.

During this event, we will be demonstrating our fully autonomous vehicle, EVA, short for Embedded Vehicle Autonomy, driving on a variety of challenging conditions.

We will also be demonstrating our latest solution for ADAS, driver monitoring, electronic mirrors and in-cabin monitoring, in collaboration with our software partners.

And we will show new solutions for robotics, home monitoring, access control and logistics, all leveraging AI-based applications and the performance of our CVflow SoCs.

And we hope to see many of you there.

And at the end, I want to thank Ambarella's 756 strong team for their focus and execution during this very exciting phase of development, and thanks to all of our shareholders, including customers, vendors and shareholders, for your continued support.

Now I will turn the call over to Casey for the third quarter financial details and guidance for our fourth quarter of fiscal 2020.

Thank you, Fermi.

Good afternoon, everyone.

Today, I'll review the financial highlights for the third quarter of fiscal 2020 and provide a financial outlook for the fourth quarter of fiscal 2020.

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.

Our Q3 revenue of $67.9 million exceeded the high end of our guidance of $63 million to $67 million.

These results represent an increase of 20% from Q2 and an increase of 19% when compared to the same quarter of the prior year.

In Q3, all markets increased sequentially led by strength in the automotive OEM and aftermarket.

Non-GAAP gross margin for Q3 was 58.1% similar to the preceding quarter.

Gross margin was slightly above the high end of our guidance of 56% to 58% due in part to a richer mix of automotive business, in both OEM and aftermarket business.

Non-GAAP operating expense for the third quarter was $29.3 million compared to $29.7 million in Q2 after backing-out R&D grants related to prior periods.

This was below our guidance range of $30 million to $32 million as engineering hardware expenses were below budget.

Other income of $1.9 million primarily represented interest income on our cash and marketable securities.

Non-GAAP net income for Q3 was $11.3 million, or $0.32 per share compared to $7.3 million, or $0.21 per share in the second quarter.

The non-GAAP effective tax rate in Q3 was 6.6%, slightly better than our guidance of 10% due to a higher than expected benefit from employee stock option exercises.

In the third quarter, the non-GAAP earnings per share were based on 34.8 million shares as compared to 33.9 million shares in the prior quarter.

Total headcount at the end of the third quarter was 756, with about 81% of the employees dedicated to engineering, most of whom are focused on software.

Approximately 70% of our total headcount is located in Asia.

In Q3, we generated positive - operating cash flow of $21.9 million.

Cash and marketable securities were $400.8 million up from $375.8 million at the end of the second quarter.

We did not repurchase stock during the quarter under the $50 million repurchase program authorized through June 30, 2020.

Total accounts receivable at the end of Q3 were $21.6 million or 29 days sales outstanding.

This compares to accounts receivable of $27.9 million or 46 days sales outstanding at the end of the prior quarter.

Net inventory at the end of the third quarter was $19.8 million compared to $17.4 million at the end of the previous quarter.

Days of inventory decreased to 59 days in Q3 from 67 days in Q2.

We had 2 10%-plus revenue customers in Q3.

WT Microelectronics, a fulfillment partner in Taiwan who ships to multiple customers in Asia, came in at 63.2% of revenue and Chicony, a Taiwanese OEM who manufacturers for multiple customers, primarily based in the U.S., came in at 15.7%.

I will now discuss the outlook for the fourth quarter of fiscal 2020.

Our fourth quarter fiscal 2020 guidance is consistent with the current Street consensus estimate.

We expect total revenue for the fourth quarter to be in the $55 million to $59 million range.

Q4 is typically a seasonally slow quarter, and we anticipate automotive and security to be down sequentially, with other revenue flat to slightly up sequentially.

We continue to expect "other" revenue, comprised primarily of consumer electronics products, to remain volatile and decline as a percentage of revenue over the next 2 to 3 years.

The geopolitical economic environment continues to generate a significant amount of uncertainty with our customers' outlooks and supply chain.

Needless to say, forecasting is difficult.

We estimate Dahua and Hikvision, combined by the end of fiscal 2020 will have pulled in approximately $10 million of revenue from fiscal 2021.

As a reminder, we typically experience a sequential decline in the first quarter, ending in April, and a rebound in our second fiscal quarter.

We estimate Q4 non-GAAP gross margin to be between 56.5% and 58.5% compared to 58.1% in the third quarter.

We expect non-GAAP OPEX in the fourth quarter to be between $29.5 million and $31.5 million.

The Q4 non-GAAP tax rate should be modeled at 10% versus 6.6% in Q3 and 9.1% in Q2.

The tax rate has normalized from Q1 levels as our increased level of profitability enables tax losses in certain jurisdictions to be utilized.

We estimate our diluted share count in Q4 to be approximately 35.2 million shares.

Ambarella will be participating in the 41st NASDAQ Investor Conference on December 3 in London, the Deutsche Bank AutoTech Conference on December 10 in San Francisco, the Nomura one on one Conference at CES on January 6 and the Needham Conference in New York on January 14.

Please contact Louis for more details on these events.

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

(Operator Instructions) And our first question is from Matt Ramsay from Cowen.

I wanted to ask a couple of longer-term questions from me.

One of the -- and I know there'll be some focus on the pull-ins from the Chinese customers.

But in your other markets, you talked a little bit more in the script today about robotics than I've heard you guys talk about in the past, and we've known it's been a long-term opportunity for the company.

But now that you're calling out more on the earnings call here, I wonder if maybe you could talk a little bit about the types of engagements, the breadth, maybe the time to revenue from the engagements that you have in the robotics market.

And then I have a follow-up.

Yes, thank you for pointing that out because you are right, this is the first time we highlighted our robotic application in our conference call.

The reason for that is this is the first time we disclosed we have a robotic SDK available for our customers.

As you know, in the past -- we never claim that we have -- we are programming a platform that a customer can buy our platform and program themselves.

Our strategy is always to understand what customer needs, and we provide the, in fact, the video and the AI cost or the functions required to deliver for the function for the customers' application.

And therefore, that's what I mean, is we really need to provide a complete software SDK.

In today's call, we highlighted that we have the first generation of SDK available in there.

We not only provide multiple new networks that are required for most -- majority of the robotic application, but also we have mono and the stereo processing.

We have low light integrated.

And all of that can run concurrently on our CV2 SoC, which I think is a great achievement -- technology achievement.

So from a technology point of view, we are making clear that we are ready to support our customer.

And also, you can see that this SDK, it become ensured after working with multiple robotic customers for different applications.

Although I think you can see that we targeted on the smart manufacturing, smart city and also logistic applications, you can imagine that if you look at our details of our SDK, you can see that this kind of robotics can be applied to both commercial as well as consumer applications.

So just in terms of revenue, I think we are at the beginning of design win activity, and we are probably -- we hope that we can close on design win soon.

So we are saying probably this is 12 months away revenue opportunity for us.

But nonetheless, it's very important for us to highlight that we have a robotic SDK target for the robotic applications.

Most of our customers will find out that -- if they review our SDK, they will find out that our SDK has majority of the function features they require.

They can quickly put the application over as testing the performance, power consumption and other benefit we're offering.

Got it.

Fermi, that perspective is helpful.

As my follow-up, I wanted to ask a question on the automotive business.

Often, I hear focus on what you guys are shipping today and sort of the data recorders and then sort of the really long-term focus on ADAS and autonomous.

And I wanted to ask about a deal that, I think, you announced just on this call with Mercedes Benz for an in-cabin application.

Maybe you could talk a little bit about what that engagement is and what that opportunity represents.

All right.

So this is really more of a commercial vehicle, and the function is really that in the event -- delivery event situation, you can imagine that when a parcel is being brought into the cabin.

And in today, you use manual process to log the parcels and also managing the parcels.

And -- but with our robotic SDK, you can imagine that they can -- the camera, into an event, can quickly scan those boxes, determine the size, as well as with barcode, we can understand the information over the receivers as well as the content of the box.

And then you can quickly managing and putting the right place.

And when the driver need to pull out that box, that can be quickly do -- be quickly done by just looking at the scanner data.

So I think that's just one way to show you that a lot of the manual process in the delivery industry in the past will be automated by cameras, and it can be done purely by one chip of CV2 running multiple cameras inside of that.

So this is really a commercial-based, in-cabin application, and we work with the OEMs directly to put a solution together for -- and in fact, what we did is, just like you said, we provide SDK.

They have worked with us closely to put their application onto CV2.

And the reason we won this is really that we sell the solution of low lights in cabin.

The lighting conditions is limited.

And we have a stereo.

We have a mono.

We have video processing, and also we have CPU, all integrated in one chip to provide all the function they need for the delivery truck.

So we are excited about this opportunity, and we believe that this is just a one -- the first -- one of the several of design wins we will talk about in the future.

Fermi, just one little quick follow-up on that, and then I'll jump back in the queue.

So you're saying that this in-cabin application with Mercedes Benz was you working directly with that OEM that has developed software on your CVflow architecture.

Am I reading that right?

That's correct.

Our next question is from Adam Gonzalez from Bank of America.

Congrats on the strong quarter.

I think I just wanted to clarify, you had called out a $10 million number for the pull-ins from 2021 in security.

I -- just doing some quick math, it seems like that's pretty much a big chunk of the upside that you've seen in the last couple of quarters in terms of your revenue performance relative to Street expectations.

Am I thinking about that right?

Or has the market share factor been more of a factor in fiscal '20 relative to the inventory pull-in?

Yes.

What we've tried to do is characterize.

Obviously, a lot of people have asked the question.

We don't have perfect visibility, and so we characterized over the last few quarters.

What we think that the potential amount is by -- will have shifted by the end of this year from fiscal '20 -- excuse me, from fiscal '21 to fiscal '20.

And so we actually have to make some assumptions and try to get an understanding from our customers where we are.

But what we're trying to say is that for the 2 years combined, if you had not had any of the situation, I think we've seen about $10 million pulled in from fiscal 2021 to fiscal 2020.

Okay.

Got it.

And is that still a risk moving forward?

Or the update you provided on October 15, do customers have some degree of comfort around the need to build inventory in future periods?

Or is that just a thing of the past?

Well, I think that in our 8K press release on [October 15] (corrected by company after the call), we stated that we are comfortable, there is no mature financial impact for our Q3 and Q4, so we still think that's the case.

The uncertainty is in the fiscal year '21, how does this get consumed by the customer and when are they going to consume and then how they are going -- how likely will they impact our fiscal year '21, which is not clear to us.

Okay.

Great.

And if I could just slip in one more question, I'm just wondering if you had an update from any of your top security camera customers on what their AI-based camera target will be over the next couple of years.

You are talking about professional security camera?

Yes, professional security, yes.

Yes.

In fact, we pretty much think that, that will be kind of done.

We won a majority of the design win we talked about in the last several calls, and we are on track to deliver the mass production with many of them this year, and the balance will follow next year.

So from that point of view, we think that we just need to continue to help our customer to go to production.

In fact, we mentioned several customers today.

We -- in the past, we talked about Avigilon, Hanwha Techwin, Vaion, and today, Verkada.

And in the future, we'll talk about the ones that get ready to move forward.

But I assume -- I believe that majority of the -- our current professional security camera customer will use our AI solution, and most of that will be in production by the end of next year.

Got it.

I think I was just asking more on just the penetration of AI-based cameras overall when you look at the (inaudible).

But...

That's a little difficult to say.

Based on the current data we saw, it's really the only -- the customer Huawei have the AI camera in production.

So from that point of view, I think this is -- I think they are doing well better than their forecast.

So I think definitely, the AI has momentum, but I think it was on the very early stage of AI camera for professional security, particularly outside China.

So I would like to see a couple more quarters of a run rate before we talk about the penetration.

But however, one thing I can say is all our customers are very eager to put the product out and introduce the AI-based cameras.

Our next question is from Ross Seymore from Deutsche Bank.

Congrats on the results.

Just that $10 million pull-in that you talked about, Casey, I just -- not to get too granular on it, but any clue of when you expect that unwind to occur?

Is it inclusive of your January quarter guidance?

Or do you think it's more of a fiscal '21 dynamic?

Any sort of clues on that sort of linearity would be great.

Yes.

No, I think it's a fiscal '21 type of a situation.

I think that going into next year, it's impossible to tell if they're going to hold it, if they're going to burn off in a quarter or over the year.

But my assumption is that over the course of fiscal '21, they'll probably get back to more normalized inventory level.

But again, that's not an exact science.

But I don't -- I just see it kind of getting burned off over fiscal '21.

Got it.

And then did you see any change in those customers' behavior when they got added to the Entity List, specific to Ambarella, of course?

And then once you guys put out the 8K that you could continue shipping, was there volatility around that?

Or did it happen in such a short period of time that you really couldn't notice?

Well, I think that, of course, they feel relieved that when they realize that we can continue to ship.

But I think that one thing also has become clear, that although we cannot -- although we can continue to ship the product to them, they are definitely putting a plan together to focus on non-U.

S. based component suppliers.

So I think that's a trend that we need to continue to watch.

And then my final question on this topic then I'll go away is you guys also have been targeting customers outside of China for the -- all the reasons that we have already discussed.

Any sort of metrics on the success in gaining design wins there?

And have you seen those customers themselves start to gain market share?

Based on our data, we believe that our other -- our non-Chinese customers definitely gained market share in the U.S., and -- but it's not clear whether they will get share outside U.S. So that's our current -- the data we have that we can talk about.

But I think that definitely reflect that in U.S., more people have concerns about the HiSilicon solution in other areas.

Yes.

And just to add to that, a clear example is Hanwha Techwin, which Fermi's talked about over the last couple of quarters.

That's a customer that in this whole -- as it's always played out, has moved from HiSilicon to Ambarella and is also moving forward with our CV products.

And so there's a clear example where I think that we picked up some market share, and I think they're going to be a good customer and a good player in the market.

If I can sneak one housekeeping one in, maybe for you, Casey.

In the past, you talked about normal seasonality, I think, on your last quarterly call for the January quarter.

Is there such a thing as normal seasonal for your April quarter?

Yes, I think they're both -- the quarter that we're in and the April quarter are down roughly 12% to 15%.

So we've guided to what we thought we were going to see in January, and then I think we'll probably see the normal 12% to 15% there as well.

We then tend to have a stronger Q2 and Q3.

Obviously, we're not guiding out that far today.

But if you looked at it historically, those 2 quarters continue to rebound pretty substantially from the kind of the low in April, if you will.

But that's what I'm talking about when I talk about that.

Our next question is from Joe Moore from Morgan Stanley.

Great.

In terms of the in-cabin monitoring, and I guess it's probably similar to Mercedes, you guys seem to be getting quite a lot of wins there, and I guess with some of the European NCAP standards, that stuff comes into production fairly quickly.

Can you talk about when you might see actual revenue coming from those wins?

And it seems to be predominantly CV2, so the more expensive products there that seems like a fairly sophisticated sale for you.

So can you just talk a little bit more about that?

Right.

We haven't given a revenue guidance on the DMS or CMS yet.

However, I want to highlight that for commercial vehicle, CV2 is more suitable because of the requirement for multiple cameras.

But I think that for consumer cars, I think CV22 might be a better fit because most of the consumer vehicle does not require stereo, and the performance requirement on the camera side also is more limited.

So I think that's just the difference between our commercial and consumer vehicles.

But like you said, we are trying very hard to win design -- get design wins on those areas.

Great.

And then on the consumer surveillance side, is it reasonable to think about CV sort of announcements over the course of 2020 and then revenue 2021?

Is that kind of the right time frame?

Or just maybe an update on what you're seeing on consumer surveillance.

No, I think that's the right time frame.

And also, there are multiple design win we are bidding on.

In fact, we are close to winning some of them.

And so I think the schedule doesn't change.

Our next question is from Quinn Bolton from Needham & Company.

Just wanted to start first on the CV ramp, especially in the professional security camera.

It sounds like it's still probably a fairly low percentage of your security camera revenue, but you've talked now for a few quarters as to some of the design wins going to production now over the next 12 months.

Can you give us any -- help us shape what you think CV might represent as your -- as a total of your professional security business, say, exiting 2019 and where it might go exiting 2020?

Is that sub -- low single digits going to 25% of revenue?

Just any help with what you think that ramp might look like as a percent of your sales would be great.

Yes.

So obviously, the ramp is just forming up in the last 2 quarters of the year, and so it will be single digits coming into next year.

But next year, I think that we can see -- what we've talked about is material revenue from the CV, and that certainly is more than 10% of revenue for next year.

And depending on how the consumer ramp comes in next year in the second half, as we said, that's going to start in the second half of next year, that will kind of define the size of it.

But I think you'll probably see us sometime over the course of next year starting to talk a little bit more in specifics about CV as it becomes material.

Great.

Then shifting to China.

I think in your script, you had mentioned you're definitely seeing share gains outside of China among the customer base.

Just wondering if you could come back and say within the China market, how that competitive dynamic is shaping up for you.

And any sense of your strength within the China customer base for domestic cameras versus export cameras?

Right.

So I think in the past, we didn't play much in the Chinese domestic market because that is basically a HiSilicon market.

And for the export business, I think that right now, the thing worries us the most is about the U.S. -- most of our Chinese customers, especially Chinese system companies, sourcing from non-U.

S. components.

And so our advantage has to be that we can provide differentiated technology that very few people, Chinese company can complete.

That's basically played to our strengths on CV and also video quality in the past.

But definitely, on the low end side, we're going to see a lot more competitor because it's not only HiSilicon there, many low end component supplier come to the space.

But however, I do believe in the middle and high end, especially on the AI and also as well as the video processing technology, that's where we can differentiate it.

And we should be -- continue to have a position for the export business.

Great.

And then just lastly, you guys mentioned the fleet management opportunity, the aftermarket fleet management potentially ramping here in calendar '20.

That seems like that's a pretty quick ramp.

Just wondering if you could give us more detail because, again, that feels like that could ramp to revenue fairly quickly.

Right.

So in fact, that -- usually because most of fleet management does not require auto grade chip, and they don't require auto qualification.

So that the front design start to the revenue usually is 12 to 18 months, which is longer than consumer, but definitely shorter than most of the auto OEM business.

And we have been working with several, both U.S. and Chinese companies, working on the solution for fleet management, basically in providing not only just recording but also AI for the driver monitoring, ADAS, blind spot detection, the combination of everything, especially for the multiple cameras around the truck.

So I think that's definitely played to our strength.

But the system definitely is a lot more complicated than the consumer vehicle.

So the trade-off time lines, I will say, design time line is roughly 12 to 18 months.

And we think that we believe the first wave of revenue will come in the second half of next year.

(Operator Instructions) Our next question is from Tore Svanberg from Stifel.

Congratulations on managing through this volatile environment.

First of all, I guess for Casey, inventory day is 57.

I know that's relatively normal for this particular quarter.

But how are you thinking about managing your own inventories over the next few quarters, given all the uncertainty that's out there?

Yes.

I think we've -- inventory down over the last 4 to 6 quarters quite a bit.

I think we were in kind of low-30s and came down to around 17 last quarter.

We are looking at making sure that we meet our customers' needs, and in particular, when you look at Chinese New Year being earlier this year and that we've brought the inventory up a little bit so that we'd be able to meet the needs for the quarter.

But we're going to try to continue.

We've got good cash management.

We had a great quarter this quarter, and we're over $400 million in cash.

We're proud of that.

But we also need to make sure that we're dealing with 14- to 16-week lead times, and we need to make sure that we're able to react to our customers' needs.

And so I think the inventory is generally at about the right spot, but we're going to have to look out into our forecast and understand how to balance that going forward.

Sounds good.

And yes, go ahead, Fermi.

This is Fermi.

I would like to add.

Since we start working with Samsung, they never told us that they have a tight wafer allocation, and this is the first time they told us that.

And because I think my speculation is the -- some of the customer who cannot get enough allocation from other foundries move their product to Samsung.

And we -- this is the first time we start seeing that Samsung also have a very tight allocation on the wafer -- total wafers.

So our strategy is definitely trying to make sure that we have inventory to supply our customer in case there's some urgent demand.

Very good.

And Fermi, a question for you on CV.

It sounds based on your rhetoric that you're going to see some material -- or relatively material consumer CV revenue second half of next year.

Could you maybe single out a few of the applications that you think will be ramping at that time?

I think it's just consumer.

I think our current customer list, if you go through that, you can see we have very strong customers in consumer IP security camera space, basically for home monitoring.

And I believe that the trend will continue, and the AI trend will continue there, and most of them are having RFQs out there for the AI-based camera requirement for the second half of next year.

Very good.

But just one last question, back to Casey.

Casey -- and I know you didn't guide the April quarter per se, but based on your answer, should we then imply that some of this sort of $10 million pull-in already starts happening that quarter?

I think it's possible.

As I said, the reason I stated that I think it will probably be burned off during the full fiscal year is it's really hard for me to judge the timing on that, and so it's difficult to pick that.

I do think what I did guide to or talk about a little bit for that quarter as we will see the normal seasonal down, 12-or-so percent that we've seen over the last few years.

I think that will definitely be there.

What the impact for inventory will be in that one specific quarter is just really tough for me to say right now.

Our next question is from Charlie Anderson from Dougherty & Company.

Congrats on a strong quarter and guide.

I wanted to start with -- in light of the $10 million comment.

Just maybe if you could touch on the sort of underlying growth rate within IP security.

It sounds like the number of end users is expanding your opportunity to pick up market share.

You've got a product cycle that's ramping.

So just real time, if we exclude out that $10 million, what do we think of the growth rate going forward to any degree?

And I've got a follow-up.

Well, first of all, I think that from a market point of view, the professional security continued growth on a single-digit percentage, and the consumer is probably higher than that, and we probably follow the market.

But sometimes, it's very hard to us to put a finger on the $10 million number.

That's really our estimation based on the feedback from the customers.

So there are a lot of guesswork in there.

We just want to give a clear guidance as much as we can to the customers about how we think and so that making sure that people understand the situation.

Great.

And then for my follow-up.

On the R&D credit side, I wonder if maybe, Casey, you could just update us on sort of what we expect for the total for the year.

And then any view on that going forward in terms of impact?

Are you talking about the Italian credit that we've talked about?

Correct.

Yes.

So that's going to run about $0.5 million a quarter.

And so the last quarter had a catch-up in it, and that's what I called out in my discussion.

But what we said last quarter, and I think it's still -- is going to be a pretty good estimate, is that it's probably about $0.5 million benefit per quarter.

And that's factored in our guidance.

Our next question is from Tore Svanberg from Stifel.

Yes, just a quick follow-up for Casey.

Casey, as it comes to gross margin, we talked about, obviously, the mix eventually helping the gross margin through fiscal '21.

Just wondering if you had any update on that.

Well, I do think, yes, as we get more and more CV revenue and more and more in the auto space, that will continue to help us stay in the guidance or get us back into the guidance of 59% to 62% that we have been in.

Obviously, in the consumer, and in particular in China, the margin pressure there is probably most significant.

The customer, they're the largest in the industry, and that's a fairly tough market to start with.

And so depending on the mix from quarter-to-quarter, that's what you see.

And for example, we've talked about the last few quarters having a little higher mix there, and that's why the margins have been down a little bit.

At this time, I am showing no further questions.

I would like to turn the call back over to Dr. Fermi Wang for closing remarks.

And everyone, I'd like to thank you for joining us today, and I'm looking forward to seeing you, talk to you next time.

Thank you.

Bye-bye.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.