Q3 2024 Ambarella Inc Earnings Call
Participants
Louis Gerhardy; VP, Corporate Development; Ambarella Inc
Fermi Wang; CEO; Ambarella Inc
Brian White; CFO; Ambarella Inc
Joe Moore; Analyst; Morgan Stanley
Nick Meyers; Analyst; Susquehanna
Kevin Cassidy; Analyst; Rosenblatt Securities
Neil Young; Analyst; Needham & Company
Martin Yang; Analyst; Oppenheimer
Presentation
Operator
Thank you for standing by, and welcome to Ambarella's Third Quarter Fiscal Year 2024 earnings conference call. (Operator Instructions)
I would now like to hand the call over to DT. corporate development, Louis Gerhardy. Please go ahead.
Louis Gerhardy
Thank you, Latif. Good afternoon, everyone, and thank you for joining our third quarter fiscal year 2024 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, Brian White, CFO, and John Young, VP of Finance.
The primary purpose of today's call is to provide you with information regarding the results for our third quarter fiscal year 2020 for 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 based on currently available information and subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect. Our actual results could differ materially from these forward-looking statements.
We're under no obligation to update these statements. These risks, uncertainties and assumptions as well as other information on potential risk factors that could affect our financial results are more fully described in the documents we file with the SEC. Access to our third 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.
The content of today's call, as well as the materials posted on our website or Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now 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?
Fermi Wang
Thank you, Louis, and good afternoon, everyone. On a challenging market, our fiscal Q3 revenue was slightly above the midpoint of our guidance. Our business appears to be in the process of stabilizing as our customers seem to be making progress with their inventory management efforts.
We expect our customer to emerge from the cyclical downturn at different times throughout the next year. And considering all of the dynamics at this time, we continue to anticipate we will return to growth in fiscal year 2025.
We remain determined and focused on our strategic R&D priorities for the introduction of a portfolio of AI SOCs and silver targeting more sophisticated, I influence workloads. Our covenants in the secular growth opportunity for inference, AI processors and software remain high, and our long-term serviceable market opportunity, CAGR estimate has not changed.
Our CV2 family of SOCs is expected to lead us out of a cyclical downturn and represent a larger portion or proportion of our total revenue in fiscal year 2025. As a reminder, this product family established Ambarella in the AI inference market, and this SOCs are expected to approach 60% of our total revenue in fiscal '24 in a single chip.
The CV2 products typically provide photo video processing and AI inference processing for one or more cameras. The average selling price of this product is close to $20 range at below $10 to about $50. In particular, I want to point out that CV5, the flagship, our CV2 family and Abril, our first final meter SOC is forecast to generate meaningful revenue next year with more than 10 customers in production.
Our CV3 platform is expected to generate production revenue from the automotive market in calendar year 2026 and beyond. The CV3 platform includes a family of SOC and software, and we began to sample the CV3 dash [ADASOC]. a year ago.
And today, I'm pleased to announce during Q3, we received the first silicon for CV3 dash 86 by six 85 SOC. The flagship our CV3 portfolio, and we are in the midst of a successful bring up of this extremely sophisticated 10 period plus transistor SOC.
We expect to deliver engineering samples to customers in Q1 next year. And we are on track to the previously announced award from Continental to the first OE and start production in calendar year 2027. CV3 SOCs are based on our third-generation AI inference technology and serve significantly more challenging AI inference workloads such as a partial or complete autonomy in vehicles.
In addition to providing a single SOC, the perception processing for multiple camera inputs. CV3 SOC for the first time enables centralized processing of a roll rate readout data as well as deep low-level fusion with data from other sensing modalities. CV. three family SOC ranging price from $50 to more than $400 per SOC.
There are two additional elements of our is our CV. three platform, both both of which are software software. This includes oxalate, adaptive AI, radar perception software and our complete autonomous driving software stack both optimized to run the CV. three.
Since November '23, we have been providing demo rides to OEMs and tier one space on CV. three SOCs and our autonomous driving stack with centralized radar processing, low-level Fusion and the ocular radar processing software, and we will continue to demo this at the CES in January.
Now I would like to provide an update on our G. and A., I plan to the last quarter was the implementation of a new era of software building blocks on CV3 touch 80. We have now successfully demonstrated inference running Alabama to 13 p. model with the SOC using LPDDR5 memory instead of high-bandwidth memory and the operating at a fraction of the power consumption of incumbent solutions, some of our existing customers are evaluating how they will implement JNI and larger language models at the age of the network.
With our successful demos and additional analysis, we have concluded the powerful and highly efficient AI inference processor embedded in our CB. three SACC.s is well-suited for this age markets. We will have we will have more updates on our our OEM strategy, as I see, is 2024.
Once a year, we update our automotive panel, which is meant to be a reference for our automotive customer engagements over the next six years. We completed a formal update in November, and it increased 4% from $2.3 billion to $2.4 billion.
The pharma is comprised of a one business of about $800 million and a pipeline of about $1.6 billion with our automotive business expected to generate about $80 million in revenue this year. The $2.4 billion six year funnel is an indication of the strong growth we anticipate from the automotive market.
There was significant number of upward and downward revisions in the final calculation this year including forecast changes and the project delays from both Tier ones and OEMs projects won or lost in the pipeline and the addition of new projects. CV3 represents a large portion of the current funnel, even though CV3 revenue is not expected to commence until calendar year 2026.
I will now discuss we presented customer engagement in this quarter.
In automotive, we are continuing to win new designs in China, the world's largest automotive market, the open architecture of CV4 AI SOCs enable leading Chinese Tier ones and a software provider to develop highly differentiated, fully featured solutions.
During the quarter, JC. introduced four new passenger car models incorporating a broad CV22 AQ. automotive SOCs in intelligent eight assistance. This included JC from GEH. and ES9 and IO hyper FT and iron S-Max.
Also high, introduced its V oh nine, meaning there was a DAS system also based on our CV. 22 AQ. and the SACHAIC. introduce Mexico start to our seven main events, including a camera mines assistance, replacing less and rail minerals.
And based on our CV. 22 FS. functional safety SOC in the automotive aftermarket, Asian market leaders think we introduced its QXDDVR. based on our CV. 25 AISOC., and that is 200 Pro to channel TV up is our A12 SOC.
And the European market leader in that space introduced its IQ smart dash cam product line using our CV22 at automotive SOC featuring 4K resolution and of a high base threat detection in enterprise security camera market, a number of leading manufacturers introduce new cameras based on our flagship five nanometer CV5 and CV52.
Motorola introduces new H6A product line featuring a base of video analytics and up to a megapixel resolution based on our CV52 A. processors and Japanese market leader April announced this new X series featuring total my model spending box indoor indoor and outdoor models up to eight megapixel space, our CV trial 52 SOCs.
And a Korean market leader handwash introduced is I see three four for oh four. Multidirectional AutoChem are based on our CV. five SOC. Also during the quarter of Ocado introduced CP. 52, Eapen till or dual camera based on our CV. 22 SOC offering camera operators, dynamic coverage of a wide areas and fishing farming, our pixel resolution and 28 x optical modules and the Germany.
Ids introduced its first Embraer based camera, the XT. Malibu for life imaging ANALYST space on our CV. 22 AISOC. in the smart home segment. This signifies the Philips Lighting spin-off known for its huge 19 products announced is a Philips Hue secret secure cameras based on our CVAISOC.s.
That cameras scale work was a hue lights to control lighting and sound alarms to detect intruders Also during the quarter and will be a leading home automation companies announces a smarter VR camera based on our CV. 28 28 AISOC.s.
In November, Infra three 60 introduced its ACE Pro and ACE action camera based on our CV. five and ICV. 52 52 AISOC.s. The ACE Pro is the first eight K consumer action camera and both cameras include advanced AI features such as new in our base, no structure, 40 mega pixel, computational photography, voice and gesture control and automatic video editing.
Collectively, you can see overall design design win activity is healthy across 13 different representative customers for 17 different projects, nine auto and eight in IoT. Furthermore, 16 of the 17 representative engagements utilize our higher value AAEISOC.s. You can also see we are successfully implementing more sophisticated AI workload in our SOCs. I highlighted was the identification of a four different CV five customer engagements.
Looking forward, we believe our newer products such as CD. five CV. 72 and the CV. three are well positioned to support increasingly sophisticated AI inference workloads and this new product ramp. And as we also capture more software value, we believe we can capture more value of parties out.
Now I would like to give an update on changes to our management team. We previously announced in October 18, 2023. Brian, our CFO, will retire from his role as CFO at the conclusion of the current fiscal year ending January 31, 2024.
I would like to thank his contributions to the company, including helping navigate the challenging inventory correction. The semiconductor industry is currently experiencing as well as continuing to strengthen our financial team and position us for success as we continue our transition into larger markets.
I am also pleased to announce that John Young currently, our VP of Finance will assume the role of CFO on February 1, 2024. John has been with Ambarella for more than six years, serving a variety of finance and accounting roles, and we are confident he will continue to be a valuable contributor as we seek to drive our transformation forward and grow shareholder value.
Now I will hand it over to Brian to discuss the Q3 results and outlook in more detail.
Brian White
Thanks, Fermi. Before I begin, I'd like to thank Fermi and the Board for the opportunity I've had to be part of the special team here at Ambarella. The timing of my upcoming transition is facilitated by the progress we've made in developing the people, processes and tools to support Ambarella at the next levels of growth and profitability. I have complete confidence in John's ability to take over as CFO, and the team he has to support him. I look forward to their ongoing success.
I'll now review the financial highlights for our third fiscal quarter and provide a financial outlook for our fourth quarter ending January 31, 2024. 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 along with acquisition related and restructuring costs adjusted for the impact of taxes
For fiscal Q3 revenue was $50.6 million, slightly above the midpoint of our prior guidance range, down 19% to the prior quarter and down 39% year over year. As expected, the sequential decline in revenue was driven primarily by our IoT end markets.
Non-GAAP gross margin for fiscal Q3 was 62.6%, in line with our prior guidance range. Non-GAAP operating expense was $44.1 million, down $1.9 million from the prior quarter and below our prior guidance range of $46 million to $49 million, driven by continued expense management and the timing of spending between quarters.
We remain on track to our internal product development milestones. Q3 net interest and other income was one point and our non-GAAP tax provision was approximately $650,000. We reported a non-GAAP net loss of $11 million or $0.28 loss per diluted share.
Non-GAAP EPS was $0.11 better than the implied midpoint of our prior guidance range, driven primarily by lower operating expenses.
Now turn to our balance sheet and cash flow. Fiscal Q3 cash and marketable securities increased $5.8 million to $222.3 million. DSO improved from 45 days in the prior quarter to 42 days, while days of inventory improved from 147 to 145 days down $4 million from the prior quarter.
Cash from operations was $7.9 million and capital expenditures for tangible and intangible assets was $2.4 million. Free cash flow defined as cash from operations less CapEx was 11% of revenue for the quarter and 6% on a trailing 12-month basis.
We had three logistics and ODM companies represent 10% or more of our revenue in Q three, WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia came in at 54% of revenue. To Kony and ODM who manufactures for multiple IoT customers was 12% of revenue. And Accredo, a logistics partner who primarily supplies multiple automotive customers in Japan, it was also 12% of revenue.
Now discuss the outlook for the fourth quarter of fiscal year 2020. For the near term, revenue outlook appears to be stabilizing. While customers continue to manage inventory levels in some pockets of end demand, softness persist, ordering patterns and customer feedback suggests that our revenue is leveling out and likely to resume growth in our next fiscal year.
For fiscal Q4, we estimate that our total revenue will be in the range of $50 million to $53 million, with IoT up slightly and automotive about flat at this time, we anticipate the sequential revenue growth will continue in our fiscal Q1 in the low to mid single digit percentage range.
We expect fiscal Q4 non-GAAP gross margin to be in the range of 62% to 63%. We expect non-GAAP OpEx in the fourth quarter to be in the range of $45 million to $48 million, with the increase compared to Q3, driven by CES. marketing activities, R&D tied to new product development and less favorable foreign exchange impact.
We estimate net interest income to be approximately $1.5 million and our non-GAAP tax expense to be approximately 600,000 and our diluted share count to be approximately 40.4 million shares. Ambarella will be participating in a fireside chat and hosting one-on-one group meetings on December 5 and 6 at NASDAQ and Morgan Stanley's wondering conference Triaz.
We also will be participating in Omeros CES. One-on-One Conference in Las Vegas on Monday, January 8, we expect to host more than 20 investor groups during our CES 2024 exhibition from January 8 to January 12. Please contact sell-side analysts to make reservations.
We will also present and host one-on-one and group meetings at the Needham Conference on January 17 in New York. Please contact us for more details. Thank youfor 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) Joe Moore of Morgan Stanley.
Joe Moore
Great. Thank you.
I wonder if you could talk about the adjustments, Fermi, that you discussed to the funnel. You had said that you saw some business kind of coming out because you had a number of businesses there that were probability weighted. What's happening to that when that happens? Is that because the programs are just moving more slowly? Is it competitive? Is it supply chain? Can you just kind of give us an indication of why those therapy does adjust?
Fermi Wang
Yes. Thank you, Joe. I think I mean, you addressed that question in credits in a Square will talk about four different factors. The first factor is that forecast changed your phone Tier one OES., for example, for some of the project that we have won and the forecast of those project would reduce particularly in the last several months, we start seeing that trend. So that's the first factor.
The second factor is we start seeing project delays, for example, for some of the project that we have won the production date is pushing out and also for some projects that were in our secure face the decision of those of the final decision of the award is also kind of push out.
So I think that's a second factor. But also there are sort of the third factor is really that we continue to have a new project or RFQ that we're bidding on. And we have different multiplier or like you said, different of a covenant level for different projects and that's new new party Elpida.
The last factor is really the project that we won and lost it yet. So if you ask me, I think the first and second factor really negatively impact our final number by the third and fourth, if the net effect in further force probably help us to continue to add numbers into the pipe the funnel. So that's the reason we have a minor increase on the final numbers.
Joe Moore
Okay, that's helpful. Thank you.
And have yourself an awful lot of growth over multiple years in five years. Is that how does that profile look versus a year ago. I know you've talked about a lot of success in China. Do you see more of a of a China skew to your numbers in the next as you start to ramp the advanced TV features, right.
Fermi Wang
So I think that first of all on this funnel with First of all on the one portion is the first time we start seeing CV three contribution there in the pipeline. Definitely CVs three continue to getting higher and higher percentage of a formal number on one thing, I can say that in addition to the first CV. three design win we announced last week two times ago was County.
We add extra on a it non Chinese commercial vehicle design wins. We see v. three and in this pipeline. So we definitely continue to make progress on that. And the trigger for those design wins is after we demo the working six, 85 CV. three batch 66, 85 chip and also thermal this a software stack.
We talk about the our a software stack that can integrate all of pharma Fusion to the radar as well as all the past planning. So we are we successful demo dosing to OENTL. Was those two factors help us to secure? Are the design wins there? Just to just talk about.
Operator
Thank you.
Tore Svanberg, Stifel.
Yes, good afternoon. This is Jeremy calling for Tori. Wondering, I guess first, just wanted to follow up a little bit more on the on the adjustments made to the funnel. And can you talk about how maybe from a broad level, how maybe what did did the overall market in terms of maybe start impacted and how much that might have impacted there is the slight increase in the funnel? And then and then a follow-up after that.
Fermi Wang
I think the global market definitely impacted two things. One is the forecast over the run rate of the party already one, but also I think you can see you can read about the article talking about for the seat for the Level two plus or Level three card, a lot of the new project, the decision to push out because people are having different thoughts about their software stack in of the what's the function features and particularly how to compete with China with their aggressive product pulling. So I think all of those contribute to the first and second factor I just mentioned.
Great. And then moving to the AI inference accelerator business on that that you've successfully demonstrated on it, is that are we right to read into it that it sounds like this is something that you're moving on Ford with.
And can you talk about maybe your competitive positioning relative to whether it's the current incumbents and the number of private companies that are in the space and maybe other large competitors that might start to move in to, I guess, talk a little bit about.
Fermi Wang
Yes, I think you are referring to the LOM. So I think, you know, first of all, this time a little bit of different than the last unless I can talk about global a lot of different application because we haven't spent enough time on the marketing side this time we kind of zoom in to say, while we understand our strengths is HRHH. devices, particularly because we were in that we are in the market and we know a lot of customers there.
And we've also done enough demos and also talking to customer to understand our strengths against our competitor, both for larger companies of ours, also start-up companies and ARM. And our strength is first of all, we have a working silicon that we can give them or at a very good performance, very low power consumption. I think that's it key.
The second thing is for us is not just a silicon. In fact, we also have bundled software. It will go into sure, given the environment that we are in, should we already introduced our customer our interest, but we'll probably introduce to the CSR. about how we are using a software environment bundle with our current solutions that enable our age device or eight servers quickly moving to a model to help age age of cases, so I think that's where we're focusing on right now.
And it's not that we don't book we don't want to focus on bigger cloud or hybrid cloud, a much bigger application is really that I think for with our current silicon and our current resources, we would like to focus on areas that we know that we were familiar with, and we want to know that we can win. So I think that's where we are sitting with the complex, of course, that we are not we definitely need to build a roadmap.
But however, like we said last time with our current commitment to our is using our current engineering resource equities enough for to do sampling system and developing the application developing software for each applications. Those are most application use incurring current resources. How do we decide to extend our roadmap or doing other applications? We publish need to talk about or define our engineering resource which haven't come into that yet.
Operator
Thank you.
Christopher Rolland, Susquehanna.
Nick Meyers
Because this is Nick Meyers on for Chris. So you guys talked to the first quarter potentially growing low to mid-single digits, maybe a little bit slower than we were thinking. So I was curious if it is this more in demand driven or inventory, how should we think about inventory dynamics into the April quarter by auto or IoT with an enterprise or consumer two within there? And then how are you thinking about the shape in the first quarter?
Brian White
Well, I think the data points that we're looking at in support of the growth we talked about for fiscal Q1 is based on number one, looking at our bookings and backlog trends and which have absolutely improved. So our book-to-bill was much better in Q3 than what we've been experiencing for a number of quarters. And as we look at the backlog build into Q1, and it's tracking well above the prior quarter.
Can it's supporting the growth range that we talked about. And so when we combine the data bookings and billings. And we we compare that to the feedback that we're getting from our customers as well as the on the requests that we're getting relative to push-outs versus pull and of shipments, which have become much more balanced than they have been in the past.
That gives us the confidence to talk about the beginning of growth in fiscal Q1 and then growth for the full fiscal '25. But certainly we have a ways to go and so that that recovery is certainly helped by the turnaround of the inventory situation.
On end markets also seem relatively healthy and in support of that growth. But I would say the primary driver at this point is getting to the bottom of that inventory cycle and getting through that excess material our customers.
Nick Meyers
Yes. Thanks, Brian. And then I also wanted a question on video processors. Based off of you talking about CB2, about 60% of revenue, there's clearly a big drop-off in video processing revenue this year and of CV. two is going to continue increasing.
What's your outlook here, particularly for video processing? Are you still investing a lot in this business or getting new wins here? And how should we just think about this particular then I hear you right.
Fermi Wang
So first of all, I want to point out, although we haven't read about other video processing only chips, but video processing technology continue to be a very important part of our offering in our AI chip. So on CV2 Overseas. Omniture has a big portion of the airport, as I'm sorry, the image processing or video processing technology in there. So I just want to clarify that.
So on the this year, our CV total revenue approaching 60%, obviously also, as I said, and also if you look at the design win momentum we have majority of that is CV so I think the present to continue go could go to favor of CV.
But however, I think the decline of a video processor will slow down because that on we have a big jump, big reduction in the last two years, but we still have a long tails of a video processor chip. They're selling to different market, including the enterprise enterprises, security cameras as well as automotive. So I think that you should expect much less reduction on the on video processor was a very long tail.
Operator
Kevin Cassidy, Rosenblatt Securities.
Kevin Cassidy
Yes, thanks for taking my question. This quarter also, the Japanese autos distributor came up as a 12% customer. The first time in years or more. Is there anything to add anything there just because the overall revenue is down or is there some new winning designs happening in Japanese automakers?
Fermi Wang
Well, I think that is really that if you compare to previous quarter out, other business dropped quickly and the Japan automotive, usually they just take at a fixed rate and is sold into change in the forecast. So is not particularly anything happened in Japan, but it's really that outside Japan, the drop is significant.
Kevin Cassidy
Okay. And that's just as you're going forward with the consumer. And even as we are in consumer surveillance cameras and with large language models being used, is there a time when the input for the consumer will be as just their voice. They can program the device. That's something you're working for.
Fermi Wang
I feel we are working now. We just have that language. We're walking a multi multi modality. I think fact we think that the era and for us for our customers' application, most important thing is processing packs that also speech as well as image all of them together that as the biggest advantage to our customer and also that that's probably one unique function at a weekend, we can really differentiate against other areas of suppliers.
Operator
Thank you.
Quinn Bolton, Needham & Company.
Neil Young
Hey Guys, this is actually Neil Young on for Quinn.
I've got one. Thanks for taking my question on the call. I wanted to ask so it's been about a year since you announced the partnership as far as Chano and Bosch, what do you believe we'll start to hear about design wins from these partnerships.
Fermi Wang
While we only announce a design win with County with equivalent. I mentioned the OE and then but I think we'll see that and you should expect that I will say that our relationship with accounting continue to improve and we are bidding on projects with OES. together on.
In fact, that arm we cannot announce OEM design win with our customers approval but one thing I can say is that activity with County is is heavy. And also, we continue to believe that the engagement between County and us are getting tighter and tighter both on the hardware design as well as the software.
Neil Young
Okay, great. Thanks. And just another follow-up. So there's been some press reports suggesting that Continental is considering divesting its automotive assets including its autonomous mobility business. How would a divesture of this business affect your guys U.S. partnership?
Brian White
But yes, we heard similar on a study reports. I think one thing I can say is based on our conversations currently, we continue to believe this a division that we're working with is continue to be a strategically important for both Embraer and also County.
And like I said, and with the close development that we continue to have, we didn't see any sign of slow slowdown on the county side. So we continue to believe this relationship is important and also the product and working on continue to be important for both Amber and Marella and the country.
(Operator Instructions)
Martin Yang, Oppenheimer.
Martin Yang
And I thank you for taking my question on just one question. Can you maybe comment on the program progress, customer design engagements regarding your CV72 products in automotive whole quarter?
Fermi Wang
Yes, CV72 is a automotive product is designed for Chinese market because it's not a so that only Chinese always only apply applicable to the Chinese market. And also last time we talk about we have multiple tier one design wins.
And also at a time last time we talk about multiport, all of the Tier ones are working on building a demo system to show two o. years. In fact, one of our Tier one, just yesterday demo, a live broadcast live demo, driving a copies on CV72 ECU founder arm, Shanghai Airport to downtown Shanghai of autonomous driving.
So I think that we continue to make huge progress and we are ready to if awarded start that them wanting to OES. and on and also, we, like I said before, I think CV72 position in a very favorable price performance for the on a middle end of Level two plus solution in China.
And we continue to believe that we have a competitive solution for that particular market, and we're working closely with Tier one to talk to OEMs, hopefully that we can announce some of these.
Martin Yang
Well, thank you for your quick follow up on the signatories to activity. Can you maybe remind us on the expected timeframe of design wins and shipments.
Fermi Wang
As the older project we're bidding on is production the end of 2025 and the revenue coming from 2026. So that design, we have to be maybe a first half of next year and spending 18-month development cycle to get it done.
Martin Yang
Thank you.
Operator
Thank you. I would now like to turn the conference back to Dr. Fermi Wang for closing remark closing.
Fermi Wang
Thank you, and thank you, everybody, for joining us today, and I'm looking forward to talk to you soon.
Operator
And thank you, that this concludes today's conference call, and thank you for participating. You may now.
