Q1 2024 Ambarella Inc Earnings Call
Participants
Brian C. White; CFO; Ambarella, Inc.
Feng-Ming Wang; Co-Founder, President, CEO & Executive Chairman; Ambarella, Inc.
Louis P. Gerhardy; VP of Corporate Development; Ambarella, Inc.
Brian William Ruttenbur; Research Analyst; Imperial Capital, LLC, Research Division
David O'Connor; Analyst of IT Hardware and Semiconductors; BNP Paribas Exane, Research Division
Gary Wade Mobley; Senior Analyst; Wells Fargo Securities, LLC, Research Division
Joshua Louis Buchalter; VP; TD Cowen, Research Division
Kevin Edward Cassidy; Senior Semiconductor Research Analyst; Rosenblatt Securities Inc., Research Division
Nathaniel Quinn Bolton; Senior Analyst; Needham & Company, LLC, Research Division
Ross Clark Seymore; MD; Deutsche Bank AG, Research Division
Suji Desilva; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Tore Egil Svanberg; MD; Stifel, Nicolaus & Company, Incorporated, Research Division
Tristan Gerra; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Unidentified Analyst
Zhihua Yang; Associate; Oppenheimer & Co. Inc., Research Division
Presentation
Operator
Thank you for standing by, and welcome to Ambarella's First Quarter of Fiscal Year 2024 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.
And now I'd like to introduce your host for today's program, Mr. Louis Gerhardy, Vice President, Corporate Development. Please go ahead, sir.
Louis P. Gerhardy
Thank you, Jonathan.
Good afternoon, and thank you for joining our First Quarter Fiscal Year 2024 Financial Results Conference Call. On the call with me today is Dr. Fermi Wang, President and CEO; and Brian White, CFO. The primary purpose of today's call is to provide you with information regarding the results for our first quarter of fiscal year 2024.
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. or under no obligation to update these statements.
These risks, uncertainties and assumptions as well as other information on potential risk factors that could affect our financial results are more fully described in the documents we filed with the SEC, including the Annual Report and Form 10-K we filed on March 31, 2023 for fiscal year 2023 ending January 31, 2023. Access to our first quarter fiscal 2024 results press release, transcripts, historical results, SEC filings and a replay of today's call can be found on the Investor Relations page of our website.
Fermi will first provide a business update for the quarter, Brian will review the financial results and outlook, and then we'll be available for your questions. Fermi?
Feng-Ming Wang
Thank you, Louis, and good afternoon. Thank you for joining our call today.
Our Q1 results were slightly ahead of our expectations despite the significant headwinds from the ongoing semiconductor industry cyclical downturn. We are not allowing this difficult environment to distract us from further developing our AI business.
Before I talk about the details of the quarter with all the [cross currents] in the market together with the other exciting developments in the AI market, so this will be a good time to review our strategic vision. Simply put, our transformation into an AI company is well underway, with AI already representing 45% of our total revenue last year and an estimated 60% this year. Now with our CV3 platform, we are expanding into a new phase of AI market development.
The AI market is at a very early stage. It is also dynamic with many technologies and [location] emerging. With all excitement about AI, the key to our continued success will be our focus and the degree to which we can leverage our unique core competencies. Even with our focus, our current service available market, or SAM, is sizable, exceeding $4 billion this year and approaching $10 billion in fiscal year 2028.
So what are we focused on? Ambarella is focused on deep learning AI processors and software, which are replacing the legacy and less powerful traditional machine learning approaches. With the deep learning market, the AI processor market has been dominated by training processors using servers typically for the cloud, data center or enterprise. Our focus is our AI inference, which is where AI models get deployed and are practically utilized by end users. As the AI market begin to mature, most third-party research firms forecast the size of influence AI to surpass training AI.
We have already demonstrated how we can leverage our rich heritage in human perception, also known as video processors, into AI. Our CV2 family was our first move into AI and it targets influence AI perception processing at the age where cameras are the principal sensing modality. We continue to expect the CV2 family to be approximately 60% total revenue in fiscal year '24 and represent a material portion of our operating profit dollars. The CV2 SoC integrates our camera perception and expertise with our proprietary second-generation CVflow AI architecture.
The incremental processing to enable AI costs causes our CV2 blended average selling price, ASP, to be greater than 2x of video processor. This contributed to an over 20% increase in our firm-wide ASP in fiscal year '23. This year, the CV2 family is expected to become the dominant driver of our revenue and remain a key driver for several years. The solid strength of operating profit from video processors and the CV2 family of [AI] processors is now being reinvested into the significantly more powerful CV3 platform targeting mobility applications. The CV3 platform built upon our CV2 family experiences and utilize our proprietary third-generation AI influencing processor. For the typical Level 2 class application, the CV3 SoC provides the perception processing for all the camera and the radar sensors, as well as the processing required in the future and the [planning] layers. The significant amount of incremental processing expected to facilitate a CV3 SoC ASP to be 5x to 20x higher than a CV2 SoC.
It is also very important to understand CV3 is a platform. Also, the SoC in the CV3 family can capture incremental value by running our own autonomous driving AD software stack IP and/or radar perception (inaudible) IP. We aim to bundle this (inaudible) IP with our CV3 SoCs in a platform approach, providing our customers with the flexibility to pick and choose exactly what they need.
Regarding our autonomous mobility partnerships at Continental, I'm pleased to share that we extended our partnership to Level 4 system development and confirm the first business award of our jointly-developed stack as a complete Level 4 [full backed] system. The system will be supplied to Continental for customers in the commercial vehicle industry.
To be clear, the CV3 platform is a major leap forward in terms of our value proposition, and it brings a new list of target customers, automotive OEMs. We are still in the early stage of building out the CV3s SoC portfolio and developing the market. However, we are not doing this alone, with leading Tier 1s like [Watch] and Continental [putting] their software to CV3, validating our superior efficiency, jointly marketing to auto OEMs using their scale and bring more credibility to our CV3 market development efforts.
Additionally, for the AI server influence market, we have already evaluated running large language model, LLM on [CV3AD high], which has been [sample] for 9 months. And we believe the LLM performance on this existing SoC to be good as NVIDIA A100 with much lower power consumption and superior total system cost. We are now establishing a software development effort as well as a business development program to engage with customers.
Turning to new products and customer engagement in this quarter. In March, at the ISC West Security Show, we announced our CV72S for mainstream enterprise and public class security cameras. CV72 utilized the same third-generation CVflow deep learning AI accelerator architecture utilized in the CV3 SoCs. This CV3 derivative SoC bring to the IoT market the highest AI performance per watt, the fusion of radar and camera data, and it improves support for the latest transformer neural networks. Furthermore, [CV72S] offers 6x the AI performance of CV2 family, enabling it to run Ambarella's groundbreaking neural network-based image signal processing software for 4K color night vision and HDR, with plenty of headroom for additional concurrent neural networks. CV72S is now sampling to leading IoT camera companies.
In IoT, there were a number of new enterprise and public security camera introduced, including Motorola who will introduce H6SL camera line based on CV25 as well as the V700 body camera based on our (inaudible) SoC. And Verkada introduced its TD52 video intercom featuring 5 megapixel camera based on our CV25. i-PRO, formerly Panasonic, and the Japan's largest security camera supplier, introduced multiple new product family based on our CV2, CV22 and CV25, including dual and quad multi-image models. And the European market leader Axis part of Canon, introduced a [3905] rocket drone models designed for surveillance onboard vehicles, such as buses, based on our (inaudible). Also in Europe, [Del mar] introduced (inaudible) E-series camera, which use our CV22 AI SoCs to enable imaging in total darkness utilizing adaptive IR illuminations.
In the home monitoring market, Alarm.com introduced its ADC-780 battery-powered (inaudible) based on our [S5LM].
I will now talk about the progress in the automotive market. As mentioned earlier, our new CV72S SoC is an important CV3 derivative for IoT market. However, it is expected to also be an important derivative product for the automotive market. And in April, at the Shanghai Auto Show, we announced and demonstrated CV72 [8Q]. This SoC targets multiple automotive application, including Level 2+ and other applications, with up to 6 cameras and 5 radars only on the same SoC. CV72AQ demonstration at the show included an ADAS plus parking system with a 5 camera configuration, including an 8-megapixel front camera and the multiple 3-megapixel fisheye camera running [V7] [neural] networks on each camera. We also demonstrated versus a leading GPU solution superior performance and lower power consumption of CV72AQ-running transformer networks.
We received very positive feedback on CV72AQ from Tier 1s and OEM in China.
Also, as of the Shanghai Auto Show, a number of other Tier 1s demonstrated CV3-based assistance. This included Continental [with a] show of 10 camera live demo with multiple neural networks running on each video stream. And HyperView demonstrated its [GT Hypermax] platform featuring a sensor suite of 11 cameras, plus 1 LiDAR and the 3 radars in a car, providing CT navigate on pilot advanced functions and leveraging the latest transformer network.
In March, China's GAC introduced its electric Aion Y Younger L2+ ADAS SUV with an intelligent (inaudible) driving assistance system based on our CV22AQ AI SoC. And in April, JV Zeekr introduced its Zeekr electric SUV with a face recognition access controls based on CD28AX AI SoC.
In summary, a majority of our new customer engagement activity continue to be our AI products. AI is expected to be a majority of our revenue for the first time in fiscal year 2024, and actually continue to grow as a proportion of our mix. To bring our AI strategy vision together, first with CV2, now again with an even more significant CV3 platform, we have leveraged our core competencies, cumulative knowledge and unique approach to establish strong presence in the AI deep learning domain. Our investment yield differentiated products that are very different, are very efficient and on open platforms that are scalable and flexible. The CV2 family is already very profitable, and we are well into the development phase with the CV3 platform.
In summary, there is still a lot of work left to execute to our strategy and the ongoing semiconductor industry cynical downturn pressure our near-term financials. However, we are confident in our long-term secular growth opportunity for (inaudible) AI. We do not intend to stray from our strategy vision, and we are continuing to invest in our differentiated AI strategy.
I will now turn it over to Brian to discuss the Q1 results and the Q2 outlook in more detail.
Brian C. White
Thank you, Fermi.
I'll review the financial highlights for the first quarter of fiscal year 2024. I'll also provide a financial outlook for our second quarter ending July 31, 2023. I'll be discussing 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 and acquisition-related costs adjusted for the impact of taxes.
For fiscal Q1, revenue was $62.1 million, in line with the midpoint of our prior guidance range, down 25% from the prior quarter and down 31% year-over-year. As expected, total Automotive revenue was approximately flat sequentially while IoT revenue was down sharply, driven by customer inventory reduction actions.
Non-GAAP gross margin for fiscal Q1 was 63.1%, in line with the midpoint of our prior guidance range of 62% to 64%. Non-GAAP operating expense for the first quarter was $46.2 million, up $200,000 from the prior quarter and below our prior guidance range of $47 million to $49 million. The lower operating expense was driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones.
Q1 net interest and other income was $1.3 million. This was higher than our original forecast driven by a higher cash balance and returns on cash invested. Our non-GAAP tax provision was $300,000 or minus 5.5% of pre-tax income. This was slightly lower than our original forecast driven by the mix of pretax income across tax jurisdictions. We reported a non-GAAP net loss of $6 million or $0.15 loss per diluted share.
Now I'll turn to our balance sheet and cash flow. Fiscal Q1 cash and marketable securities increased $20.5 million to $227.4 million. DSO improved significantly from 57 days to 43 days as the timing of shipments throughout the quarter normalized after being back-end loaded in the prior quarter. Ending inventory increased slightly, up 1.8%. However, days of inventory increased more significantly from 116 to 151 due to the sequential reduction in cost of goods sold on lower revenue.
Cash from operations was strong at $22 million, driven by the decrease in accounts receivable. And capital expenditures for tangible and intangible assets were $2.3 million. Free cash flow, defined as cash from operations less CapEx, was 31.7% of revenue for the quarter and 6.4% on a trailing 12-month basis.
We had 2 logistics and ODM companies represent 10% or more of our revenue in Q1. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 49% of revenue. Chicony and ODM, who manufactures for multiple IoT customers, was 16% of revenue.
I'll now discuss the outlook for the second quarter of fiscal year 2024. Customer feedback on end demand remains generally healthy. However, at the same time, customers also continue to aggressively manage down their inventory levels. Considering these factors, we estimate that our fiscal Q2 revenue will be flat to Q1 and in the same range of $60 million to $64 million that we guided for the prior quarter. By end market, we expect that both Automotive and IoT revenue will be approximately flat sequentially as well.
We expect non-GAAP gross margin to be in the range of 62.5% to 64.5%, up slightly from Q1. We expect non-GAAP OpEx in the second quarter to be in the range of $48 million to $50 million, with the increase compared to Q1 driven by higher R&D tied to new product development activities. We estimate net interest income to be approximately $1 million, our non-GAAP tax expense to be approximately $700,000, and our diluted share count to be approximately 39.7 million shares.
Ambarella will be participating in TD Cowen's Technology, Media and Telecom Conference on May 31 and June 1; Bank of America's Global Technology Conference on June 6; and (inaudible) [Agent] AI Conference on June 7. Please contact us for more details.
Thank you for joining our call today. And with that, I'll turn the call over to the operator for questions.
Question and Answer Session
Operator
(Operator Instructions)
And our first question comes from the line of Gary Mobley from Wells Fargo.
Gary Wade Mobley
I wanted to ask about inventory drawdown with customers. You mentioned that customer and demand appears to be healthy. Obviously, you're undershipping in demand. Could you give us a sense by how much and by how much or how close we are to inventories being back down to a normal level? And then maybe you can comment as well specific to China-related demand?
Feng-Ming Wang
Yes, this is Fermi.
I think like Brian said, we haven't seen a huge change from the customer side. For example, last quarter, we talked about customer that has a healthy growth with based on our silicon, but our silicon revenue from them is down 15%, 20% year-over-year. And that station continues, and I think the customer continue to confirm that their growth and continues to forecast lower revenue this year.
So I think from that point of view, I think the situation is very similar to last quarter, and we have not seen anything -- any indication that this inventory correction will end. So I think what we are looking for is really that the ramping up of new orders consistently from different customers, that will probably give us an indication that it's recovered. We haven't seen that yet.
Gary Wade Mobley
As a follow-up, I wanted to ask about your win that you captured in conjunction with Continental. Is that an automotive grade wins? And maybe if you can give us a sense of where automotive -- other automotive grade wins may stand?
Feng-Ming Wang
Right. So that's automotive grade win. And like I said, it's a level 4 car, and it's going to be also a great chip, and it's going to be its first design win that we work with after we announce and with working with Continental. And this design win involves not only our CV3 SoC but also our software IP, the software stack that we and Continental are co-developing. So I think it's combination of software and the SoC win.
If we do -- we are working on other design wins. For example, we talk about -- first of all, we continue to work with Tier 1s like (inaudible) and Bosch on any potential design wins. At the same time, we also mentioned that in China, I think we start seeing that a lot of opportunity in Level 2+ cars, and especially at the Shanghai Auto Show, we introduced CV72AQ. It make us believe that we have plenty of opportunity there, and we are optimistic that we're going to close on design win this year there. And also, the time to revenue is much faster with those potential design win in China.
Operator
(Operator Instructions) And our next question comes from the line of Ross Seymore from Deutsche Bank.
Ross Clark Seymore
Fermi, you mentioned that you haven't seen any signs of end of the inventory digestion that's going on and that growth would really resume when some of the new products kick in. Can you, I guess, dive a little bit deeper into that? And so the 2-part question would be, where do you believe the revenue level would be for your company versus the $60 million to $64 million, if you were shipping to [true] end demand? And to the extent it's dependent upon new products kicking in, when do you believe that occurs?
Feng-Ming Wang
Right.
So first of all, I think that we are not waiting for new products to kick in. We believe the current inventory correction, when they finish, the existing product line will come back supplies will go back to original level. So we are not counting on new product design win to fix this inventory correction problem.
And for your first question in terms of level, last quarter, when we look at just one example of a customer, we think that we are probably like a 25%, 30% below the [reality] level. So I think we still hope, believe that's a level, the differences we're looking at. And hopefully, when the inventory correction finished and all the customer went back to normal, I think that should give you an indication where we think the normal level of revenue is.
Ross Clark Seymore
Got it.
And I guess for my follow-up, on the Automotive side, specifically, it's good to see the design win with Conti turn into products, et cetera. That business has been basically flat sequentially, I think, for 4 quarters now. Three quarter reported, and I think like you're guiding it relatively flat. When is the timing where we should start to see that business picking up? You guys have talked about this investment. I know it's a longer term strategy for the company, but it seems like one that should yield some pretty strong tailwinds of the size company you're currently running at. So just wondered on the timing that we should look for and what the drivers of that growth should be?
Feng-Ming Wang
Well, I definitely think that's it's flat. If you look at -- there are few quarters before the inventory correction, and now you're comparing to the inventory correction period. So I think with the last 2 quarters, definitely been impacted by inventory question in the automotive section. So I also believe that as soon as inventory correction is finished, which also should show some revenue growth from that point of view.
But like you said, the really big auto growth should come with the ADAS market and also Level 2+ market when that go into production.
Operator
(Operator Instructions) And our next question comes from the line Tristan Gerra from Baird.
Tristan Gerra
Just wanted to have a follow-up on the inventory correction and also try to tie this with market share shift. So it's no secret that some Chinese companies have tried to diversify away from U.S. supply, either because there is a push for that from the Chinese government or because you're concerned about potential future sanctions. I know you've very much derisked your surveillance camera exposure to China in the past, but you still have exposure in Automotive. So I wanted to know if there is any signs that perhaps the ramp in China, is that expected at the pace that you thought would happen a year ago? Are you getting any feedback? And also, just to the extent that the inventory correction that you're describing seems to be a little bit more pronounced than some of the other companies where it's been really more smartphone and PC-centric for other companies. So any elaboration around that would be great.
Feng-Ming Wang
Right.
So in terms of the geopolitical situation, I think for Automotive market, it's much less severe than security. Security is really being viewed as the safety of the country, so that's why I think people are trying to avoid U.S. components. But in Automotive, in fact, if you look at the middle and high end auto compnents in the Chinese market today, all of them are U.S. components. So that's because in automotive processing, I think that our solutions among other U.S. components are -- still have better performance efficiency, and we haven't seen a similar impact from Chinese government on mandating the Chinese automotive OEM use exclusively the Chinese component.
So I think that's the 2 things add together. I think I still believe that we won't see a severe downturn on the Chinese Automotive business.
Tristan Gerra
Okay. Great.
And then as my follow-up question, obviously, you've made that software acquisition, you have the sensor fusion chip. So do you think you have all the pieces you need to move into L2+ and L3 application? Are you getting any feedback about customers looking at your company size versus a larger supplier? Or is it purely based on chip performance where obviously you excel? Is there any other consideration that -- and how you -- in terms of getting design wins, and how you would address that? And that question will also tie to the product road map, and whether customers are kind of wondering where will you be 5 years out in terms of product road map?
Feng-Ming Wang
Right.
So I think the -- from a product roadmap point of view, I think for Level 2+, Level 3 car, I think we have all the contents that we need to go after this market. Of course, from a hardware, software point of view, I think we can offer a complete solution. But from a strategy point of view, as we said before, we are not bundling hardware and software together. We are trying to offer a software platform that a customer can pick and choose, and we can help our customer to build their own software stack, and working with Conti is probably the best example.
And in terms of scale, it's always a problem. And try to compete with a bigger company, it's always a disadvantage for us. But I think that's the reason we continue to try to work with the bigger Tier 1s and using -- with their scale and with the expertise, that will help us partially further to address this problem.
Tristan Gerra
Great. And clearly, the Conti and (inaudible) design wins speak to that effect. Very useful.
Operator
(Operator Instructions) And our next question comes from the line of Tore Svanberg from Stifel.
Tore Egil Svanberg
My first question, Fermi, could you just talk a little bit about the main difference between the CV3AD and the CV3AQ, whether it's functionality or ASPs? Or any other color you could share with us?
Feng-Ming Wang
Right. So CV3AD and CV72AQ.
First of all, they are all based on the same architect -- CV3 architecture, all of them using the third-generation AI influence, AI processor. The difference -- the main difference is the CV3AD is designed for the auto-grade chip level ASO and CV72AQ is designed for the system level auto grade. So I think that's the main difference.
So I think the -- for example, CV72AQ definitely is targeted for Chinese market where the people are willing to accept system-level ASO system versus chip levels ASO system. And that's the main difference.
Tore Egil Svanberg
Very good.
And my follow-up question, you announced the design win for the software IP modules. Again, I was just hoping you could elaborate a little bit more on that? And it's surprising to me when I hear software IP margin, right, because I think hardware and software, so like how exactly is the accounting for this particular design?
Feng-Ming Wang
So when we -- I think at ISC, we announced this is a software partner with Conti. So basically, the idea is that we are contributing a portion of software solutions, and we work with Conti's software team to integrate those modules into a complete software stack, leveraging the strength of both sides. For example, Ambarella's strength is on the perception side particularly today, it's video perception and [radar] of perception, but Conti definitely has a lot more system-level solutions and famous for their auto grade system software.
So I think that's where we see that we can leverage both sides of our strength and build a software stack based on leveraging the both side's strength. So I think that's an approach that were different than the customer. And also for OEMs, that if there are anybody who want to do a similar business model, we are open to that too.
Tore Egil Svanberg
And are the sort of revenue accounting for -- I mean is this a marginal sale or IP revenue (inaudible)? Yes.
Feng-Ming Wang
Oh, I see. That's basically software revenue split. We need to decide how to share the software revenue together.
Operator
(Operator Instructions) And our next question comes from the line of Kevin Cassidy from Rosenblatt Securities.
Kevin Edward Cassidy
Maybe a similar question to what Tristan had about automotive. But in the AI server, as you move to the adjacent market, AI server inference, and you said you have about the same performance of NVIDIA A100 but much less power, can you say -- like do you have all the tools you need to move into the server market or into the cloud inference market?
Feng-Ming Wang
Right.
So obviously, the similarity between our current automotive market and the new AI server market is they are really running a new network on our chip. So from tools point of view, that -- we always develop many, many software tools to help our customers to put a neural network onto our chip. But obviously, LLM is a different beast because they are much larger than the typical neural network that we are working with. So definitely, there is optimization cycle we still need to work on.
But the reason we decide and we think we have a great opportunity here is, first of all, we have a working (inaudible) in demo. Two, we have a bunch of expertise and the software tools available that we build for other markets. Three, we just need to fine-tune and optimize the current software for this LLM to achieve the best possible performance that we can get.
So I think from that point of view, the effort for us is well (inaudible), is limited. And also, I think we also believe that in the market, very few people can claim what I just said, that we have a working [silicon], can show real performance and real power consumption, and also demo to the customer. So I think that's our advantage, and I also believe that the extra resource we need to put on is something that we can handle.
Kevin Edward Cassidy
Great.
And what would be the go-to-market strategy? Are you looking for a few maybe flagship customers to lead the way? Or are you going broad with lots of different customers?
Feng-Ming Wang
No, I think we have to be focused. I think we need to identify the sweet spot. I think we should talk about strategy later because we are in the process of talking to customers, but I think we need to focus on where our strength is and also focusing on companies that can leverage our chip and our software immediately.
And so I think that one thing we learned is to work with customer who has really -- they feel the most painful experience with current solution while most likely to work with us, and that's where we're going to focus on.
Operator
(Operator Instructions) And our next question comes from the line of Quinn Bolton from Needham & Company.
Nathaniel Quinn Bolton
I guess Fermi and Brian, maybe just your best guess. I mean we've been working down this inventory now for a few quarters, certainly doesn't sound like it's -- you haven't seen any green shoots yet in terms of the orders. What's your best guess as to how many more quarters do you think it will take to work down this inventory? Do you think we'll be pretty clear by the end of your fiscal year or the end of the calendar year? Or do you think it could take longer?
Brian C. White
Yes. Quinn, this is Brian.
A quarter ago, we said that our guidance with -- for fiscal Q1, which was $62 million at the midpoint, we thought that that would represent the bottom as it related to impact associated with inventory adjustments, and then it would likely not get worse from that point. And we're kind of sitting in the same place we were 90 days ago from the standpoint that we still believe that's the case.
What becomes challenging is forecasting when this thing lifts off again and at what slope. We certainly have visibility to backlog, but that backlog has been shifting, right? We've had reschedules, cancellations that we've had to deal with. So while in normal times, we can look at that backlog and have a lot of confidence as to how revenue might shape up, say, in fiscal Q3 because of the movements that we've seen, our confidence in providing a forecast would be lower in this cycle than kind of a normal time.
So we don't see it getting worse, but the visibility to the second half and just how that recovery plays out, I think it's hard for us to talk to at this point.
Nathaniel Quinn Bolton
I understand you're not getting to the fiscal second half. Historically, you've seen some stronger seasonal trends in the second half. I mean, can you just provide any framework, how we might be thinking about it if the inventory doesn't get any worse than you see normal seasonality that would imply a lift? Obviously, if you start to see the inventory correction, then that would imply a lift. I mean are you sort of suggesting, hey, keep it in the 60% to 64% range until you see the inventory clear? Or do you think you can see some seasonal upticks in the second half?
Brian C. White
Well, normally, we would see some uptick in the fiscal third quarter in particular, and we would hope that we do again. But we're just at a point where we don't have the visibility and the confidence to put a number out there and try to give you some magnitude of directional increase at this point in time.
Nathaniel Quinn Bolton
Got it. Understood.
And then I guess for Fermi, [I guess I was a] little surprised to see your first win with Continental being a Level 4 win. I think the initial partnership you had announced back late last year, I think, was for Level 2+. And so can you just sort of maybe talk about how the Level 4 win came together? I know you had expanded the relationship with CES and so maybe that was on the fast track. But when were you surprised that the Level 4 came before Level 2+ with Continental?
Feng-Ming Wang
Well, I think that the engagement definitely, after we announced this software collaboration between Continental and us, [which will happen at] CES and things go very fast after that. So I think definitely I'm also surprised how fast this developed. And also -- and you thank Conti for putting this whole thing together because the one important thing is that to sell that joined software stack and get the confidence with the customer is important for us, and I think that's a great win for us.
But at the same time, I want to say again, on the Level 2+, I think that with -- we look at 2 things. One is the momentum with Conti and with [bosch] that we're still working on and still there. But more importantly, I really think now with Shanghai Auto Show and with our CV72AQ announcement, and sampling the component and the software to a customer recently, that gives us the confidence that we're going to see CV72AQ Level 2+ design win this year and maybe quick revenue returns. And in China, you know that the design cycle is not full year. Usually, it's less than 2 years. So we are hopeful to see a really quick revenue return from the CV72AQ. And also that we have a road map to continue to address this market.
So I think overall, I think the Level 2+ design win is -- we are continuing to be our focus, and we think we'll continue to deliver what we think that we can do.
Operator
(Operator Instructions) And our next question comes from the line of Brian Ruttenbur from Imperial Capital.
Brian William Ruttenbur
Can you give me, first of all, housekeeping D&A and material (inaudible) amortization?
Brian C. White
Depreciation and amortization, is that the question?
Brian William Ruttenbur
Yes, that's affirmative.
Brian C. White
Yes.
For fiscal Q1, I think it was $5.8 million.
Brian William Ruttenbur
Okay. $5.8 million for the first quarter.
Also, in terms of DSOs, do you anticipate DSOs stabilizing here? So in other words, trying to understand your cash situation probably will just go down? You probably won't have [air staff] event again? Or do you anticipate DSOs continuing to go down?
Brian C. White
No. I mean what we saw in fiscal Q1 was a normalization of the timing of shipments throughout the quarter versus, say, fiscal Q4, where shipments were very back-end loaded. So we had a couple of quarters. Fiscal Q3, Q4 were both very back-end loaded quarters. Q1, normalized DSOs came down. That provided about a $22 million benefit to cash flow in the quarter.
As we move forward, we would expect DSOs to remain at similar levels. Thus, we would not expect to get a large benefit in a future quarter from another tier step down, for example. So as we move into Q2, obviously, at the revenue level and the other metrics that we gave you, that would be a forecast for a non-GAAP loss, and so you'll have lower free cash flow in fiscal Q2 versus Q1. And as we go through the year, cash flow is just going to be highly dependent upon the revenue levels. We've talked about the fact that we just -- we don't have great visibility at this point in time to the second half revenue.
Operator
(Operator Instructions) And our next question comes from the line of Suji Desilva from Roth Capital.
Suji Desilva
Fermi and Brian. Good to see the Continental win.
I don't know if I missed this, but did you say the L4 commercial vehicle customer, what geography that was?
Feng-Ming Wang
We didn't. And we -- our customer doesn't want us to disclose that yet.
Suji Desilva
Okay. Fair enough.
And then I think when we talked about a range of ASPs, 5x to 20x, can you just talk about what drives the delta there? Is that more compute (inaudible) horsepower in the chip? Or is that compute plus software? Any color there would be helpful.
Feng-Ming Wang
I think that comment is purely for silicon. That does not include software. So the difference is really from the low end to the high end. So for example, the lower end -- for the high-end chip, we talk about $400 plus. And the lower end, for example, our 655 chips that we're talking about are probably in the $100 range. So it's really that level of the different performance -- price range that we're talking about.
I also believe that for automotive road map, you need to have a family of chip to address different performance level for Level 4, Level 3, Level 2+, even multiple layers of Level 2+ require different ships. So I think that's where we [were] talking about.
Operator
(Operator Instructions) And our next question comes from the line of David O'Connor from BMP Paribas.
David O'Connor
Great.
Maybe Fermi, just going back to the question on the AI inference opportunity. Can you just give us a bit more detail there on what type of customers are potentially kind of you could engage with on the AI inference side? Is that data [prise] or enterprise? Any particular vertical that you think may be open to you?
And I know it's early days, but as you mentioned, you have a working chip and you need to rework the software, but what kind of time frame do you think you could potentially get to revenue there? Is that kind of 3 to 5 years now? Is it kind of -- is it before that? And anything around kind of content opportunity there would be helpful.
Feng-Ming Wang
Yes. So it's a [hard] question.
So I think like I said, the target market is really where is -- I think our first target is really on the (inaudible) server side, which where you can focus on the enterprise and the people who are running their own neural network. For people running open AI or other very large model, that might not be the best customer at this point for us. But there are plenty of other different software [SVs] and that use -- driving different neural net model either for the own code or they are running the enterprise level. Those are the probably sweet spot for our chip because we know that, just like I said, the scale definitely matters in this market too, and we need to pick the best market we go after. And we are still in the process to figure that out, but I definitely think that's, what I just said, it's along our current thinking.
But I think in terms of the content, I think is obviously even better than our automotive ASPs because the competition out there is selling at a much higher level. And also, we have great advantage on both. On the power consumption side, we are not talking about 5%, 10%, we're talking about significant difference (inaudible) power consumption, therefore -- as well as the total system cost. So I think from that point of view, it will help us to get a healthy content there.
I think there is another question, I forgot.
David O'Connor
Time to revenue.
Feng-Ming Wang
Time to revenue.
So we -- I think we need to get -- but that we're running -- a software (inaudible) running so that a customer can put, and then we can talk about design and then we talk about revenue. So I think if you ask me today, I would say that's a 24-month process totally. That's a wild guess....
David O'Connor
That's quite helpful to frame that.
And maybe just a follow-up on that for Brian. Just on the -- I'm thinking that software development team. Just to clarify, that fits in with the current OpEx envelope? Or would there need to be some kind of step up there to fund (inaudible) that new team?
Feng-Ming Wang
Yes, our plan is to use our current expertise and team to facilitate this activity. The idea is simple because we have -- our internal team is -- has helping many other customers to put their neural network onto CV3. And we understand [ROM] because it's so large and it takes an extra effort, so that -- the best way to do this is fund it and put internal resource on this project.
Obviously, it will take a trade-off, right? We don't plan to add much of the resource into the company, so I think that we need to really focus on the area where we think is important. I think it's very important for us is definitely security camera to provide cash for us, maintaining our CV3 momentum with the current design wins like Bosch and Conti, and then try to secure a CV3 design with OEMs and also try to find a resource to fund this ROM, and everything else is a trade-off that we need to consider.
Operator
(Operator Instructions) And our next question comes from the line of Vivek Arya from Bank of America.
Unidentified Analyst
This is (inaudible) on for Vivek.
Just first on the cash side. Just curious, I know you mentioned talking about increased R&D investments over the next few quarters. Just with your current cash flow, are you comfortable there? Or do you see any need to raise incremental cash in the future?
Brian C. White
No, we don't see any need to raise incremental cash. We have a strong cash balance, no debt, and we've got a history of being positive from a free cash flow perspective. So no need to raise additional cash.
Unidentified Analyst
Great.
And then quickly as a follow up. Just given the current revenue levels, we've seen a relatively substantial profit kind of split between IoT and Auto is now roughly 65%, 35%. Gross margins are still kind of held up relatively okay and above this the long-term range of 59% to 62%. So just kind of curious if you can give us the puts and takes on to the gross margin side and maybe beyond Q2 [personalizing] level?
Brian C. White
Yes. I think we'd stick with that long-term model that we provided previously. In the recent history, we've been delivering higher gross margins than that, and we would expect that that would continue until we get into the impacts of potentially very large automotive opportunities, and that's why that long-term model provides for a slightly lower gross margin if we need to get there to secure those design wins. But for now, in the foreseeable future, we should be at recent gross margin levels and probably a little bit higher once we get through this inventory correction and get back to slightly higher gross margins that we were posting in last fiscal year.
Operator
(Operator Instructions) And our next question comes from the line of Martin Yang from Oppenheimer.
Zhihua Yang
(technical difficulty)
Feng-Ming Wang
I'm sorry, I cannot hear you well.
Zhihua Yang
Can you hear me better now?
Feng-Ming Wang
Yes.
Zhihua Yang
Do you expect most customers either on automotive (technical difficulty)
Louis P. Gerhardy
Jonathan, let's go to the next question, and then we'll give Martin another chance after this question. .
Operator
Okay. Understood. (Operator Instructions)
And our next question comes from the line of Matt Ramsey from TD Cowen.
Joshua Louis Buchalter
This is Josh Buchalter on behalf of Matt.
It is great to see that the CV3 win with Continental for commercial applications. I was wondering if you could provide some initial feedback on how it's going on the consumer passenger vehicle side? I know -- I recognize it's only been a few months since the partnerships have been announced, but you're going against some entrenched and large competitors in the central ADAS domain. And I was wondering how Conti and Bosch are positioning your CV3-based solutions to win in that market?
Feng-Ming Wang
Yes. I think first of all, we have a strong relationship with both Bosch and Conti, and the Conti has even further collaboration because of software relationship, and you can see that software relationship already starting off not only on the Level 4, but also we start getting our engineers in collaboration on that. So I think that activity definitely is very helpful.
And also on the business on [both] side, both sides are working with the Conti and Bosch definitely help us to address the scale problem partially. And also, we believe that working with Conti, we continue to believe that working with Conti and Bosch is the right thing for us to do to get design wins in the U.S. and Europe.
I think that said, that I also believe that our first Level 2+ design will come from China, like I said, because the momentum we see after the Shanghai Auto Show is real and that we not only demo a powerful chip, but also we demo something that very few people can do which is running transformer neural network in a lower-end chip that just nobody out there can demo, like the company you mentioned. None of them, the low-end chip can demo [transformer] efficiently. And the transformer will become such an important neural network and being used as benchmark everywhere, so particularly in China where AI neural network performance is very much appreciated.
So I think that's a momentum where we definitely enjoy it. And I think -- I hope we can get several design wins in China this year.
Joshua Louis Buchalter
Appreciate the color. That's actually a nice segue to my follow-up.
Can you talk about -- I think this is the first time you've mentioned auto being a source of inventory correction despite the results coming in line with your expectations. Did that get any appreciably worse during the quarter? I know we've all heard about weakness in the China EV market. It would be helpful if you could help us understand your exposure there? And if that worsened and drove, I guess, some incremental weakness during the quarter?
Feng-Ming Wang
No. What we said before is we think that our inventory control in auto is much less than the inventory control in IoT. That's what we said. We didn't say Auto was not impacted. We definitely see a few -- several customers got impacted, but not as bad as IoT space.
So from that point of view, I think we still think that -- I still expect that when the inventory correction finished, auto should go back to growth.
Operator
(Operator Instructions) Mr. Yang, your line is now open.
Zhihua Yang
I apologize for my technical issue. Can you hear me now?
Feng-Ming Wang
Yes.
Zhihua Yang
I have a question on CV72. So do you expect your Automotive and IoT customers to -- most of them to opt and adopt the Oculii integration that comes with CV72.
Feng-Ming Wang
That's a good question.
So I think for the IoT, the adoption of radar system will be slower because the core market, the IoT market, is moving towards radar but not as fast as auto. Radar in auto space is basically everywhere. Everybody realizes that they need to have a radar solution in any Level 2+ systems. So I think in terms of adoption, that the radar will go to auto space first.
For CV72AQ, I think that the radar integration will come later because right now, we're focusing on winning the video side. But however, at the second phase of software development, [auto] radar integration will come also.
Operator
This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Fermi Wang for any further remarks.
Feng-Ming Wang
Thank you. Thank you very much for you to join us today. Looking forward to talk to you next quarter. Thank you.
Operator
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
