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Edited Transcript of AMBA earnings conference call or presentation 3-Mar-20 9:30pm GMT

Q4 2020 Ambarella Inc Earnings Call

California Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Ambarella Inc earnings conference call or presentation Tuesday, March 3, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Feng-Ming Wang

Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman

* Kevin Casey Eichler

Ambarella, Inc. - VP & CFO

* Louis P. Gerhardy

Ambarella, Inc. - Director of Corporate Development & IR

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Conference Call Participants

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* Adam Gonzalez

BofA Merrill Lynch, Research Division - Research Analyst

* Charles Lowell Anderson

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

* Joseph Lawrence Moore

Morgan Stanley, Research Division - Executive Director

* Matthew D. Ramsay

Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst

* Quinn Bolton

Needham & Company, LLC, Research Division - Senior Analyst

* Ross Clark Seymore

Deutsche Bank AG, Research Division - MD

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Tore Egil Svanberg

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Ambarella's Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Louis Gerhardy, Corporate Development. Thank you, and please go ahead, sir.

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Louis P. Gerhardy, Ambarella, Inc. - Director of Corporate Development & IR [2]

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Thank you, Chris. Good afternoon, and thank you for joining our fourth quarter and fiscal year 2020 financial results conference call. Our speakers will be Dr. Fermi Wang, President and CEO; and Casey Eichler, CFO.

The primary purpose of today's call is to provide you with information regarding our fourth quarter and fiscal 2020 results.

The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth and demand for our solutions, among other things. These statements are subject to risks, uncertainties and assumptions.

Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements.

We're under no obligation to update these statements.

These risks, uncertainties and assumptions as well as other information on potential risk factors that could affect our financial results are more fully described in the documents that we file with the SEC, including the annual report on Form 10-K that we filed on March 29, 2019, for the fiscal year 2019 ending January 31, 2019, and the Form 10-Q filed on December 6, 2019, for the third quarter of fiscal year ending January 31, 2020.

Access to our fourth quarter and 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.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [3]

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Thank you, Louis, and good afternoon, everyone. Before reviewing our results, I will first provide an update on the extraordinary factors, geopolitical and now, also public health, that may continue to impact our business. First, on COVID-19, we are and will continue to take the necessary precautions to ensure the safety of our employees. We express our deepest sympathies to those affected worldwide, and we offer our best wishes to them for a complete recovery. We are starting to see a financial impact from the virus, and we expect to continue to face an elevated level of demand and supply uncertainty.

We are taking precautions to mitigate the risks to our own operation. Based on what we know at the time of this call, and to the best of our ability, we have factored these risks into our Q1 guidance.

Geopolitical risks are dynamic and remain high. The Phase 1 trade deal eased tension somewhat. And our October 15 8K update draw some clarity to the October 9th entity list, but there are a wide variety of geopolitical risk at play, including foreign policy, trade and IP matters. Factors potentially disruptive to our business include new export controls on advanced technologies, the risk customer in China take actions to reduce their dependence on the supply of U.S. components potentially subject to the various geopolitical factors, changes to the entity list and/or tariffs, market share shifts between our customers and the supply chain issues. 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 share outside of China. As you can see, multiple factors are contributing to a wide range of potential outcomes for us.

Fiscal year '20 revenue of $228.7 million increased slightly from the prior year, with no major shift in market exposure. In fiscal year '20, just a year after taping out CV2, CV22 and CV25, these products generated production revenue from a dozen customers. It is still very early with the CV revenue only a few percent of our total revenue, but with more than 100 different CV customers purchasing engineering parts, evaluation kits, and/or development boards in fiscal year '20. This foundation of activity give us confidence our CV investment will take another major step forward. Looking into fiscal year '21, momentum in our strategic focus area of CV is strong, and we expect CV to reach 10% of total revenue for the year. Our goal is to grow our total revenue in fiscal year '21, despite the headwinds and uncertainties.

At the recent Consumer Electronics Show in January, we experienced a strong turnout with more than 250 customer and partner meetings. With more than 20 indoor and auto demos, we exhibited our latest solution for automotive and home monitoring applications as well as for new applications such as access control, robotics, retail and logistics.

During CES, we announced our first SoCs with Automotive Safety Integrity Level B (also known as ASIL B) for safety critical automotive applications. CV22FS and CV2FS target forward-facing monocular and the stereovision ADAS cameras, as well as the computer vision ECUs for L2+ and higher level of autonomy. Featuring extremely low power consumption, these 2 SoCs make it possible for Tier-1s and OEMs to surpass New Car Assessment Program or NCAP, performance requirements within the power consumption constraints of a single-box, windshield-mounted forward ADAS cameras.

"ZF", a German-based Tier 1 that is one of the largest global supplier to the passenger and the commercial vehicle market, announced it was working with Ambarella on the next generation of intelligent viewing platforms, including surround view visualization, driver monitoring, stand-alone vision processing and e-mirror solution during CES. ZF chose CVflow SoCs for their combination of high-quality imaging and advanced AI processing enabling ZF to offer a wide range of viewing and interior sensing applications.

German ADAS software supplier Hella-Aglaia, demonstrated its latest deep learning based ADAS software suite running on our CV22 SoC. The AI algorithms included multi-class object detection, detection of the driving area of limitations, depth estimation,, and the classification of traffic lights and the traffic signs. Hella chose Ambarella's CVflow SoC due to their ability to deliver extremely high computer vision processing performance with very low power consumption.

At our CES location OEM Mercedes-Benz provided live demonstrations, in one of their Sprinter van of COROS or Cargo Recognition and Organization System. The system is designed to make the parcel delivery process more efficient, and it leverages both the AI and the stereo processing capability of CV2, with multiple CV2 SoC per van.

A rapidly expanding list of third-party software developers had chosen to invest resource to develop deep learning AI software on our CVflow platform, with a number of these companies demonstrating at CES.

For example, StradVision demonstrated both forward facing ADAS and the driver monitoring running simultaneously on a single CV22.

Brodmann17's forward facing ADAS and a recording solution runs on CV25 and targets fleets and the passenger vehicles.

EyeSight's driver and the interior cabin camera system ran 3 cameras on one CV22.

Anyvision's retail analytics platform was based on 4 live CV22-based cameras.

[And Sensetime's forward facing ADAS and the driver monitoring system ran on our CV22.

At the CES, Ambarella's Level 4 autonomous vehicle demonstration platform, EVA, or Embedded Vehicle Autonomy, successfully completed over 140 autonomous rides on Las Vegas streets. The rides were conducted both during the day, and for the first time, at night. The EVA cars leverage Ambarella's CV2-based stereos SuperCam cameras and Ambarella's L4 demonstration software stack, together with radar, but without LiDAR. The demonstration included generic obstacle detection, pedestrian, vehicle, bike, motorcycle and the traffic sign detection and the classification, traffic light detection and management, path planning and autonomous parking.

Ambarella also demonstrated at CES an AI-based 3 camera and a 3 mirror solution running on a single CV22 SoC. This e-mirror system's left and the right side mirror not only provide an improved field-of-view in difficult lighting conditions, but by leveraging our Cvflow processing in the same chip, we could provide a blind spot detection warning from bikes, car or pedestrian present.

During CES, Ambarella announced and demonstrated for two new AI market applications: 3D access control and robotics.

Ambarella's 3D sensing platform addresses access control, security panels, smart video locks, video doorbells and the face recognition payment systems. The platform is based on Ambarella's CV25 CVflow AI vision system on chip(SoC), ON Semiconductor's RGB-IR image sensor, and the structured-light powered by Lumentum's "VCSELs". The system use a single sensor for both visible and infrared images for depth sensing. The Ambarella CV25 SoC powers depth processing, anti-spoofing algorithms, 3D facial recognition algorithms and the video encoding on a single chip, significantly reducing system complexity.

And Ambarella's new robotic platform facilitates the development of robotic applications based on Ambarella's CVflow SoCs. It targets automated guided vehicle, or AGV, consumer robots and industrial robots. The robotic platform provides the unified software infrastructure for the most common robotics functions, including new network processing and open source computer vision library or open CV functions. Our demonstration included a single CV2 chip performing stereo processing, object detection, keep on tracking, occupancy grid and the visual odometry.

I will now talk a little about some additional customer product information from the last quarter, starting with professional security.

Motorola Solutions announced in February the launch of the newest addition of video security portfolio, the Avigilon H5M camera. Based on Ambarella's video processing SoCs, the new H5M camera line is a cost-effective solution for budget-conscious video security projects that require a small footprint camera for outdoor use.

Pelco, a recent spin out of the global industrial giant Schneider Electric, intends to announce in March the Sarix Enhanced Series 3 camera targeting critical infrastructure customers such as airports, cities, gaming and other enterprises and the smart city customers. Based on Ambarella's CV SoCs and built with the industry-leading image quality, performance, ruggedness and the deep learning analytics, these cameras are expected to be shipping later this month.

At the ISC West, a security exhibition to be held later in March, Vivotek, a major professional security camera OEM and ODM in Taiwan, will demonstrate to their new Cvflow based camera. This outdoor fisheye camera will feature 6 megapixel, H.265, encoding IP66 and IK10 ratings, smart IR, WDR Pro, local de-warping and embedded Smart360 VCA analytics, including intrusion detection, crowd detection and loitering detection.

In the consumer security camera market, Home security and automation firm, ADT, unveiled its first do-it-yourself home security platform, Blue by ADTAmbarella's S5L or S2L are designed into indoor/outdoor and doorbell cameras in this platform, all capable of recording 1080p videos.

Chinese home-monitoring camera maker, SIMToo introduces a Simcam 1S camera, the first consumer model to feature Ambarella's CVflow SoC. Based on our CV25 SoC, the camera included, facial recognition, pet and vehicle recognition, auto-tracking and support for Amazon Alexa.

I will now talk a little about the customer product introductions from automotive markets.

Gentex Corporation and Aston Martin announced they've jointly developed of camera-based rear vision system that dramatically improves the driver's ability to monitor traffic to the rear and the sides of the vehicle. The Ambarella-based prototype was demonstrated at Gentex CS booth in Aston Martin DBS Superleggera.

The largest bus and passenger coach OEM in China, Yutong, will use a forward-facing ADAS camera based on CV22AQ in their commercial fleet. Based on Tier 1 Maxieye's IFVS 500, the system provides autonomous emergency braking for vehicles and the pedestrians and Lane keep functions.

During the quarter, Garmin introduced its Tandem dash camera featuring two lenses, each with a 180-degree field of view to record in front and inside the car, to provide complete coverage around the driver. Featuring 1440 resolution video and night vision, the Tandem camera is based on Ambarella's A12A automotive SoC.

Nextbase, the U.K. and the Europe's leading dash camera supplier, introduced its 622GW model. Based on Ambarella's H22 automotive SoC, the camera records a 4K video at 30 frames per second and includes image stabilization, super slow motion, night vision and Amazon Alexa integration.

In the China OEM automotive market, LiXiang introduced its LiXiang One electric vehicle featuring a car recorder as a the standard feature. Supplied by tier one INVO and based on Ambarella's S2LM SoC, the car recorder offers full [HD] (added by company after the call) video recording.

And the Korean dash cam leader Thinkware introduced new models based on Ambarella's H22 automotive SoC. The QXD-3000 and QXD- min, are 2 channel full HD design with small form factor and a super night vision features, while the Quantum model is a 4K+ quad HD design.

In the consumer market segment, Chinese sports and VR camera maker, Insta360, introduced its new OneR sports camera based on our H22V75 SoC. The camera includes a one inch sensor, AI-driven editing software and a unique twin mode, which enables camera to offer 5.7k resolution, 360-degree capture of 4Kp60 wide angle video.

In summary, fiscal year '20, represented a major step forward as we begin to establish the commercial foundation for our nearly $400 million investment into AI and the computer vision. The three waves of CV revenue we have previously articulated are all taking shape, led by wave 1, in the professional security camera market, where we have 7 customers in production. And this wave is in a very strong position to become material on calendar year '20. In wave 2, the home monitoring market, we have 2 customers in production, and we expect the design activity to remain high this year with revenue becoming maturing calendar year '21.

In the automotive market, we are generating production CV revenue from 3 fleet or aftermarket customers and design activity is high across many different applications. We continue to expect auto CV revenue to become material in the calendar year '22 and the calendar year '23 time frame.

AI and the CV are bringing new product cycle to our existing markets, like security cameras, but most importantly, as you saw at the CES, this new product are enabling a multibillion expansion of our serviceable market into vehicle, smart cities, smart homes, industrial 4.0, logistics and other robotic applications.

Despite the global uncertainty surrounding us, I want to thank Ambarella's 761 strong team for their presence and the successful execution during this critical phase of development for our company. And we are thankful to all of our other stakeholders, including customers, vendors and shareholders for your support.

Now I'll turn the call over to Casey for the fourth quarter financial details and guidance for our first quarter of fiscal year '21.

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [4]

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Thank you, Fermi, and good afternoon, everyone. Today, I will review the financial highlights for the fourth quarter and FY '20 ending January 31st and provide a financial outlook for the first quarter of fiscal year '21.

During the call, I'll discuss non-GAAP results and I 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.

Revenue in FY '20, increased slightly to $228.7 million, with revenue by market similar to the prior year, with security camera in the 60% to 65% range, and the balance split between automotive and "other". For FY '20, non-GAAP gross margin was 58.5% down from 61.2%, due to lower margins in the professional security camera and "other" markets, partially offset by higher auto margins. Non-GAAP operating expenses decreased 2%, primarily due to foreign credits included in R&D. Even with non-GAAP R&D expense at 38% of revenue, our operating cash flow was a positive $39.4 million for the year. With no debt, net cash and marketable securities totaling $404.7 million.

Our Q4 revenue of $57.2 million was slightly above the midpoint of our guidance, $55 million to $59 million, and in line with consensus. These results represent a decrease of 16% from Q3 and an increase of 12% when compared to the same quarter of the prior year. As expected, auto and security were down, while other revenue increased sequentially.

Non-GAAP gross margin for Q4 was 58.7%, up about 60 basis points from the prior quarter and slightly higher than our guidance of 56.5% to 58.5%, primarily due to mix.

Non-GAAP operating expense for the fourth quarter was $30.5 million compared to $29.3 million in Q3. This was close to the midpoint of our guidance of $29.5 million to $31.5 million.

Other income was $1.7 million and primarily represented interest income on cash and marketable securities.

Non-GAAP net income for the fourth quarter was $4.9 million or $0.14 per share compared to $11.3 million or $0.32 per share in the third quarter. The non-GAAP effective tax rate in Q4 was a benefit of 1.66%, better than our guidance of 10% at the end of Q3 due to tax law change in Taiwan, foreign tax credits and lower taxable income in foreign jurisdictions. In the fourth quarter, the non-GAAP earnings per share were based on 35.1 million shares as compared to 34.8 million shares in the prior quarter.

Total headcount at the end of the fourth quarter was 761, with about 81% of our employees dedicated to engineering, most of them focused on software. Approximately 69% of our total headcount is located in Asia.

In Q4, we generated positive operating cash flow of $4.1 million. Total accounts receivable at the end of Q4 were $18.5 million or 30 days sales outstanding. This compares to accounts receivable of $21.6 million or 29 days sales outstanding at the end of the prior quarter. Net inventory at the end of the fourth quarter was $23 million compared to $19.8 million at the end of the previous quarter. Days of inventory increased to 82 days in Q4 from 59 days in Q3.

We had two 10%-plus revenue customers in Q4. WT Microelectronics, a fulfillment partner in Taiwan, who ships to multiple customers in Asia, came in at 63% of revenue and Chicony, a Taiwanese ODM, who manufactures for multiple customers, primarily U.S.-based, came in at 18.7%.

I'll now discuss the outlook for the first quarter of fiscal '21.

We expect total revenue for the first quarter to be in the $52 million to $57 million range or down 1% to 9% sequentially, which is less than our typical seasonal decline in Q1. In Q1, we anticipate all markets to decline seasonally, with the exception of the home security camera market, where we are seeing strong and broad-based demand.

As Fermi discussed, the geopolitical and now public health factors are bringing significant uncertainty to our forecasting demand and supply, and we are taking measures to protect our employees and operations. In November, we estimated 2 professional security camera customers in China had pulled in roughly $10 million of revenue from fiscal year '21 to fiscal year '20, and while we're starting to see weaker ordering patterns from one of these customers in Q1, we still believe a vast majority of the safety stock inventory has not been depleted.

Going forward, we remain concerned about the dual China and non-China supply chain that is being created and what that means as it relates to our ability to continue to supply to our customers in China. In addition, due to COVID-19, we have started to see some order pushouts and cancellations, and our Q1 guidance assumes these recent trends continue in the quarter. Needless to say, forecasting is extremely difficult.

We estimate Q1 non-GAAP gross margin to be between 57.5% and 59.5% compared to 58.7% in the fourth quarter.

We expect non-GAAP OPEX in the first quarter to be between $33 million and $35 million, with the increase from Q4 primarily coming from engineering headcount, payroll tax accruals and other engineering expenses.

In Q1, non-GAAP tax rate should be modeled in the 10% to 13% range versus the benefit of 1.7% in Q4.

We estimate our diluted share count in Q1 to be approximately 35.4 million shares.

We are closely monitoring the public health crisis and will re-evaluate external events on a case-by-case basis. We intend to limit the number of executives at each event. Currently, we intend to participate in the Morgan Stanley TMT conference and the KeyBanc Emerging Technology Summit on March 4. Although at KeyBanc's request, we have converted our fireside chat to a one-on-one presentation. We also expect to participate in the Roth conference on March 17, in the Bank of America Auto Summit on April 7. Please contact Louis for more details.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from the line of Adam Gonzalez with Bank of America Securities.

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Adam Gonzalez, BofA Merrill Lynch, Research Division - Research Analyst [2]

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I wanted to start with a more long-term question. Fermi, you guys first started talking about this access control opportunity at CES, and you spoke a little bit about it tonight. Can you just give us a sense of what the longer-term opportunity there is?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [3]

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Yes. In fact, this technology can be used in many different applications. We kind of touched on the -- our traditional market like doorbell, like the -- just, for example, enterprises access control. But it can be applied to many other applications, for example, the payment system in China, like the use of face recognition as the way to do identification. So as you know, the biggest challenge of current face detection algorithm is that you can be easily fooled by some -- using a picture or other materials, so that using a strict, sometimes 3D lighting, structure to enhance the algorithm is -- become necessary for those applications. And I think we quickly estimate the total market size of a unit number, we're talking about probably tens of millions, close to 20 million to 30 million units and growing fast in the future. So -- and we also believe because for the security reason, the technology required for this kind of system will continue to grow so that we need to continue to do better in terms of AI technology for different sensing technology as well as providing more fusion of different kind sensor to provide higher confidence on those face detection access control. So what I'm trying to say is we think this is a new market, and we saw a lot of -- addressing a lot of needs on the traditional as well as new applications. And most of the things really interests us is, we believe the technology requirement for this market will continue to grow, which play to our strength.

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Adam Gonzalez, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Great. And then, Casey, I have 1 follow-up. In the press release, you talked about growing revenue overall this year, and I appreciate there are a lot of uncertainties with the geopolitical environment and virus concerns. You also outlined in the prepared remarks that your end market exposure is relatively the same as last year, which I think implies that consumer and your legacy nonstrategic areas still 10%, 15% of overall revenues, at least. Could you just help us understand, first, on the consumer legacy side, how is that business going to wind down? What do you expect that business to grow? And then what are the puts and takes in terms of growing this year overall?

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [5]

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Well, to kind of clean up the first part of that, yes, we've said in the past that revenue was about 60% security, 20% auto and 20% other, and what I'm indicating is it roughly came in at that level. Obviously, we had some pull-ins in the professional security side, but we think the mix data is about the same.

From the other section, and in particular, in a couple of our consumer areas, we had some new product introductions that actually did better than we were forecasting, so we saw stronger revenue there last year, and I think we'll continue to see that into this year. But it hasn't changed our perspective that over the next 3 to 5 years we think that is going to continue to decline, but there happens to be a couple of current products right now that seem to be helping us there and that's constructive.

As far as the puts and takes, it kind of goes back to Fermi's comments. Between the China and the virus uncertainty, automotive industry continues to be -- it was soft last year, continues to be soft. And the visibility issue of how much disruption we've seen, are we're going to see, it's really hard to say exactly how that's going to shake out. We're going to continue to give you good guidance on it. We continue to be excited about our penetration in the markets and probably most excited about the CV adoption, which isn't necessary, just a this-year story, but it really sets up the future of the company that Fermi's been talking about.

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Operator [6]

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And our next question comes from the line of Matt Ramsay with Cowen.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [7]

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Fermi, I wanted to talk about the CV adoption. And I think in the prepared remarks, you talked about EV being on the order of 10% of revenue in the upcoming fiscal year that might -- I don't know if that's above your expectations about what you guys expected. I assume most of the business you're picking up from Huawei's challenges internationally is still non-CV. So maybe you could just give us some puts and takes there? And what end markets and maybe what China exposure are you guys thinking about of that 10% of revenue that might be CV-based this year?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [8]

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First of all, I think that you are right, the CV revenue increase that we see this year, majority come from the non-Chinese customers, and especially, we announced -- we mentioned 5 customers already in like Avigilon, which is Motorola, Hanwha Techwin, Panasonic, Vivotek, Pelco. You can see that trend from the professional. This professional IP security camera guide generating majority of the CV revenue this year. So you can see that is really about the new product line introduced by our non-Chinese customer at this point, and we continue to feel confident about this 10% guidance for CV revenue. And I think that we talked about, we have -- in addition to the 10 million -- sorry, 10% of revenue growth, we also talk about -- we have more than 100 customer buying the design kits, engineering parts and development boards in fiscal year '20, which will really build a huge base for us to grow in the future. So I really think this is an important portion of discussion.

And also that you talk about China, I think our China exposure, you need to look in 2 different ways. First of all, there are a lot of products being manufactured in China. We talked about, we estimate probably 40% roughly being manufactured in China. But we also talk about Hikvision and Dahua use our chip manufacture in China, but are export to the -- outside China. So we think our [overall end customer exposure total revenue that is consumed by customers] (corrected by company after the call) in China is roughly 20% of total revenue. I hope that helps you to clarify that question.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [9]

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That does help. As my follow-up, Casey, I noticed that -- I mean, we've talked about here on the call, the different uncertainties around geopolitical [trend] and with the virus. But it looks like you've guided OpEx up on the order of 10% sequentially. Maybe you could walk us through the new areas of spending and which pieces are ramping? And then also, if things do get tough from some of these variables, how much flexibility you have to limit that spending growth?

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [10]

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Yes. So a majority of that increase is coming in engineering, and that's in 2 places. One is we continue to hire in that area and continue to push the CV platform and the new product introduction there, and so that's a portion of it. It also is our largest number of employees. And when the first of the year comes around, the employee taxes kick in, and all the other things that you see in the beginning of the year, typically. And so that adds to the engineering line in particular, but across the board, to everywhere. The other thing that runs through the engineering is, as we start to go to lower geometries and CAD tools continue to get more expensive, mass costs continue to get more expensive, so the amortization of that through the P&L also builds as we start to build these higher -- or lower geometry, higher development projects.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [11]

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And Matt, this is Fermi. I would like to add, you should expect that we have our first 5-nanometer tape-out this year, which basically explained to you that the NRE we have to put into our budget as well as the CAD tools that we have to buy to get a 5-nanometer tape-out is extremely higher than the whole pay for in the past.

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Operator [12]

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

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [13]

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Congrats on the solid guide. I guess, either Casey or Fermi, I guess, that's why I want to start with my first question is, if we went 30 days ago, you talked about kind of down, I think, low double digits was normal seasonality and then you have the concern about the inventory digestion from the 2 big Chinese security camera customers. I guess, what's changed since then that leads you to kind of guiding down roughly 5%? Because it seems like the world has gotten more uncertain and yet your numbers are better despite highlighting accurately all those uncertainties. So something seems to have gotten significantly better. And so any color you could provide on that would be helpful.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [14]

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Right. So first of all, the previous guidance we provided was 90 days ago, in the previous conference call. I don't think we provide any guidance between that earnings call and now. But however, you are right, that there are things changed. I think that Q1 seasonally is a weak quarter for us, and we continue to see the weakness cross the market, except in consumer security -- IP security camera market, and we see a broad based as well as higher demand than we expected than before and led by one large customer, that is Ring. So in general, we do see -- we're doing well in the market and our customers doing well in the market. That's basically the main reason showing some strength on our guidance this time.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [15]

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Specifically, if it wasn't for that customer, that's kind of the primary delta?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [16]

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No. In fact, I say it's not less than 1 customer but this is really a market we're talking about broad-based customer base. In fact, we are many consumer IP camera customers and most of them show strength in Q4 and on the forecast on the Q1. So -- but which, of course, Ring is our largest customer in this space, and they are leading our -- in terms of total revenue forecast.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [17]

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Got it. Okay. And I guess, a slightly longer-term question, but still the same sort of financial bend to it. The line that you have at the end of your press release, stating that your goal is to grow revenue for the year, what are you trying to capture in that? Because you're starting the year up the better part of 15, mid-teens, at least year-over-year. Is there a seasonality difference that you guys expect this year with that $10 million? Or is it just an abundance of caution, given -- or abundance of uncertainty given what's going on in the world with virus and geopolitical, et cetera.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [18]

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Well, first of all, I think we established a goal this year that we definitely think we want to have a growth year this year. And before this COVID-19 situation, we do see, like I said, strong forecast in certain market segments. And although we cannot predict or forecast what's going to happen in the next 3 quarters, but we want to maintain a goal that we want to have a growth year, particularly with our strength on the CV and -- which is our basis of growth, and hopefully, that if we can have a stabilized market in the next 3 quarters, we want to achieve the goals that we set up early this year.

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Operator [19]

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And our next question comes from the line of Joe Moore with Morgan Stanley.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [20]

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Great. Just following up on the last question. As you guys have looked at these risk factors that you talked about around COVID, can you give us a sense of how much you might -- that might have changed your forecast? Because we hadn't seen that situation, is it possible to quantify how much of an impact that was?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [21]

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Well, Joe, I think it's hard for us to provide the whole year guidance at this point. And COVID-19, obviously, there's an impact to our forecast. And we try to factor that in our Q1 forecast already. And...

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [22]

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And just more for the quarter, not for the full year, just for the quarter.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [23]

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So this quarter, we -- I definitely think that with 1 month of shipment already in the bag, and we look at the forecast we're going to do in the next 2 months, we think we feel relatively good about our current guidance.

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [24]

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Yes, Joe, it's difficult to say how much impact it's really having. What we did is we looked out what we're seeing early in the quarter and what we might expect as or anticipate is further cancellations or pushouts and try to work that into our guidance, but we're kind of caught here because of the 1-month off from December in a place where all this happening really pretty quick in the last week or so. And so what we tried to communicate is that we tried to factor into our guidance, not only what we've seen, but what we think we're going to see the quarter.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [25]

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Great. That's helpful. And then as you talk about 10% CV for the year, I assume that's still primarily in professional surveillance, and it seems like that means you're exiting the year at -- with a pretty reasonably good percentage of your professional surveillance business having transitioned. Is that -- any context I'm missing there? And just anything you can do to kind of help us with what that progression looks like?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [26]

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I think we end fiscal year '20, with some initial ramp-up of professional IP cam. And we made some assumptions on how fast they ramp up, what happened this year and also with the -- considering the factors of the geopolitical situation and COVID-19. But also, we're also putting some of the forecasts that early ramp-up consumer IP cam also. So between the professional IP cam for the whole year revenue and some late Q4 consumer IP revenues, that should be the big portion of our new CV revenue for year '21.

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Operator [27]

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And our next question comes from the line of Quinn Bolton with Needham & Company.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [28]

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Congratulations on the nice guidance. I guess just following up on Joe's question. It sounds like you've got a pretty good backlog on hand over the next couple of months, and you've judged that down for COVID-19. So are we right to assume that if you shipped everything in backlog, revenue would have been higher than what you guided? So you're actually expecting some pushouts or cancellations from what's in backlog today?

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [29]

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As we said, we've seen some already. And we have kind of not -- we don't think that's over. We're going to see some. So by definition, yes, some of that. Now you're always hoping, of course, it's pushed, not canceled. And so initially, it tends to be pushed, and we're hoping that, that's the case. But we generally see an increase in business in Q2 and then another increase in business in Q3. And so all bets are kind of off as far as ordering patterns and how things are flowing today, but we will see some of that, or we hope to see some of that in Q2 because the starts, like I say, is pushouts. And what you hope is some of -- at some time will get canceled possibly, but you hope you have more pushouts than cancellations.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [30]

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Great. And then a second question, I think, subsequent to your -- the last quarterly earnings conference call, it seems like the commerce department has increased chatter about potentially changing the de-minimis rule. It still sounds like from your comments today that the $10 million pull into fiscal '20 and out of fiscal '21 is the right amount of inventory that you haven't seen for inventory build as a result of potential de minimis rule changes?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [31]

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Well, first of all, de minimis rule still hasn't changed. Of course, there are a lot of discussion, but we haven't seen the rule changed.

In terms of the inventory buildup from our Chinese customers, I think in Q4, they did exactly what we expected them to do. And for Q1, that Casey just reported that 1 of the customer, showing some weak ordering patterns, so we believe they are trying to deplete their inventory starting this quarter. So we -- based on that, we believe that the $10 million inventory is still there, and it will take time for them to use all of that.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [32]

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Great. And then just last thing for me. You talked about a 10% of revenue from CV applications, mostly professional security this year. But I think in the script, you talked about 3 sort of aftermarket automotive CV-based wins. I'm just wondering if you could give us a time frame? Do you think that those aftermarket designs could start to ramp in some meaningful way in calendar '21 or is -- even though is aftermarket more in this calendar '22, '23 time frame.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [33]

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No, I think for those 3 products we mentioned, I think the ramp-up will be this year. But however, the size, because of the aftermarket as well as the fleet management in terms of the volume, is not going to be as meaningful as professional security camera that we're seeing right now. So I do believe that those -- although the 3 production products we talk about in the automotive side will contribute, but it's going to be less than professional IP handheld cameras.

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [34]

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A little bit of the temper on the auto is, obviously, as we talked about, auto was, as an industry, softer last year. And we see that somewhat carrying forward into this year. So that makes you kind of temper your comment as well.

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Operator [35]

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And our next question comes from the line of Suji Desilva with Roth Capital Markets.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [36]

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Just a quick financial question first, Casey. The fiscal '21 growth revenue guidance, what is that -- what's the assumption of [parts] in there about the consumer legacy? Is that part stable? Is that part declining? Just any color there would be helpful.

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [37]

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Again, right now, we're seeing it pretty stable. As we saw last year, we thought we were going to start to see a bigger decline than we really saw. So for the year, we really haven't guided on anything. But right now, it feels pretty stable. This, obviously, from a consumer standpoint, this quarter is typically weaker because it's after the Q4 time frame. So even if it was stronger than usual, it doesn't necessarily mean that it would be up. It just would be down less than you might expect.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [38]

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Okay, that's helpful, Casey. And then a question on the OpEx growth in terms of what's driving it. The -- you've reached 100 engagements on CVs, so congratulations on that. Are you seeing partners and channel folks helping you kind of source new engagements? Or are you still having to deploy people to acquire and then support these additional customers? Or is the engineering really for the product road map and support there? Any color on the -- where the resources are going to would be helpful.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [39]

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Yes, the go-to-market strategy is still the same. We are leveraging our partners -- business contact, for example, we mentioned the 5, 6 software partners, they're all demo-ing our system, they're helping us to acquire customer that based on their market approach. At the same time, we still have -- using our own marketing and sales to try to capture customers. So we're using both. In fact, that trying to get a lot more software partners to port our CV silicon. The main reason is trying to -- with their help, we can gain access to more customer quicker than by doing everything ourself.

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Operator [40]

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And our next question comes from the line of Charlie Anderson with the Dougherty & Company.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [41]

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Congrats on all the CV progress. I wanted to start with some of the commentary around CV more material in OEM for automotive in the '22, '23 time frame. I wonder to what degree you guys have visibility today on any wins there? And then as you kind of consider how this year plays out, what would be some of the goals in terms of achieving those wins? In what areas and specifically, do you think you'll see the early success that result in that 2022, 2023 ramp? And I've got a follow up.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [42]

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Right. So for the auto OEMs, I think there's a multiple direction that we are following up, right? So 1 thing is, for example, we talk about electronic mirrors and we finally start seeing momentum there, and we do believe that will help us to address that wave 3 revenue for the calendar year '22, '23, as well as the driver monitor as well as the cabin monitor system, that definitely is happening. And we are, but more importantly, the most important thing for us is to continue to talk to the Tier 1s and OEM for the ADAS and the L2+. I think that's the biggest area that we spend most of our engineering marketing resource to secure design wins as well as helping our customers. So all the 3 areas are the key focus for us right now.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [43]

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Great. And then for my follow-up, Casey, just a couple of housekeeping. On gross margin, it was obviously strong. Sort of curious what you view as the trajectory there? And then inventory, you've been sort of bringing it down, but you did build a little bit this quarter. So I'm just kind of curious your thoughts there as well?

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [44]

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Yes. From an inventory basis, I feel that we're still pretty lean. Obviously, when we came into the beginning of the quarter, we had a little bit more inventory, and that's because we saw a little bit more opportunity or a little bit more activity in month 1, and so we had built inventory a little bit, but there really isn't much to read into that.

As far as from a margin perspective, we don't give longer-term guidance other than our model or our target. We're kind of hovering around the bottom of that target right now. As I think Fermi mentioned or we both mentioned in the past, although you aren't going to see significantly higher margins on the CV products, you are going to see twice the ASPs, which gives you the operating leverage that we're really looking for. So depending on the mix and what we see happening in the professional business, in particular, in China, that will really guide kind of where we are in our range, but we're going to maintain the range at 59% to 62% and work to get back, not only in it but higher up into it than where we are.

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Operator [45]

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And our last question comes from the line of Tore Svanberg with Stifel.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [46]

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My first question is on the R&D efficiency. So you announced the [CV22FS] (corrected by company after the call) and CV2FS products in January. Are these sort of very simple derivative products from a cost perspective? Or is there still a lot of heavy R&D that goes into those products? I'm just trying to understand because it does seem like those are very specific for auto.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [47]

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Yes. So from a purely video processing and AI technology point of view, CV2 and CV2FS, for example, are similar. But however, the biggest challenge for CV2FS is to build ASIL B, which is auto-grade silicon. The amount of engineering effort, not in developing new technology products, follow the process, follow the standard, so that we can say we can pass ASIL B qualification. That's a significant investment and has been viewed as a big barrier to get into the automotive business. Now we reached that, and we are confident that we're going to pass the ASIL B qualification. I think that investment is behind us. But however, that's really it. I think that's basically -- if you view that as a barrier that we have to cross over to get in auto. But from an engineering development point of view, from a technology point of view, it's [CV2FS] (corrected by company after the call) just similar to the CV2.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [48]

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That's very helpful. And Fermi, you mentioned 5-nanometer. When should we expect products to be in production on 5?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [49]

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Well, what I say is, we are planning to take our first 5-nanometer chip, but we haven't talked about the product plan, how we're going to -- what kind of product we are going to be used based on 5-nanometer. But based on history, you should expect that we're going to build 5-nanometer product across the board for auto, for security camera, for smart city, smart home, and it will be a family of chips. I think that we kind of basically say we are going to skip 7-nanometer, go to 5-nano directly as our engineering investment. But you should see that in the next few -- after -- when we think about 5-nano, we're going to provide much more detailed description about our plan for products with the 5-nanometer projects.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [50]

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Sounds good. And 1 last question for Casey. Casey, the R&D is obviously something quite a bit [here] in the April quarter. Will it kind of flatten out, do you think a little bit for the remaining quarters? Or will we continue to see these types of step-ups?

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [51]

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Yes. So again, we don't typically guide beyond 1 quarter. But what I'd say is you're not going to see a step function like that throughout the year. Like I said, there's some unusual things that come in like the payroll taxes and some of those that tend to feather out as you get further in the year. So I think you're going to see us continue to invest in the R&D, and our OpEx will stay fairly constant where we are today. But you're not going to see us back off R&D or really accelerate it much more.

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Operator [52]

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Thank you. And this does conclude today's question-and-answer session. I would now like to turn the call back to Dr. Wang for closing remarks.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [53]

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And thank you for joining us today. I will talk to you the next time. Thank you. Bye.

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [54]

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Thanks.

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Operator [55]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.