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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day ladies and gentlemen, and welcome to the Ambarella’s First Quarter Fiscal 2020 Earnings Call. At this time all participations are in a listen only mode.
Later we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Mr. Louis Gerhardy, Director of Corporate Development and Investor Relations. You may begin.
Thank you, Skyler. Good afternoon and thank you for joining our first quarter fiscal 2020 financial results conference call. Our speakers today will be Dr. Fermi Wang, President and CEO; and Casey Eichler, CFO. The primary purpose of today's call was to provide you with information regarding the results for the first 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 are under no obligation to update these statements.
These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents that we filed with the SEC, including an annual report on Form 10-K filed on March 29, 2019 for fiscal 2019 and in January 31, 2019.
Access to our first 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 will now turn the call over to Dr. Fermi Wang.
Thank you, Louis, and good afternoon everyone. Before I address our financial results, I would like to comment on the geopolitical factors injecting higher levels of uncertainty and volatility into our business. All through there is currently no regulation in place, there is speculation a lot of security camera customers in China may become subject to U.S. Government Regulations limiting or restricting our shipments to them.
In addition, some of our customers both in China and outside of China will be facing higher tariffs when their products are imported into the US. During these uncertain times, market share may shift between our customers and as such transition could be subject to disruptions. Furthermore, our non-security cameras customer in China may also be subject to the unfavorable geopolitical forces.
Our largest competitor in the security cameras semiconductors market, HiSilicon a unit of Huawei, they also face headwinds of their own. As a result, one can see the environment is volatile with a wide range of potential outcomes. For example, in the last two weeks we have received orders, pull-ins from the security camera customer in China.
In terms of our financial performance in Q1 fiscal year 2020, the revenue of $47.2 million was slightly above the midpoint of our guidance and declined 8% from the $51.1 million in the prior quarter.
During the quarter, we demonstrate a solid progress towards a multi-billion dollar expansion of our addressable market. Our deep domain expertise in video processing, integrated with computation of horsepower of our proprietary CVflow AI processor yields a highly optimized computer-based solution, enabling our customers products to become more intelligent.
An important milestone for us is that we started mass production of all second CV SoC, CV25 in Q1 with shipments scheduled in Q2. Also during Q1 we continued our early ramp of the CV22 shipments and maintained a strong design activity in our core automotive and the security camera markets.
I will now talk about our progress in our target security and automotive markets starting with security. During April’s ISC West Security Convention, Ambarella demonstrated its full range of IT Security Solutions including our CVflow family of computer vision SoCs, as well as announcing our new S6LM SoC.
At the show many leading professional camera suppliers demonstrated a new AI enabled camera based on our CVflow SoC, in advance of a formal product announcement to be made over the coming months. This included a leading Korean supplier Hanwha Techwin who demonstrated a professional IP camera based on Ambarella Solutions for the first time. Our CVflow SoC are in design at the nine of the 10 leading professional security camera suppliers.
We are continuing to displace SoCs from HiSilicon and computer vision coprocessors including most of [formal media] [ph] and FPGA-based solutions and new designs. We also believe that around five professional IP camera makers should be in mass production of a camera based on our CVflow SoC in the second half of this year.
During the show we introduced our new H6LM camera SoC targeting both professional and home security cameras. It includes and Ambarella's latest High Dynamic Range and a low-light processing technology, highly efficient 4K H264 and H265 encoding, multi-screen streaming on-chip 360 degree dewarping cyber security features and the quad-core Arm CPU. Fabricated in 10nm process technology, the SoC has a very low-power operation, making it well-suited for small form factor and battery-powered designs.
Fully software compatible with our CVflow family of chips, the S6LM expands our IP camera product portfolio to address the most close conscious applications with no compromise on image quality.
In addition to our on-going investments and progress in AI processing, we are continuing to advance our image processing technology, which remains a critical differentiator in both security and automotive applications.
At ISC West we demonstrated the low light capability of our new SoC’s by generating full frame rate color video in less than 0.07 lux lighting conditions or near total darkness. At this light levels, previously camera had to turn on power hungry IR LED for illumination, which provides only gray scale images. This new low light color capability is available on all of our new CVflow and H6LM SoCs.
We have now worked with over 50 customers and partners who successfully port their Deep Neural Networks to our CVflow SoC with our advanced tools typically enabling net reporting in a few days.
The number of leading third party computer vision software developers joined us at ISC West for demonstrations. This included any regions of face recognition, FX groups, vehicle and license plate recognition, pilot AI person and the vehicle detection, Trueface’s access control and IntelliVision's license plate recognition, and Xnor's person detection and recognition.
In a Consumer Home Monitoring Market, Vivint a leading SmartPhone company owned by Blackstone Group and serving over 1.4 million customers in the U.S. and Canada introduced its first Ambarella based product, the outdoor Camera Pro. The camera is sold as a part of Vivint’s complete integrated home security system and 24/7 monitoring services. Based on Ambarella’s S4L SoC, it includes a 4K sensor, 10ETP video HD Room, Night Vision, 2-way audio and ability to both detect and to deter threats.
I will now update you on our continuing progress in automotive markets. In April Ambarella exhibited at the Shanghai Auto Show for the first time. We hosted a significant number of leading Chinese automotive OEMs and the Tier 1 suppliers.
While Dr. Alberto Broggi, General Manager of Ambarella’s VisLab team delivered the speeches highlighting autonomous driving technologies to almost 600 attendees. Our technology demonstration included our partner HELLA Aglaia Front Camera AI based ADAS software running our CV22, CVflow SoC. We also demonstrated driver monitor solutions form partners EyeSight and RealSense. The RealSense cam will run on Ambarella’s new CV25, CVflow SoC.
And yesterday we announced that we are working with leading Chinese Tier 1 supplier Longhorn to develop automated parking system based on a combination of the visual and ultrasound technologies, with sensor fusion software. The platform uses Ambarella’s CV22 H2 SoC to run multiple AI algorithms simultaneously to enable free space detection, parking detection, vehicle identification, obstacle type identification and emergency break in a full 360 degree paranomic parking system.
And yesterday we also announced a collaboration with Baolong, a leading Chinese’s Tier 1 supplier to the automotive sensor and ADAS market. Baolong’s DMS AI was run on our CV22 H2 SoC, create a high performance low power and a compact form factor driver monitoring systems.
The driver monitor system solution captures the drivers’ facial information, including characteristic of the eyes, head and the mouth from an image sensor and in the CV22 H2 and then provides both real time both video processing and the AI computational horsepower to determine the drivers level of fatigue.
In April we announced that we are working with China-based Momenta on a collaborative HD mapping platform for autonomous vehicles. The combined solution leverage had a broad CV22, H2 SoC and the Momenta’s deep learning algorithm to provide HD Map solution, including localization and the map updates through cloud sourcing. The solution can create a close fee value of a fixed data AI and HD map update. We expand our partnership with Momenta to include development of ADAS, and able to process timely solutions in the future.
Also in April we announced that we are working with Chinese Tier 1 automotive supplier Shanghai OFilm, a leading provider for smart driving solutions on automated valet parking or AVP hardware platforms. The platform uses Ambarella’s CV22AQ SoC and OFilm’s Intelligent Driving algorithms to perform high precision image recognition, free space detection and obstacle detection and enable emergency braking and map construction.
In the OEM automotive market, we are continuing to win new designs in car recorder applications, as this capability increasingly becomes a pre-installed option in new vehicles. In the last two year’s our drive recorder SoC have been incorporated into 18 new car models with 10 different OEMs. These OEMs includes GE, Honda, Toyota, Nissan, SAIC, Dongfeng, Changan and the BAIC.
During Q1 a number of Chinese automotive customers introduced new car models with recorder space on Ambarella’s A12 SoC. This included Geely's Jiaji MPV with a car recorder supplied by Tier 1 Longhorn, Chery’s Tiggo Fly SUV with a car recorder supplied by Tier 1 Skyworth and the BUI's sole Max NPV.
In automotive aftermarket, Garmin announced its new mini-family of compact dash cameras consisting of a four new models ranging from $129 to $249. All based on Ambarella’s A12 SoCs, the new cameras include features such as 14/14 resolution video, 180 degree field view, parking security recording and ability to link up to four cameras together to form a synchronized network that provide a full coverage around a vehicle.
And in April Ambarella’s Italian team VisLab obtained authorization to pass autonomous vehicle on public roads in Italy, the first authorization to be issued by the Ministry of Infrastructure and Transport, under the new Smart Road decree. The authorization was obtained based on evaluation of the VisLab’s technology, its proven experience in passing in real world environments and the vehicle or safety records.
Commemorating the occasion, Ambarella’s EVAs autonomous vehicle was demonstrated to an Italian Deputy Prime Minister and Minister of Economic Development on an iconic Torino Lingotto test track built on the roof of the former Fiat factory.
In a consumer camera market, drone market leader DJI introduced its Osmo action camera raising the bar for features and image quality in the action camera market. Priced at $349 and based on Ambarella’s H2 SoC, it offers 4Kp60 media recording, full frame rate 3-axis electronic image stabilization called Rock Solid, video HDR processing in excellent low light image. The waterproof camera also featured a front facing color display to illuminate the dashboard when taking selfies.
In summary despite the geopolitical headwinds, I’m pleased with our execution and the foundation we are building for the secular growth opportunity in the AI and the computer vision market. With multiple CV devices now in production, with more CV design wins and with new technology and products and development, we see three CV waves taking shape.
CV revenue from the professional security camera market has stated and we expect it to become material in calendar 2020. The second CV was expected from the consumer security camera market. We expect it to commence in the second half of calendar 2020 and become material in calendar 2021. The first CV with automotive is expected in calendar 2022, 2023 with a portfolio to be the largest wave yet.
I would like to recognize Ambarella’s team for keeping their heads up and executing our plans despite all the macro uncertainty. Thank you to all of our shareholders, including our 750 employees, customer, vendors and shareholders for your trust.
Now, I will turn the call over to Casey for the first quarter financial details and the guidance for our second quarter of fiscal 2020.
Thank you Fermi and good afternoon everyone. Today I’ll review the financial highlights for the first quarter of fiscal 2020 and the April 30 and provide a financial outlook for our second quarter of fiscal 2020 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 a limited stock based compensation expense, adjusted for the impact of taxes.
Consistent with our previous guidance, our Q1 revenue totaled $47.2 million which represents a decrease of 8% from Q4 and a decrease of 17% when compared to the same quarter of the prior year. In Q1 revenue by market was in-line with expectation, automotive and other product revenue was up sequentially and security was down sequentially with consumer security increasing and professional security declining.
Non-GAAP gross margin for Q1 was 59.6% compared to 60.6% in the preceding quarter and slightly above the midpoint of our guidance. Non-GAAP operating expenses for the first quarter were $29.9 million compared to $29.5 million for the previous quarter. OpEx increased primarily due to an increase in payroll taxes and other payroll related expenses. Other income of $2.2 million was higher than anticipated as we received a $346,000 one-time government subsidy.
Non-GAAP net income for Q1 was $266,000 or $0.01 per share compared to non-GAAP net income of $4.5 million or $0.14 per share in the fourth quarter. The non-GAAP effective tax rate in Q1 was approximately 36%.
In the first quarter the non-GAAP earnings per share were based on 33.5 million shares as compared to 32.8 million shares in the prior quarter. Total head count at the end of the fourth quarter was 750 with about 81% of our employees dedicated to engineering. Approximately 70% of our total headcount is in Asia.
In Q1 we generated positive operating cash flow $5.3 million. Cash and marketable securities were $366 million, up from $359 million at the end of the fourth quarter. We did not repurchase stock during the quarter under the $100 million repurchase program authorized through June, 4, 2019. On May 29, the company's Board of Directors authorized the repurchase of up to 50 million of the company's ordinary shares through June 30, 2020.
Total accounts receivable at the end of Q1 were $26.5 million or 50 days sales outstanding. This compares to accounts receivable of $26.2 million or 47 days sales outstanding at the end of the prior quarter. Net inventory at the end of the first quarter was $17.6 million compared to $18.3 million at the end of the previous quarter. Days of inventory declined to 85 days in Q1 from 93 days in Q4.
We had two 10%-plus revenue customers in Q1, WT Microelectronics our fulfillment partner in Taiwan which came in at 59% of revenue and Chicony, a Taiwanese ODM who manufactures for multiple customers came in at 18%.
I will now discuss the outlook for the second quarter of fiscal 2020. Before the recent geo political news, we were comfortable with the market expectation for second quarter fiscal year 2020 revenue outlook. However due to recent order pull-ins, we are now raising our revenue guidance about the market's expectation. We expect total revenue for the second quarter ending July 31, 2019 to be in the $51 million to $53 million range.
We anticipate automotive and security revenue to increase sequentially, all other revenue is expected to decline. We continue to expect other revenue comprised primarily of custom electronics products to remain volatile and decline as a percentage of revenue in the next two to three years.
Although forecasting is difficult in the current environment, we continue to expect our revenue will increase in the second half of the year when compared to the first half. The global economic and political environment is generating a significant amount of uncertainty with our customers’ outlook in our customers supply chains. Overall, conditions remain extremely volatile.
A number of factors impact our gross margin outlook. In anticipation of export restrictions that might be implemented our professional security camera customers in China have pulled in orders which are lower margin products. In addition, rise in tariffs may have a greater impact on our customers’ ability to sell their products incorporating our higher margin devices. There is also some supply chain congestion in the packaging and test area that may make it difficult and/or more expensive for us to pull-in orders.
As a result, we estimate Q2 non- GAAP gross margin to be in the 57% to 59% range as compared to 59.6% in the first quarter. We expect non-GAAP OpEx in the second quarter to be between $29.5 million and $31.5 million due to increased engineering headcount, payroll tax accruals and other engineering expenses.
For Q2, tax rate should be mild at 32%. The tax rate is a result of our inability to use tax losses in certain jurisdictions and tax rate should return to the high single digits as we become more profitable.
We estimate our diluted share account for Q2 to be approximately 34.1 million shares. Ambarella will be presenting at the Bank of America Merrill Lynch 2019 Global Technology Conference on June 5. The Stifel 2019 Cross Sector Inside Conference on June 10, and participating in CES Asia, June 11 to June 13. Please contact Louis for more details on these events
Thank you for joining our call today. With that, I'll turn the call over to the operator for questions.
[Operator Instructions]. Our first question comes from Kevin Cassidy with Stifel. Your line is now open.
Thanks for taking my questions and congratulations. Just to be clear, the pull-ins, these were because of high silicon and concerns of them not being able to ship it. It's not a concern that the U.S. may ban surveillance products or your products being shipped into surveillance products. Do I have that right?
Well, it’s hard for us to have perfect visibility into that, but I would say primarily the pull-ins are related to customers concern about a ban or potential ban and so I think we're seeing some order patterns as we've seen over the last quarter or so move around a little bit, and we think that we're already seeing some pull-ins into this quarter and that's what we were referencing. From a HiSilicon standpoint, we may see some increased orders due to concerns around HiSilicon, but it's hard for us to have visibility in the back.
Okay, thanks. So should we be thinking of the second half? I know you're saying it’s still higher than the first half, but maybe not as high as your first thinking, because the first half is going to be higher than expected?
I think what we are going to see is movement kind of quarter-on-quarter over the next two to three quarters. We are seeing the type of traction we were expecting, especially across the CV products and some of the other products, but as all of this you know gets digested and we try to get some resolution, it's a little difficult for us to have as much visibility as we typically do.
But what we're seeing right now is pretty good demand and certainly demand better than we saw in the first half of the year and so that's why we're guiding second half over first half. But on a quarter –by-quarter basis you know we're going to keep you posted as we move forward, because it's difficult for us to have good visibility right now.
Okay, thank you very much for the clarity.
Sure.
Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Hi guys, thanks for all the color and all this uncertain times, so I appreciate you guys trying to give us a little more of a crystal.
To that point I know Casey you said you were comparable with what the Street expectations were before. Just trying to size the pull-ins here; is it fair to say that if the Street was that $49 million to $50 million you're thinking kind of $2 million to $3 million to hit the mid-point is the pull-in side of the equation or is there other things that are moving, you know new design wins, something else that's helping your business above the current expectations?
Yeah, I mean most people had us, you know starting to have some revenue growth in the second quarter, thus the $48 million to $49 million you were talking about versus what we just did. And the incremental above that, again, it’s hard to have perfect visibility, but clearly a good piece that is pull-ins that we're starting to see into Q2 and so you know exactly how much of that is pull-ins is again hard to have an exact beat on that. It’s clear to say that a large portion of that additional about this. where the Street was is pull-in related.
Got it, and then I guess any more color you can give and the confidence you have in the back half of the year still being bigger. Obviously you have a lot of drivers there, but it seems like it will be less so to Kevin's question given that you have the higher base in the second quarter. Can you just talk about some of the things that you have confidence in that will create that increase into the second half?
Well, you know as I said, you know our CV products remain on target and online. We’ve got some of the other products and some of the things that Fermi discussed in the call today that we think are going to really start to be contributors there and generally some of the markets that have been soft are starting to come back a little bit. You know auto kind of lightened up a little bit, security growth had spun a little bit and if you listen to our customers they were seeing growth to start come back a little stronger in the second half, so that's all good signs.
Now again, when you get disrupted in the visibility is if all of a sudden we're not allowed to ship products or if you can't get the supply chain straightened out for our customers, obviously that's very disruptive and we can't control that, but barring something like that happen, I feel pretty confident and pretty good about what we are hearing from our customers today.
And also, this is Fermi and let me add one more thing. Before the discussion of this ban, potential ban of Hikvision, Dahua, Casey and I feel comfortable with our previous guidance, which means that Q2 should be a little better than Q1 and the second half will be better than in the first half. We were comfortable even before this older discussion or the excitement of our Hikvision, Dahua situation.
Got it. Thanks guys. I appreciate it.
You got it. Appreciate it.
Our next question comes from Joe Moore with Morgan Stanley. Your line is now open.
Great, thank you. My question is on the pipeline of automotive wins, particularly in China you guys have talked about the Shenzhen, OFilm, Momenta, Baolong, Longhorn now. It seems like there's a lot more design wins coming from China than I would have expected. Can you talk about why you're getting so much traction in that region and you know obviously the Halloween in the west was pretty important as well, but it's sort of harder to get the companies that you're working with in the west to press release those activities.
Right, so first of all I really think that HELLA's announcement to help us in China even because a lot of Chinese customers are waiting to get a platform they can use and would highlight obviously, what highlighting does in our CV22 platform, it gives the confidence to the Chinese vendors who are looking for solutions, and there was – we that we talked about in the past, in China people are more aggressive and they really want to get some product they can ship in 2020 and 2021, tons a year, and there are not many good solutions out there.
So with endorsement of HELLA, as well as we continue to demonstrate the progress we made in our CV chip and the performance and the low power consumption, all of that, and image quality we just recently demoed, all of that to help us to establish.
I think at the end the Momenta we seen in China really reflect that Chinese support automotive industry is more aggressive to try new solutions, as well as their time to market and time to revenue is shorter than an outside channel.
Okay, great. And I guess a follow up, is the competitive dynamics in the Chinese market different than here? I mean here we talk about because like Mobileye and FPGAs and things like that. In China is it the same. You know we certainly hear about a number of AI inference related start up, so is that a different competitive set there.
Yeah, first of all I think between the Chinese and non-Chinese company they are probably 50 kind of different AI company or start up company trying to do inference engine like we are doing, but I still think that our main competitor is people we talked about in the past, maybe Intel, Mobileye and NVIDIA and also the traditional company like HPTI and APJ companies.
I think what we show on the CV22 and the CV25, we believe will establish our performance, especially our CNN performance as a Telco, something better than the competitor we just talked about, and also that because our existing cell structure and customer relationship in China definitely help us to get Momenta going in China.
On top of that I think Mobileye and NVIDIA, although they are very big and they are very strong sales there, but the price is much higher than us in China. All of that I think helped us to get in there. So we believe in China we are competing with like I said, Intel and Media Plus TI and HP and the APJ companies. I think that's your main competitors.
Thank you very much.
Our next question comes from Adam Gonzalez with Bank of America. Your line is now open.
Yeah, thanks for taking my question. Just a really quick one. Can you just quantify what your overall exposure to China is? I think we have a pretty good sense of what it is in security, but just trying to think beyond security and automotive and continuing that as well. Thanks.
Sure, in the securities case I think the question of the exposure to China, if you think about our professional security revenue, security overall is about 60% of our revenue and the professional side of that is about two-thirds with the consumers’ security being one-third.
Of that two-thirds, you know if you look at our revenue in the security space alone, you know you're going to have a majority of our revenue coming from the export business. In the export business we have some internal as well, but the export business is the biggest piece, but it probably represents 20% to 30% of their business.
So when you roll all of that up, you know there's a decent piece of our business is in the professional security business that’s solid by our Chinese customers, but most of that is export and it's a smaller piece of their business, the business inside of China is primarily our competitor HiSilicon.
And also in auto space, I think that we talk about in our OEM car TV business, OEM recorder business, really Japan and China I will say – sorry, China, Japan and Korea and I really think China is probably roughly 50% of that business. So that basically gives you an idea about our China exposure.
Great, thanks for the color. And then on autos, Fermi you gave some color on the timing of the three waves of the CV ramp that you see over the next few years and you know you said auto would really be material in calendar ‘22 and ’23. Just wondering if you can give us an update on what you expect some of the near term drivers to be in autos between the you know – I know it's 100% or mostly 100% auto recorders, drive recorders today. What can help bridge the gap between where we are today and material CV ramp three, four years from now. Thanks.
Right so when we talk about 2022, 2023, we talk about renowned China CV ramp and as I just said, I think there will be a Chinese CV ramp earlier than the 2022, 2023 timeframe we talked about. For example, a lot of Chinese engagement we announced, but the timeframe is really a 2020, 2021, although the volume is not high, but definitely it will give us momentum moving towards that.
But even before that CV wave, you know for ADAS, there's another wave which is DMS, Driver Monitor System. We continue to see huge momentum behind this market and all of them moving to using a CN neutral network with our CV25 chip for the next generation. So I really think that we are going to see another wave of the revenue coming probably 2020, 2021 based on what DMS momentum.
Before that, I will say it’s all about video products, recorder will be the biggest business which continue to grow. We believe the total penetration rate is still low in China and we expect the Chinese video recorder business will continue to grow in the next two or three years.
In addition to that, I think we, this time we talked about we have this surround view and also the smart parking system which is using, leveraging the surround view system which past CV to object detection, parking solution, so all of that will be incremental to our revenue in the next couple of years.
So when we say this, the auto wave is really referring to that, I think less than ADAS customer can go into production and that will give us a big impact on our revenue. But before that I think all of this that Casey just mentioned and also Chinese CV revenue will help us appreciate the revenue.
Thank you.
Our next question comes from Quinn Bolton with Needham & Company. Your line is now open.
Hey guys, I was just trying to sort of better understand you’re sort of your thoughts around the impact of the tariffs and the potential bans, one security cameras and the current ban on Huawei. You said you know prior to those events you are comfortable with sort of the annual consensus estimates. Once those events happened, you’ve seen, it sounds about $3 million of pull-in into the July quarter, which I assume would have otherwise been recognized later in the year.
So I sort of understand that pull-in effect, but I guess my question is, do you not see any risk to the second half just from overall tariff uncertainties, the supply chain tightening inventories as a result and any potential ban of security cameras to the extent that those entities are placed on the U.S. Entity list?
Well, that’s defiantly a concern, that’s why we didn't give any guidance on the Q3, Q4 second half, because of all the risk you just mentioned. The only thing we said so far is before this discussion, before this potential ban being talked about we were comfortable and after that the only thing we commented was that we see Q2 pull-ins. We assume that if this geopolitical situation continues, we'll see continued pull-in in Q3 until the ban starts. I hope it won't, but if it starts, we defiantly will put at more risk our Q3, Q4 outlooks, but with so many uncertainties at this point we just don't want to give any guidance for Q3, Q4 at this point.
Got it, and then you received a question on sort of the exposure to some of the Chinese security OEMs that could potentially go on the Entity List? I think in aggregate that could be roughly 25% of total sales. You had mentioned in the prepared script I think for me that maybe it was only Hikvision that that could go on that list. Could you, you know to the extent that it's only one entity that goes on the list rather than multiple entities, would you be willing to share what the exposure specifically is to Hikvision versus Daiwa or would you prefer not to get to that level of specificity?
Well, we are not making any assumptions at this point. Both Hikvision and Daiwa we mentioned in those media press and we are doing all kind of calculation assuming one tool, none or both. At this point we haven't given any guide while potential impact if any of the scenario happens we want to wait. While in fact the biggest question is you know Entity List is one thing to look at, but there are many other ways that can the limitation can come from. So we just wait until the situation becomes clear, then we will address the potential impact to us.
Just to add to that, should companies like Hikvision or Daiwa get added to list, the first thing we have to determine and obviously we're not waiting or looking at that right now, is whether or not the Ambarella solutions, you know which are developed and manufactured outside of the U.S. are they subject to the restrictions, and you know without knowing exactly what's going on, we’re digging into that. But two things would have to happen, one is they would have to be put on this Entity List and then we would have to make a determination whether or not that impacts our products based off of our back patterns, so.
Got it and then not to make all my questions about the potential of the ban, I wanted to shift over to professional security. Do you guys have an estimate as to the number of AI based cameras that would ship perhaps in calendar ‘19, and calendar ‘20 just to give us kind of a unit tam, so we can start thinking about what that ramp might look like. I know you expect material revenue from CV in 2020 and professional cameras. But just wondered if you might be able to give us kind of a unit tam as you are thinking about the market today? Thank you.
So right now only Hikvision has shipped many AI based camera. In calendar year 2018 they say they shipped roughly 1 million units. In calendar year ‘19 their forecasts shows that they want to ship roughly 3 million AI based camera and we haven’t really given any indication for calendar 2020 yet. And so between Hikvision or Daiwa we believe they'll be aggressive in AI camera side.
On top of that outside China, we only talk about one of our customer that would be ramping up there AI camera and also we talk about totally, we believe five of our CVflow customer will start shipping professional security camera by the end of the year. So I hope this will give a lot of momentum from the supply point of view.
But from demand point of view I really think that security depends on the pricing of the customer products. The aggressiveness of them pushing the technology and position the product. So with that we are waiting for more visibility from our customer about their short sales rollout of those products.
Understood. Thank you.
Our next question comes from Matt Ramsay with Cowen. Your line is now open.
Thank you very much, good afternoon. Fermi just quickly on the longer term, you guys are -- continue to announce new CV chips and also obviously based on the CVflow architecture and I just wanted to maybe get a little bit of an understanding with the engagement that you've gotten so far, what level of software investment those customers are making on top of the CVflow architecture, whether that’s your own investment, the customers own investment, any NRE payment that you might be getting to do that investment collaborative and how sort of the software development on top your platform and architecture is going for CV? Thanks.
Well, that’s a good question, because one thing we noticed about all of the AI or CV technology development, so far it’s probably the biggest investment at this point for both customer and us. In my script I mentioned one important thing, more than 50 customers and partners have put their neural network on to our CV platform using our tools and most of those network, in fact for each customer they probably put anywhere from two to 10, their own developed networks on to our platform and most of the network can be pointed to in a couple days. So that just shows you efficiency and a number of customers are looking for this technology.
And in fact more importantly, after the put their neuro network onto our platform, they convince themselves that our message today in terms of power consumption, performances, video quality are matching what we said in our spreadsheet.
So I think that's a very important portion of this. And the other one is, in two calls before I mentioned that HELLA ported their software on to our platform in less than three months, including new network and other applications on CV22 in less than three months. That just showed you how – it’s much easier than our customer expectation. It is our software structure and the probability for their software to go to our hardware platform.
The third thing you asked is NRE. For most of our automotive engagement, we are definitely asking for NRE to exchange for the support, software support, hardware support and maybe the ongoing system support for this alongside of the multi engagement, and that – some of them will show up in our financial guidance and will continue to show up in our financial guidance in the future.
Got it, thanks. For me that’s encouraging and really helpful color. I guess as an unrelated follow-up, maybe my naive understanding of the CV opportunity was really in professional security cameras and then in the longer term in auto and it was interesting to me today to hear you guys talk about the home security market as sort of the second leg of CV adoptions. Can you talk a little bit about what opportunities you're seeing from a home security stand point and like how close we are to those transitioning on to CV?
Right, so if you look at all of those reviews of the current consumer security camera, doesn't matter who is building with Ambarella solutions or other solutions, the biggest concern is the accuracy of those alarms. You know most people trying to sell service by providing alarms in the emails to the customer when they see something in the camera and say oh there is an alarm, just look at it, but most of the alarms are false.
In fact there is – some stats that shows that 95% of the alarms sending to the consumer through the consumer security camera were false, and so really the false alarm becomes such a problem, in fact at the end most of the consumer, including myself turn off those alarms. And the reason for that is the AI using streaming a video to the cloud was a very small video resolution, it didn’t give you the accuracy and the response that you need.
So we all believe, when we talk to our customer, we all believe that pushing AI or computer vision to the edge and so that you can apply CV on a high resolution video without much any delay and making a real-time decision is the way to reduce the false alarms. We believe that with our AI Technology we can help all customers easily eliminate 90% or more false alarms that we saw in technology.
With that I think the alarm system will become useful and our customers can start to really monetize their service from there. So that’s one of the reason I think that our consumer IP camera will start adopting AI.
But at the same time we also know that our consumer IP can go to two extremes now. You see a lot of the $20 consumer IP cams sold in Amazon. At the same time you see people selling $199 with AI functions.
So you are going to continue to see these two trend. One go to high end provide complete AI service and age or you go to total the other end which is a very low end nothing, just a pure video streaming. So you are going to see consumer IP go through extremes, and that will mean that our CVflow is targeting to serve the higher performance and the higher gross margin product that we are working on.
So in terms of the timing of this product line, we start seeing a lot of design win activities and that’s why we mentioned that we probably are going to see, start seeing people renting up, current year 2020, second half 2020 and mature revenue coming in 2021.
Thanks Fermi for the color and all the best guys given all the uncertainty out there. Thank you.
Thanks Matt.
Our next question comes from Suji Desilva with Roth Capital. Your line is now open.
Hi Fermi, hi Casey, just a housekeeping question. What percent of revenue at this point is a consumer legacy, is it deminimus at this point or still material.
Yeah, we have said that we are entering the year in kind of a high teens, and that that would be rolling down over the next, like is say two to three years. And so you can think that you know again there is going to be ups and downs, it’s going to be kind of lumpy because there is less and less products in there, but over the course of the year you can see that decline from that point down. So you can assume that did make a dramatic change in the current quarter.
Okay and my next question you know may be unfair. I mean there is a lot of uncertainty, but also a lot of guidance on the call about computer vision. But are we at the point now where we can talk about in the kind of calendar ’20 timeframe what percent of revenue that might be or the run rate or qualitatively, and if not that you know, what are the two or three things you should watch out for that can drive CV as a material part of the revenue in ’20?
I think that it’s too early because our customers haven’t gained mass production yet. I really think that the milestone you need to watch is when our customers start announcing their products, that's really when they start shipping and how many of them, what’s their pricing points, and that's something we are watching anyway to give us a location and revenue stream we can expect next year.
And Fermi, when do you expect that wave of announcements to hit, holiday season or…?
I think it’s going to be later this year or early next year. CES might be a good time to look at it, but I think I expect a lot of announcement at late this year.
Got it. Alright, thanks guys.
Our next question comes from Charlie Anderson with Dougherty & Company. Your line is now open.
Yes, thanks for taking my questions and congrats on the CV progress. Alright just two quick ones. So one you mentioned sort of obviously the change in behavior from the Chinese security camera customer, the pull-in activity. I wonder are you noticing any change in behavior or rhetoric from the customers that are using high silicon that could potentially cut over to you, that’s question one.
And then question two is if the appetite increases for pull-in activity from the Chinese security customers, can you maybe help us understand how much you could maybe serve that increased appetite. You did mention there were some constraints of supply chain, so I just wanted to understand the dynamics there. Thanks.
Okay, so the first question is about HiSilicon. I think that we already start thinking – you know for example when we talked about Hanwha Techwin today, which was a HiSilicon customer and they transitioned to us, not only of the CV part, but also on the video product, so that’s just one example. I think that outside China we do believe that we are taking over some of the HiSilicon accounts and we are going to ramp up the second half of the year.
In fact the other trend we definitely noticed, but we haven’t seen big impact is that Huawei has made it clear they want to become one of the largest security camera vendors in China, which means they are going to compete with Hikvision, Dahua. How does that impact their relationship and HiSilicon’s relationship with Hikvision, Dahua is something I try to understand and see how that could help us in the long run. That’s something we are just clear, we haven’t seen a clear indication yet.
So the second question is – sorry, I forgot the second question.
It had to do with your capacity to ramp-up if the appetite increases for more pull-in activity.
Yes, thank you for reminding. For example, you can see that Casey talked about, we still have 80 days inventory that that will help us to address a portion of the pull-in requirements and also that, I think we have great suppliers that are willing to help us to do some urgent pull-ins from those wafer and the packing testing point of view.
So, so far you know we think we can handle more pull-ins, but however it really depends on whether this geopolitical situation continues and will our customer continue to want more pull-ins in the next several months. So we're watching that very carefully, but we do have a sound inventory that can handle it and also can prepare more if things continue to detrital.
On top of that, I think the things we are watching the most is whether the packing testing house capacity and when the costs will go up before having too much of higher demand and that's something we are watching. We haven't seen that yet, but we worry that it might be the case.
Great, thanks so much.
Our next question comes from Richard Shannon with Craig-Hallum. Your line is now open.
Hi Fermi, Casey. Thanks for taking my questions as well. Fermi, I think I caught your comments regarding your success in auto recorders, I think you said 18 wins with the 10 OEMs. Can you give us some perspective of that market so far in terms of maybe your share, the volume you are seeing with those customers, are they add-ins or are they default, selection things like that. Just give us a view of how that's going so far.
We mentioned 10 OEMs and 18 models, all of them are you know, it's either option or its default inside of the OEM cars and that’s definitely one thing we are focused on – one market we are focusing on. Our estimation is total penetration of that market is probably rough 10% in China based on the number we can see.
So we do believe there is a potential market share to gain and so market growth that we can do in China, particularly that we continue to hear that some of them might put a regulation out to ask for some commercial cost, even consumer costs to have this function as default.
If that happens, when that happens I think that will really help the market growth and our advantage in this market is addition to our traditional video quality and the power consumption, I really thinking that the quality of silicon that we have, auto-grade chip and also not only just the temperature but also get to a AEC-Q level, ASO level and that we saw it was a very good quality history with our current product line. I think that’s really one of the benefit we enjoy in channel right now.
Okay, great that’s helpful. My follow-on question, Fermi if you want to look at a little bigger picture longer term, looking at the level 4, level 5 opportunity has been a lot of discussion. Well there has been for a while, but certainly this year about the interest and usage of lidar versus non-lidar approaches for level four, level five. I wonder what you are hearing about those – what’s the discussion out there in the industry and then also maybe as that plays into the engagements on and interest in stereo versus monovision.
So first of all we continue to believe level four, level five will be a long term market for us and we – but we will still continue to engage the OEMs we’re doing Level 4, Level 5, but our expectation is that it’s more of a small volume production and also that some of the R&D project that we get involved with NRE and also building relationship with technology together.
In terms of lidar and non-lidar discussion, we [inaudible] we didn’t put any lidar there. We believe that stereo is a good technology complementary to the other mona camera assistant and we try to prove the concept that without lidar you can have a level 4, level 5 of the car.
However, like I said, if our customer coming to us and says they want to use our CV chip with lidar, we would definitely work with them, because this is a trend that you know we are not going to compete and market trend. If market trend says lidar plus mono camera we will work with this customer and if a customer comes and says you want the stereo plus mono, we’ll work with them. We’ll try to stay neutral on this discussion.
However, we definitely try to improve the concept, the following concept that when the stereo processing work properly as we saw with technology, we want to show the people that stereo processing can be as powerful as lidar or even more powerful because the sensitivity, the cloud point density that we can provide with stereo cameras.
So this is a job that we can continue to improve the quality of our stereo processing and hopefully that we can demo in the near future that combination of stereo processing plus our CN mono camera can be the main sensor used by the Level 4, Level 5 cars in the future.
Okay Fermi, thank you for that detail. That’s all my questions.
Thank you.
Thanks Richard.
Our next question comes from Gus Richard with Northland Capital Markets. Your line is now open.
Yes, thanks for taking the question. Casey in terms of the margin pressure in the current quarter, can you give us a sense of how much of that is increased packaging costs versus mix.
This quarter I think most of it is mix. Going out into the future if there continues to be more pull-ins, then I think you know we have to go back and see what our opportunity is to get that done without any extra costs and so the extra packaging costs and test costs would really be you know Q3 and Q4 this year. This quarter it’s really all mix.
Got it. And then you know when you think about the opportunity to gain share from HiSilicon versus you know the loss of opportunity because of tariffs and banning of customers. Can you kind of size those two relative to each other? Is there more opportunities for you to gain share or more opportunity for you to lose business or are they about the same?
Well, this is Fermi. As you can imagine, I asked this question in the company many times. We have many different models that show different results. So at this point I really think that it depends on your assumption when it comes to total different result at this point. I think the way we approach this problem is, when we get more clarity in terms of whether the ban is happening; two, sort of the ban of applies to our products, then we will really have a more – we can give you a more precise and that will answer to your question.
Do you have a range?
That’s quite wide.
Thanks so much.
Thank you.
At this time I'd like to turn the call back over to Dr. Fermi Wang for closing remarks.
Yes, thank you all for joining today and looking forward to talk to you next time. Good bye for now. Thanks.
Thank you.
Ladies and gentlemen, thank you for your participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day!