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Edited Transcript of AMBA earnings conference call or presentation 29-Aug-19 8:30pm GMT

Q2 2020 Ambarella Inc Earnings Call

California Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Ambarella Inc earnings conference call or presentation Thursday, August 29, 2019 at 8:30:00pm 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

* Auguste Philip Richard

Northland Capital Markets, Research Division - MD & Senior 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

* Michelle Waller

Needham & Company, LLC, Research Division - Associate

* Richard Cutts Shannon

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Sujeeva Desilva

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Ambarella's Second Quarter Fiscal Year 2020 Earnings Conference Call. (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, Head of Corporate Development and Investor Relations. You may begin.

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

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Thank you, Skylar. Good afternoon, and thank you for joining our second quarter fiscal 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 the results for the second 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 file with the SEC, including the annual report on Form 10-K filed on March 29, 2019, for fiscal 2019 ending January 31, 2019, in the Form 10-Q filed on June 7, 2019, for the first quarter of the fiscal year ending January 31, 2020.

Access to our second quarter fiscal 2020 results press release, historical results, SEC filings and a replay of today's call can be found on the Investor Relations portion of our website.

I'll now turn the call over to Dr. Fermi Wang.

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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 I discuss our results, I will provide an update on geopolitical factors that may continue to impact our business. New and/or higher trade tariffs, market share shifts between our customers and supply chain issues continued to be potentially disruptive and several of our customers in China continue to face the risk that may be added to a U.S. government Entity List, which could limit or restrict our shipments to them. At the same time, our largest competitor in the security camera semiconductor market, HiSilicon, a unit of Huawei, is facing challenges that are helping us gain market share. As you can see, there are multiple factors, positive and negative, that yield a wide range of outcomes for us.

We continue to demonstrate strong progress toward our strategy to transform from a pure video processing company to an AI and a computer vision company. During Q2, 3 customers, including 1 in the automotive market, generated mass production CV revenue. CV design activity remained strong. In Q2, we generated preproduction CV revenue from more than 40 customers, ordering engineering parts, evaluation kits and/or development boards.

Driven by demand for our core video processing portfolio, our confidence in our fiscal year 2020 outlook has increased despite the geopolitical uncertainty. Our Q2 fiscal year 2020 revenue of $56.4 million was above the high end of our guidance range and the revenue increased 20% from the $47.2 million in the prior quarter.

Three factors are driving the strong outlook in our core business: First, underlying demand at our largest security camera customer in China has improved, as noted by these customers in their recent earnings reports; second, this solid demand outlook for security camera is being fortified by our global market share gains; and third, there is some inventory restocking in China.

I will now talk about our progress in our target markets, starting with Security. We are seeing professional security camera makers increasing orders for shipments in the second half of the year. We are continuing to gain market share at the customers outside of China as well as at the Chinese customer for camera models to be exported to Europe and to the U.S. We are also seeing widespread adoption of our CV solutions in the professional security camera market, with both large established players as well as with the new group of emerging private players.

We are excited to announce that Avigilon, a Motorola Solutions company, will be releasing its new H5A AI-powered camera line in the coming weeks. The new camera line lays the foundation for Avigilon's next generation of intelligent video solutions and will offer a new era of AI innovation in video security. Based on Ambarella's CV22 CVflow AI processor, the new cameras feature Avigilon's next-generation video analytics that leverages the chip's neural network-based video processing and advanced image capabilities to help recognize and classify different objects with extremely high accuracy.

In July, German engineering giant, Bosch, honored Ambarella with its prestigious Bosch Global Supplier Award for their Energy and the Building Technology business. The award recognized Ambarella's performance in the manufacture and the supply of products and the services, notably in the area of innovation, quality, cost and logistics. This year, Bosch awarded 47 of its 43,000 suppliers, representing its top suppliers across an array of industry and in 15 different countries. Ambarella has been a supplier of SoC for Bosch IP cameras for over 10 years.

During the quarter, leading Korean security camera supplier, Hanwha Techwin, released its new Q series of camera, with models ranging from 2-mega and 5-mega resolution and inbox, mini-dome and the multi-PTZ form factors. All of new models are based on Ambarella's S3L HEVC SoCs, our first wins in professional models at this customer. Hanwha has stated that they will use Ambarella's CVflow SoC as they introduce new camera with integrated AI capabilities.

At the IFSEC International security show held in London in June, new professional IP camera maker, Vaion, introduced its vcam dome and panoramic cameras based on Ambarella's CV22 CVflow SoCs. With embedded video and audio analytics powered by AI algorithms, Vaion's end-to-end surveillance solution can detect threats in their earlier stage and perform fast and effective investigations.

In August, U.S.-based Verkada introduced its new Ambarella-based CM61 camera designs to give customer the flexibility to add 4K video coverage everywhere. The solution's hybrid cloud architecture supports ease of installation and the usability for minimized bandwidth usage without sacrificing 4K quality or performance.

In the consumer home monitoring market, which we previously mentioned is the second wave of our CV revenue, we see increasing demand for camera solutions with greater intelligence as customers demand cameras with small motion detection that notify users only in the event that something interesting is happening. In future, such camera will also be capable of identifying people as well as classifying objects. This level of intelligence will increasingly require dedicated AI [processing] (added by company after the call) power in the cameras. We also see cameras being offered as part of the broader IoT ecosystems that support a seamless integration with other devices in the home.

During the quarter, U.S.-based alarm.com introduced its V723 and V523 intelligent outdoor and indoor cameras based on Ambarella's SoCs and operating Wi-Fi connectivity for HD video and night vision.

And Samsung SmartThing introduced its SmartThing cam, a home monitoring camera based on Ambarella's S2LM SoC. Selling for $90, it offers full HD video, wide-angle operation, HDR processing and a 2-way audio.

LifeShield, an ADT company, introduces LifeShield HD video doorbell, which integrates seamlessly with its security systems. Based on Ambarella's S2L SoC, the camera offers voice support for Amazon Alexa, allowing it to control alarm systems, adjust lightings and manage thermostats via voice commands.

We are also seeing new opportunity for cameras being integrated into smart locks. During this quarter, HIKvision's consumer division, EZVIZ, introduced its DL30VS Smart Lock with built-in 720p wide-angle camera and night-vision capabilities. Based on Ambarella's H3LM SoC, the lock camera can detect when intruders are lurking and take a snapshot or record a video clip to send to the homeowner.

In summary, for IP security camera market, our sales are expanding both professional and the consumer markets are growing as we take market share and as we continue to make excellent progress in designing our CVflow SoCs into the next generation of AI cameras.

I will now update you on our automotive market progress.

In July, leading Korean automotive Tier 1 Hyundai Mobis announced that it has developed a camera monitoring system using cameras and monitors to replace the vehicle's rear and the side view mirrors. The system enables vehicles to achieve greater fuel economy by eliminating the drag of the side mirrors while the camera's wide field of view enhances driver safety by reducing blind spots. Ambarella's A9AQ automotive SoC provides the image processing for all 3 of the video channels.

We are also seeing increasing interest in our computer vision SoC from companies that provide a fleet management solution for commercial vehicles, such as trucks and the buses. Existing camera solutions for commercial market typically lack intelligent features and can only run analytics in the cloud. With Ambarella's CVflow portfolio of AI chips, the solution providers can now deploy AI-based applications, such as front ADAS, active driver monitoring system, and blind-spot detection in the vehicles. Our CVflow solution has been chosen by multiple providers in Asia and the USA, with one generating mass production in revenue in Q2 and others expect to be entering production by the end of the year.

We continue to win car recorder designs as Asian automotive OEMs increasingly offer this feature in new car models as a preinstalled option. During the quarter, Chinese carmaker Geely introduces New Emgrand GS and GL models featuring full HD car recorder based on Ambarella's A12 automotive SoCs. Additionally, Great Wall Motors introduced its WEY VV6 SUV with a 1-camera and 3-camera DVR option based on Ambarella's A12A and H22A automotive SoCs. And the new electric car, the ORA R2 featuring a recorder based on our A12A.;

In the aftermarket dash camera category, Korean supplier, Thinkware, announced its QHD Mega recorder based on Ambarella's A9AQ automotive SoC, the first 4 channel for HD car recording in Korea. Additionally, Thinkware introduced its [2500 Plus] (corrected by company after the call) 2-channel dash camera based on Ambarella's A12 SoC. Also in Korea, Finedigital introduced its GX200 and GX2000 model based on Ambarella's A12 SoC, featuring quad HD front and the full HD rear recording, smartphone connectivity and auto night vision.

In summary, we are just starting to realize our vision to enable big data analytics in video-edged endpoint devices or AI in the camera. As this play out, we expect to see multibillion-dollar increases in our addressable market. Our CV solution integrates our state-of-the-art video processing heritage with our recently deployed deep neural network AI processor. It is evident now that customer who are experienced with our video processors are able to efficiently migrate to our CV solutions, and our CV portfolio is also attracting new customers and expanding our customer base. We are on schedule to realize the 3 waves of CV revenue articulated on our last earning call, and we'd be pleased to see the improvements in our Q3 forecast of our core video processing products.

There are many distractions in the market today, and I am thankful Ambarella's global team is keeping up the strong pace of execution. And also thanks to all of our stakeholders, including our 754 employees, customers, vendors and shareholders for your support.

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

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

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Thank you, Fermi. Good afternoon, everyone. Today, I will review the financial highlights for the second quarter of fiscal 2020 and provide a financial outlook for the third quarter of fiscal 2020 as well as full year.

During the call, I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense adjusted for the impact of taxes.

Our Q2 revenue of $56.4 million exceeded the high end of our guidance of $51 million to $53 million. These results represent an increase of 20% from Q1 and a decrease of 10% when compared to the same quarter of the prior year.

In Q2, on a sequential basis, security revenue increased, automotive was relatively flat and other revenue was down. Non-GAAP gross margin for Q2 was 58.1% compared to 59.6% in the preceding quarter and was slightly above the midpoint of our guidance of 57% to 59%. Non-GAAP operating expense for the second quarter was $27 million compared to $29.9 million for the previous quarter. This was below our guidance range of $29.5 million to $31.5 million due to R&D grants of $3.2 million for fiscal year '19 and the first half of fiscal year '20. We will be including this benefit on a quarterly basis in our operating expense guidance in the future quarters.

Other income was $2.2 million and primarily represented interest income on our cash and marketable securities. GAAP net income for the second quarter was $7.3 million or $0.21 per share compared to $266,000 or $0.01 per share in the first quarter. The non-GAAP effective tax rate in Q2 was 9.1%. In the second quarter, the non-GAAP earnings per share were based on 33.9 million shares as compared to 33.5 million shares in the prior quarter. Total headcount at the end of the second quarter was 754, with about 81% of our employees dedicated to engineering, most of whom are software engineers. Approximately, 70% of our total headcount is located in Asia.

In Q2, we generated positive operating cash flow of $8.1 million. Cash and marketable securities were $376 million, up from $366 million at the end of the first quarter. We did not repurchase stock during the quarter under the $50 million repurchase program authorized through June 30, 2020.

Total accounts receivable at the end of Q2 were $27.9 million or 46 days sales outstanding. This compares to accounts receivable of $26.5 million or 50 days sales outstanding at the end of the prior quarter. Net inventory at the end of the second quarter was $17.4 million compared to $17.6 million at the end of the previous quarter.

Days of inventory declined to 67 days in Q2 from 85 days in Q1. We had 2 10%-plus revenue customers in Q2. WT Microelectronics, a fulfillment partner in Taiwan, came in at 55% of revenue, and Chicony, a Taiwanese ODM who manufactures for multiple customers, came in at 21%.

I will now discuss the outlook for the third quarter of fiscal 2020. For Q3 fiscal 2020, we are raising our revenue guidance above the current Street consensus. We expect total revenue for the third quarter to be in the $63 million to $67 million range. We anticipate all market segments, led by automotive, but including security and other, to increase sequentially. We continue to expect other revenue, comprised primarily of consumer electronics products, to remain volatile and decline as a percentage of revenue over the next 2 to 3 years.

Although forecasting is difficult in the current environment, we continue to expect our revenue to increase in the second half of the year when compared to the first half, with fourth quarter revenue experiencing the normal seasonal sequential decline. The global economic and political environment is generating a significant amount of uncertainty with our customers' outlook in our customers' supply chains. Three key factors were impacting our gross margin results and our outlook.

Our professional security camera business is experiencing strong underlying demand globally. Combined with some restocking at our Chinese customers, they are growing faster than the market and with their purchasing powers as the #1 and #2 suppliers globally, this puts pressure on our gross margin.

To support our increased revenue outlook and to manage the supply chain challenges from geopolitical factors, we may also experience increased costs as we accelerate orders to our suppliers

In addition, rising tariffs may have a greater impact on our customers' ability to sell their products incorporating our higher-margin devices.

Based on these factors, we estimate Q3 non-GAAP gross margin to be between 56% and 58% compared to 58% in the second quarter. We expect non-GAAP OpEx in the third quarter to be between $30 million and $32 million. We expect to continue to provide positive operating leverage as revenue increases.

The Q3 tax rate should be modeled at 10% versus 9.1% in Q2 and 36% in Q1. The tax rate has started to normalize from Q1 levels as our increased level of profitability enables tax losses in certain jurisdictions to be utilized.

We estimate our diluted share count for Q3 to be approximately 34.4 million shares. Ambarella will be participating in the Dougherty & Company Institutional Investor Conference on September 5th in Minneapolis and the 26th Annual CLSA Investor Forum on September 12th in Hong Kong. Please contact Louis for more details on these events.

Thank you for joining us on our call today. And with that, I'll turn the call 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) Our first question comes from Joe Moore with Morgan Stanley.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [2]

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Congratulations on the good results. I wonder if you could talk about the Chinese inventory accumulation, you referenced it again. Any sense for how much that's contributing to the top line last quarter and this coming quarter and how long you expect that to continue to happen?

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

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Well, like Casey said, I think the upside that we have seen right now is a combination of our Chinese customer accumulating inventory as well as their business getting stronger. And at this point, it's hard for us to differentiate between the two. But however, we continue to believe that our Chinese customers will continue to build out inventory until to a level they feel comfortable. And that reflects our Q3 forecast and -- but also because their business -- ongoing business also have a strong demand and that's why we provide as a higher revenue forecast for Q3. I do believe that with the uncertainty of these 2 customers might get onto the Entity List, they will definitely try to build to an inventory level till they are comfortable.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [4]

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Got it. Okay. And then it seems like with the individual announcements of some of the others, you're starting to see real, kind of, announceable traction in the surveillance base. Can you give us a sense for when the CV contribution, is that starting to become material in the second half? And just if you look at your professional business next year, can you kind of just give us a qualitative sense for how much CV ramps within the portfolio?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [5]

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Right. Like I said last time, we expect that we already -- we said that 9 of the top 10 professional securities customer are doing a design with us. Now we are believing 5 of them will get into the mass production stage at the end of this year so that we do see revenue coming out this year. But I think a material revenue contribution will come from next year, particularly on the professional security camera side. And that definitely helps us to get a better gross margin as well as market share.

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Operator [6]

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Our next question comes from 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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I guess, Fermi, you talked on the call about a number of different design wins and engagements that you guys have for the computer vision program. Obviously, some are in China, many are not. Maybe you could just talk a little bit, and Casey, you can obviously chime in when you can, but what -- how do you feel about the pipeline for CV in terms of what percentage of that might be in China versus outside?

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

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I see. First of all, really the answer is different from markets to markets. So let me repeat some of the things we said. First of all, we said there are 3 CV customer in production with us at this time in Q3 -- sorry, in Q2 and Q3. And I will say one is in outside China, 2 are inside China. If you look at -- I also talked about we have 40 revenue customers -- or CV revenue customer this year -- this quarter, and it's -- almost all of them are in the security camera as well as in auto. In security camera, majority of them is outside China. In the auto, I would say half and half. But I think that's definitely the split we are seeing. But one thing I have to say is that the momentum of our CV design that people are trying to buying the preproduction chip or evaluation board, that activity has continued to be strong for us.

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

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Got it. I guess as a follow-up question for me. I think, Casey, in your prepared script, you had mentioned that the guidance for the third quarter would be led by automotive. Maybe you could talk a little bit more specifically about which programs you see ramping and the split across maybe e-mirrors and different types of cameras that are going into automotive that might be driving that revenue for the third quarter.

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

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Yes. Well, on the product side, I'll let Fermi talk about that a little bit. But clearly, the revenue today is being driven in the automotive space by our vision-based or our video-based products. As we talked about in automotive, the ability to get mass production revenue off of CV is a longer-term story, and that's why we talked about the first 2 waves being the professional security or surveillance and the consumer home that we talk about.

But I think it's kind of -- in the vision-based initially, we were led by the aftermarket in the video recorders. And then -- and that's not getting adopted more and more in the OEMs, as we talked about. And so that certainly is leading the revenue in the auto space, is the recorder business. But we are seeing the traction across the announcements that again Fermi has talked about in the e-mirror space, cabin monitor, driver monitoring in the fleet type of opportunities that we just announced during the quarter. So I think it will become more broad-based. But today, it still is primarily driven by the video recorders.

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

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All right. As you can see that in our announcement, we mentioned a few several design wins with Chinese and Japanese OEMs for recorders. But we also mentioned that we have a mass production product with the driver monitoring system for the aftermarket business, and that's basically for fleet management with a [commercial vehicle] (corrected by company after the call). So I think that also we've announced a Korean company doing e-mirror with us. So although majority of the revenue -- Q3 revenue come from recorder OEM, especially OEM recorders, but also we started talking about revenue coming from other portions of the OEM business.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [12]

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Got it. And if I could just sneak one more in, guys. Casey, you mentioned Q4 being normal seasonality. The last couple of fiscal years have been a bit abnormal, I would guess. Maybe can you remind us what you guys consider normal for Q4?

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [13]

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Yes. I think if you look back over a longer period of time, say 3 to 5 years, you would see that Q4 is usually down in the low double digits, somewhere between 12% and 15%. And that's just based off of the last few years. So I would expect we'd see that similar type of activity in our Q4 as well. But as you point out, sometimes you're surprised by other activity. It's not always the case. But that would not seem to be unreasonable, in my mind, for an estimate of Q4.

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Operator [14]

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Our next question comes from Adam Gonzalez with Bank of America Merrill Lynch.

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Adam Gonzalez, BofA Merrill Lynch, Research Division - Research Analyst [15]

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Congrats on the strong results. Fermi, on your prepared remarks, you outlined the 3 factors that are driving your better outlook for Q3 and the year. I know it's hard for you to decipher, at least from a quantitative perspective, what -- how much is from inventory restocking versus just market share gains. But just qualitatively, can you help us understand which is the biggest factor? Is it inventory restocking? Is it better demand from your underlying security camera customers? Or is it just market share gain factor that you mentioned?

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

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Well, I will say it's hard to really put a quantity on that. But however, if you have to be -- to prioritize those factors, I think that our best estimate of the improved demand outlook is probably the #1 and followed by the inventory stocking. And also -- but the share gain, although it's more than short-term results, but I think the share gain has more longer-term impact to our revenue in the future, especially several of our customer, while switching from our competitors solution to us, it would take time came for them to go into production. But cumulatively, in the long term, it will help us more for our revenue growth.

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Adam Gonzalez, BofA Merrill Lynch, Research Division - Research Analyst [17]

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Got it. And then on seasonality for Q4, I know you just mentioned there's down 12% to 15%. But in the past, I think that's really been driven by your outsized consumer exposure. Now that that's kind of a less meaningful part of the business, just wondering what's driving that steep sequential decline in Q4 specifically.

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

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Well, first of all, the consumer security camera is still consumer business, right? That's one thing. And also, professional security camera at the end of the year, usually that's when you saw weakness. That's our experience. And so I think we still expect that typical seasonality to us this year.

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Adam Gonzalez, BofA Merrill Lynch, Research Division - Research Analyst [19]

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Got it. And if I can just sneak one more in. I saw that R&D was down quite a bit in Q2. Just wondering what caused that and how should we should expect that to -- moving forward.

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [20]

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Yes. So as I mentioned, we had an R&D grant that totaled about $3.2 million in the current quarter. That was accumulation. As you remember, at the end of last year, we took a similar grant. And we did that for the fiscal year 2018 as we went through and calculated '19, started getting the benefit of '18 and look to '20, we were able to book '19 and the first half of '20 based off of -- are starting to utilize the credit or the grant and our ability to look forward.

So now I think we have an ability to see how that's going to play out, and we'll be able to record that on a quarterly basis. So the guidance I gave for Q3, that incorporates anything that would come. And I'll do that continually into the future quarters. But this is, if you will, a bit of a catch-up. As we move forward, you won't see that. And so that's why the R&D is going back or the OpEx is going back to normal levels.

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Operator [21]

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Our next question comes from Quinn Bolton with Needham & Company.

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Michelle Waller, Needham & Company, LLC, Research Division - Associate [22]

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This is Michelle on for Quinn. So I guess first, on the AI-based professional camera market and the market guidance for calendar 2019. I believe you guys have said before the Hikvision is the largest player there. And they shipped about 1 million units in 2018 and they were targeting 3 million this year. So I was just trying to see, is that still in line with -- or is that still their expectation? Are you guys hearing anything different there? Any idea to kind of get a unit perspective. That would be good.

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

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You are talking about Hikvision's forecast for the AI-based camera, right?

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Michelle Waller, Needham & Company, LLC, Research Division - Associate [24]

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Exactly, yes, yes.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [25]

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Yes. So when we talked about it, I think the 1 million units was history, so last year numbers. So I think that's done. I think they are still looking at strong growth. They haven't given us a new update on that, but I think they are on track to get to that level. Maybe a little less. Maybe a little more. But I definitely think the growth from last year to this year in terms of AI camera is significant for HIKvision.

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Michelle Waller, Needham & Company, LLC, Research Division - Associate [26]

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Okay. And they still haven't given any sort of target for 2020 as well, right?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [27]

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We haven't seen anything yet.

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Michelle Waller, Needham & Company, LLC, Research Division - Associate [28]

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Okay. And then just another one on the Chinese automotive market. Have you guys seen any design activity changes with the automotive OEM in China there? Do the trade tensions -- or maybe any other signs that Chinese OEMs are becoming increasingly cautious designing it due to the trade relations?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [29]

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Just purely from the trade point of view, I don't think we have -- we got any feedback from our automotive OEM/ODM customer in China. I don't think they care that -- well, I don't think they emphasize it on that point or we haven't seen any resistance on design wins using external solutions so far. I think majority of the resistance comes from our China security customers, especially the 2 being mentioned by the -- potentially to be [put down in the figures].

In general, in automotive Chinese market, I really think that the biggest impact is the growth this year was relatively weak compared to the history data. And so that a lot of people are trying to figure out how to move to a new direction, add differentiation to the car. And I really think that the CV function, CV features could be -- is the one direction that many Chinese OEM Tier 1 are focusing on. So that's definitely something we see. And like I said, I don't see any of them has a concern because of the trade.

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Michelle Waller, Needham & Company, LLC, Research Division - Associate [30]

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Okay. And one last one. Have you -- maybe have you seen any indication of additional in-sourcing, Hikvision or Dahua, given the threat of being added to the Entity List?

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

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No. There is no -- we don't see any other enforcement that we have -- other than what we have talked about. So it's the same thing. But I think the pressure is still there. It's really about our customer want to make sure that they prepare for the worst, and that's why they continue to pull in the products from us.

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Operator [32]

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Our next question comes from Charlie Anderson with Dougherty & Company.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [33]

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Congrats on the strong results and guidance. So just wanted to look into the 40 customers or so that are preproduction revenue at this point. I wonder if you maybe could speak to the some of the applications you're seeing from some of those customers. What are the more promising ones in terms of underlying volume? And then I've got a follow-up.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [34]

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Yes. I think the 40 customers basically fall into that 3 waves of CV revenue we talked about last time. The first wave is professional security. You can imagine that out of that 40, it covers almost all the major branded professional security camera branded out there plus several of the startup company focused on using CV as a differentiation for the professional security camera. So that's a big chunk of the 40 people. And also, we start seeing some consumer security camera demands, and there are a few companies in that category.

And then on the auto side, there is a huge amount of company but it's separate into multi-different category. There are some of them using CV purely for DMS. Some are using for heavy monitoring. Some are using for ADAS. Some for e-mail or for the blind spot detection. So although there's quite a few automotive customer, if you divide it into different category, you see several in each category in that. So among the 40 companies, I will say that the security company and auto probably is equally split.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [35]

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Okay. And then for my follow-up for me. I wonder if you can just give us an update on the HELLA Aglaia partnership, kind of roughly where is that in terms of responding to RFPs. Are you actively in that phase at this point? And maybe time line of when we might start to see some volume associated with that partnership.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [36]

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Right. So for the HELLA Aglaia, we continue to work together on porting more of their pure network AI onto our platform. I think the major milestone for the -- this collaboration is because ADAS require ASIL chip. [So we believe that our current customer preparation on our current CV22, our CV2AQ chip is really preparing the customer for the ASIL chip when it comes out. So I think we continue to work on the super with the development. And as soon as our ASIL chip comes out, you should expect that the customer will run ASIL chip] (corrected by company after the call). So we can demo to the OEM together. And the demo to OEM continue to happen with our AQ chip, just that we have to come out with an ASIL chip to get into the mass production -- for the final production ready solution.

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Operator [37]

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(Operator Instructions) Our next question comes from Suji Desilva with Roth Capital.

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

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Congratulations on the strong results here. Just to be clear, Casey, on the inventory restocking, I just want to understand whether the relative impact of it was stronger in the reported fiscal second quarter or the guided third quarter. And just along with that, on the guidance for seasonal fiscal fourth quarter, are you no longer comprehending inventory restocking continuing into that time frame?

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [39]

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As Fermi I think referenced, it's hard for us to know exactly or have good visibility into that. I think that there's no question that they are going to restock and build some inventory for the reasons that we discussed earlier. I would agree with the order of priority that Fermi said in the earlier question. But it's a combination of both, it definitely affected this quarter and will affect next quarter as well. Where we don't have perfect visibility into Q4 that there could be some activity in Q4 as well.

But I really think what you're going to see continue over the next few quarters is the strength that Hikvision and Dahua talked about in the market overall and the growth that they are seeing outside of all of this. I think the overall home monitoring and surveillance market as well as the professional market are going to be pretty good. And so we should see pretty good growth in particular with some of the CV products coming online. Just to remind you, they do have 2x the ASP as the comparable vision-only systems.

And so I think that the restocking is a part of the current dynamic with the global tension that we see. But really I think the story, as we get out into next year, past the seasonal aspects that we talked about in Q4, is really going to be that revenue building not only in the vision-based products but primarily -- or in particular in the CV products as the second wave starts to come in on the consumer side.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [40]

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Okay. Understood. Yes. And then in the professional security market, I know you couldn't give a specific on maybe what Hikvision was expecting for AI professional cameras in '20. But maybe more broadly, could you talk about in calendar '20 what you might think given all the programs you have and interest, what the attach rate, Fermi, is of AI potentially to professional security cameras or maybe a range of attach rates in the calendar '20 time frame?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [41]

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Suji, I think it's hard for me to predict at this point because it really depends on the pricing and the marketing strategy for our current customers. But one thing I can say is we are seeing our customer spending more and more resource building CV-based products, AI-based products. And I think next year, I will probably expect customer building more CV SKUs than the video SKUs moving forward. So I have to believe that the attach rate will start ramping up next year. We're going to see -- next year will probably be the first year we're going to see material revenue from security camera customer. But I do believe that could be a very good ramp-up for us. But again, there's no data to support it. It's really a gut feeling more than analytics.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [42]

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But the point you're making, Fermi, is that the new SKUs coming out next year, the majority will have now CV incorporated. That's what you're saying?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [43]

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That's what I think, yes.

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Operator [44]

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Our next question comes from Gus Richard with Northland.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [45]

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Congratulations on the good results. Basically, China is implementing social scoring. The numbers I see, about 600 million cameras by the end of 2020, up from about 180 in '18. How much of this professional security camera demand is coming from China in terms of internal consumption? And how fast do you think the overall market is growing? And I've got a follow-up.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [46]

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Well, first of all, I think the Hikvision, Dahua is seeing strong demands on their -- for their products. I think that our products that we ship to Hikvision, Dahua are mainly used in their export business. And I think this market is probably -- professional security camera continue to grow, I would say, to high single-digit point. Maybe Hikvision, Dahua probably is higher than the market. So I think this is a trend we'll continue to see in the professional security camera.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [47]

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Okay. So the strong results there are a function of market share gains primarily?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [48]

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Market share gains, yes, and also outside China particularly that we are continuing to see market share gains.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [49]

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Got it. And then in terms of manufacturing at Samsung, it looks like only the EUV photoresist is going to be banned. In conversations with Samsung, your foundry, what are they telling you in terms of their availability and capacity moving forward?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [50]

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Majority of our products are still in the 28, 14 and moving to 10 nanometers. So we are not in the EUV yet. When we talk to Samsung, they basically give a guarantee that our current product line will not be impacted by this Japan, Korean tensions.

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Operator [51]

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Your next question comes from Richard Shannon with Craig-Hallum.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [52]

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Maybe kind of a multipart question in the security market. I think you said you're engaged with 9 of the top 10 OEMs, expecting to ship 5 of them with CV this year. Maybe if you can talk about whether you expect any of the other 4 remaining ones to be shipping at some point next year. Any visibility on that? And then any discussion about competition? You've talked about a few of the bigger public players out there, but wondering is still that's the competitive profile or if there's any new entrants you're seeing out there.

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

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Right. So for the balance of the CV design win, we definitely believe all of the rest are probably going to production sometime next year. And that's our current visibility, and we still -- progress were made, and we'll be confident that all of them will be in production sometime next year.

In terms of the competition on the CV side, I think HiSilicon will be our biggest competitor. But Huawei really was trying to be there and Intel bought Movidius. But I really think that among all the -- all of them try to come to this using the -- our processors. But for the professional security or consumer security camera market, we continue to believe that HiSilicon will be our biggest competitor moving forward.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [54]

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Okay. Just a quick follow-up on that, Fermi. Do you expect any particular customer, especially in those top 10, to be using one or another solution? Or do you think it will be a mix of more than one supplier, specifically CV solutions to be specific?

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [55]

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Yes. Well, I have to believe that all of them will try to have a few suppliers. But at this point, I think the design wins we have announced so far, they are using our solution. But for example, I think some of our customers using it have their own solutions. Sooner or later, they will probably have their own CV chips. And so they have a dual source, one for internal, one for us. So that's a possibility. Also, I think outside the U.S. right now, I think we are in very good position for this AI base of security camera. And eventually, people will find out how to compete with us on the low end. But on the high end side, I think we're in a relatively good position.

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Operator [56]

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At this time, I am showing no further questions. I'd like to turn the call back over to Mr. Wang for closing remarks.

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Feng-Ming Wang, Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman [57]

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And thank you, especially thank you for all of you for joining us on our earning call today. And I will talk to you guys next time. Thank you, and goodbye.

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Kevin Casey Eichler, Ambarella, Inc. - VP & CFO [58]

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Appreciate it.

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Operator [59]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.