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Ambarella (AMBA) Q2 2022 Earnings Call Transcript | The Motley Fool

Ambarella (NASDAQ:AMBA)
Q2 2022 Earnings Call
Aug 31, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to Ambarella second-quarter fiscal year 2022, earnings conference call. [Operator instructions]. As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program Louis Gerhardy, corporate development and investor relations.

Please go ahead, sir.

Louis GerhardyCorporate Development and Investor Relations

Thank you, Jonathan. And good afternoon. Thank you for joining our second-quarter fiscal year 2022 financial results conference call for the three months ending July 31, 2021. With me, today on the call is 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 year 2022. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions among other things. These statements are subject to risks, uncertainties, and assumptions.

Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We’re under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our business operations and financial results, are more fully described in the documents we filed with the SEC, including the annual report on Form 10-K, filed on March 31st, 2021 for the fiscal year 2021 and in January 31st, 2021, in the Form 10-Q filed on June 8th, 2021 for the first quarter of the fiscal year 2022. Access to our second-quarter fiscal 2022 results press release, historical results, SEC filings, and the transcript of our prepared remarks, and the replay of today’s call can be found on the investor relations portion of our website.

Fermi will now offer a business update and then we will review the financial results, and then Fermi, Casey, and I will be available for your questions. With that, I will turn it over to Dr. Fermi Wang.

Fermi WangPresident and Chief Executive Officer

Thank you, Louis, and good afternoon. Thank you for joining us today. We’re pleased to report significant market and the financial momentum as our AIoT transformation continues to play out. Q3 revenue was above the high-end of our guidance, up 13% sequentially, and 58% on a year-over-year basis.

Our Q3 outlook is also well above the consensus estimate that by computer region CV used product cycles in the existing markets, as well as our penetration into entirely new markets. CV continues to drive our blended ASP higher. and the positive operating leverage inherent in our model was apparent with a non-GAAP operating margin increasing 450 basis points, sequentially reaching 16.9%. Cyclical forces continue to constrain our performance wafer supply consensus ousting taxes wafer fab following the taxes freeze earlier this year, reached a low point in Q2, while we are seeing a recovery from this patch fab and expect the recovery to continue in the second half.

We do not anticipate a material improvement in the industrywide supply chain challenges. CV momentum continues to rapidly build. Since introducing our CV SoC family to the market, we have had more than 240 unique customers purchase engineering parts, and or development systems, with almost 60 unique customers achieving production status in the first half of this year. Even at this early stage of our transformation, we are realizing a revenue mix that is of a higher quality and with more diversity — diversification.

A majority of our revenues are now driven by enterprise capex, public infrastructure spending, and consumer durable growth investment. For example, our Automotive and IoT Camera business, mostly security camera [Inaudible], both decisively achieved record quarterly revenue levels, while our non-focused other revenue, mostly discretionary consumer leisure goods, representing 10% of revenue or a rec LO. Now, I will now update you on target market progress. In June, we announced the expansion of the AI region SoC portfolio with the introduction of our new CV5S and the CV52S SoCs.

Based on the CV4 architecture, the five-nanometer SoC target IoT security of locations with [Inaudible] OS and a new SDK including multi-imager and small form factors. This new SoC camera supports applications requiring 360-degree coverage, lower interviewing, advanced coding, and AI performance to more accurately identifying — to identify individuals or updates in the scene. During the quarter, eight weeks after receiving the first silicon, we shipped our first CV5S development systems and software developers kit to customers. This is a significant accomplishment on such an advanced note.

And I’m thankful for the strong execution by our hardware and software teams that made this happen. Also, in June in advance of the annual IAC West Trade Show in Las Vegas, we held a virtual event that was attended by over 50 leading customers worldwide. The event featured over 20 demonstrations, including a first look at the new CV5S in the multi-imaging system, and our leader’s access control reference design based on our continuing partnership with momentum and on the semiconductor. We have already secured multiple design wins for the new CV5S, as well as new customers in the access control market.

Motorola Solution has become one of our largest customers, and we are pleased to see their announcement. They intended to acquire open pass, a technology leader in an access control system, further validating the significant opportunity in this growing market segment. Motorola to video security portfolio now includes IP camera makers for digital, Telkom, and the integral vision, as well as [Inaudible] of UK-based police body-worn camera supply, and the WatchGuard, a supplier of police vehicle cameras. All of these companies are Ambarella customers.

Ambarella’s CV4 AI Vision SoC continue to gain share in a professional IoT security camera market, with most major manufacturers have chosen our CV SoCs. During the quarter, European giant Bosch introduced its first three families of cameras based on Ambarella’s CV SoCs. Bosch introduced the 5000i based on our CV22 and the 7000i and 8000i based on our CV2 SoCs. By winning the three major platforms at Bosch, the scalability of our CV SoC portfolio is demonstrated.

In addition to our SoC share gains in professional security outside of China, last quarter, we spoke about opportunity to gain market share within China, and we announced two new customers today. We’re announcing two additional customers, Milesight and the [Inaudible]. First, Milesight introduced its CV25-based AI pro-bullet network camera family available in two, five, and eight megapixel version and including advanced analytics, people counting face detection in ultra-low light operations. Second, [Inaudible] introduced a noncontact facial recognition temperature major system based on our CV28M SoC.

The tablet device can recognize people with max arm and use few sensors. Also, during the quarter, Canada-based march networks introduced its new VA series IP camera based on our CVflow processors. Our chip sets make them fully compliant with the U.S. National Defense Authorization Act, or NDAA, and power the cameras advance video analytics.

Now turning to the automotive market. We continue to make progress in the fleet management market due to the efficiency of our CV SoC, as well as the advantage of our open platform which allow OEMs and Tier 1s to create differentiated multifunctional products. Last quarter, we announced four examples from the Shanghai Auto Show. And this quarter, we are pleased to announce three additional wins; KeepTruckin, Yandex and Solera.

Earlier in August, fleet management leader KeepTruckin announcing it was partnering with Ambarella to deliver its new AI Dashcam for Front ADAS, driver monitoring, and telematics. The AI Dashcam uses a single CV22 SoC to simultaneously provide AI and image processing for its dual camera system, which integrate one camera for the Front ADAS with instant incident recording and the second RGB-IR camera for the driver monitoring system with recording. This morning, we announced Yandex, a major Internet service and product company, introduces a SignalQ2 driver monitoring camera for its ride-hailing partners, powered by Ambarella’s CV25 SoC. The Yandex DMS camera will be deployed across Yandex Taxi partner fleet, which consists of over 700,000 vehicles starting in 2022 and is also being offered to other delivery fleet companies.

Also, during the quarter, Solera’s Omnitracs division announced its next-generation fleet solution using SmartDrive technology with our CV25 SoC. This combo systems simultaneously process data from two sensors, monochrome and RGB-IR to enable DMS and the recording functionality. In the passenger vehicle OEM market, Chinese car maker Dongfeng introduced its new EVO max car featuring a driver monitoring camera-based Ambarella CV25AQ processor. With this market progress, you can see we are winning because of our efficiency, both in terms of performance per watt and performance per dollar.

And our open platform and a flexible architecture, which allow our customers to capture software value and introduce differentiated multi-featured combination systems. In conclusion, we are leading a significant shift in how camera are used and providing the corresponding step function increase in processing performance. In addition to human viewing, all through a lens of a camera, data can be collected and then processing our SoC, enabling new level of safety, security, and efficiency through partial or complete level of automation across multiple industries. This processing will provide is occurring in purpose-built IoT endpoints, not in servers, where it’s fundamentally different and more expensive SoC architecture are used.

The global economic picture is strong. New stimulus programs are in the works, like infrastructure build in the U.S. Supply side cyclical dynamics are extended. But to be clear, the inflection you are seeing with Ambarella, what gets us most excited is how we are driving AI into numerous IoT endpoint verticals and how we are demonstrating we can capitalize on this tremendous growth opportunity to drive shareholder returns.

The demand for deep learning in AIoT endpoint is a new and a critical phase of the digital transformation that is just beginning to impact to so many verticals. Our confidence in our long-term prospects is high. We expect to achieve record revenue in fiscal year ’22, ahead of the $360 million revenue in fiscal year in [Inaudible] and we remain comfortable that CV revenue will be at least 25% of total revenue this year. Before we get into the financials, I would like to — I would like you to mark your calendars for our Capital Market Days, we plan to host at our Las Vegas CES location on Tuesday afternoon, January 4th.

This event will allow us to more thoroughly discuss the inflection we are seeing and provide a corporate strategy update. With that, I’ll ask Louis to review the Q2 financials and provide Q3 outlook.

Louis GerhardyCorporate Development and Investor Relations

Thank you, Fermi. I will now review the financial highlights for the second quarter of fiscal ’22, ending July 31st, and provide a financial outlook for our third quarter of fiscal ’22 ending October 31. 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 adjusted for the impact of taxes.

In Q2, the industrywide supply chain challenges remain significant. And in this period, we believe we experienced the worst of the wafer shortfall from the Texas freeze as previously forecasted. However, our operations team and manufacturing partners worked diligently to support the strong and broad-based demand, and they successfully minimized disruptions for our customers. Our revenue of 79.3 million was 5% above the high end of our guidance, representing a sequential increase of 13% from Q1 and a 58% increase from the year-ago quarter.

Automotive revenue increased about 10% sequentially, security grew more than 20% sequentially, and other product revenue was down more than 20% sequentially. Non-GAAP gross margin for Q2 was 62.8%, slightly below the 62.9% in the preceding quarter. We incurred some higher cost to manage the supply chain challenges, but the pricing environment and the mix remained relatively stable, sustaining gross margin above the high end of our long-term model. Non-GAAP operating expense for the second quarter was 36.4, compared to 35.4 million for the previous quarter.

Opex was slightly below the midpoint of our guidance as G&A was lower than forecasted. We continue to demonstrate strong positive operating leverage with operating margin on a non-GAAP basis of 450 basis points sequentially, reaching 16.9%, up from 2.2% a year ago. Other income of $218,000 reflects the low-interest rate environment. The non-GAAP net income for Q2 was 13.1 million or $0.35 per diluted share compared with non-GAAP net income of 8.9 million or $0.23 per share in the first quarter.

In the second quarter, the non-GAAP earnings per share were based on 38 million diluted shares. Total headcount at the end of the second quarter was 827. That’s up 9% from a year ago, with about 81% of employees dedicated to engineering. Approximately 68% of our total headcount is located in Asia.

Total accounts receivable at the end of Q2 were 38.3 or 44 days of sales outstanding versus 34.5 million or 44 DSOs at the end of the prior quarter. Net inventory at the end of the second quarter was 42.1 million, compared to 33.1 million at the end of the previous quarter. Days of inventory increased to 115 in Q2 from 102 the prior quarter. On a sequential basis, work in progress was up sequentially to support the rising demand while the finished goods inventory was down and at two-year lows.

Our Q2 operating cash flow was a positive 14.4 million or about 18% of revenue. This compares with an outflow of 4.5 million in the prior quarter. Cash and marketable securities were 449.2 million, up from 435.5 million at the end of the first quarter. We had two 10%-plus customers in Q2.

WT Microelectronics, a fulfillment partner in Taiwan, who ships to multiple customers in Asia, they represented 62% of revenue. In Chicony, the Taiwanese ODM who manufactures for multiple customers, was 16% of revenue in the quarter. Dahua and Hikvision combined represented a high single-digit proportion of our revenue. I will now discuss the outlook for our third quarter of fiscal ’22.

During the second half of the year, we expect output from Samsung’s Austin, Texas wafer fab to continue to recover from the February freeze. Nevertheless, we continue to experience a variety of industrywide supply chain challenges. While extended lead times for wafers and substrates persist, our outlook is also constrained by shortages of other companies’ components on our customers’ bill of material. Based on these factors and our best judgment at the current time, we expect total revenue for the third quarter ending October 31, 2021, to be in the range of 88 to 92 million revenue from automotive and IoT cameras, primarily security today is expected to increase about 10% sequentially.

Other revenue off a low base is expected to have a seasonally strong quarter, but still down on a year-over-year basis. We estimate Q3 non-GAAP gross margin to be between 61 and 63%, compared to 62.8% in the second quarter. While we’re seeing some higher cost to manage the supply chain, the healthy mix and relatively stable pricing environment may cause our gross margins in the short term to temporarily exceed the high end of our long-term model of 59 to 62%. We expect non-GAAP opex in the third quarter to be between 36 and 37.5 million.

The Q3 non-GAAP tax rate should be modeled in the 3 to 6% range. And we estimate our diluted share count for Q3 to be approximately 38.3 million shares. Ambarella will be participating in the Jefferies one-on-one conference tomorrow, September 1st, Credit Suisse’s Asian Technology conference on September 7, Deutsche Bank and Colliers conferences, both on September 9, Evercore Autotech and AI Forum on September 21, and Berenberg CEO conference in New York on November 9. And as Fermi noted, please mark your calendar for our Capital Markets Day on January 4 at our CES location in Las Vegas.

Thank you for joining the call today. And with that, Jonathan, I’ll turn it back to you for the Q&A session with Fermi and Casey.

Questions & Answers:

Operator

Certainly. [Operator instructions]. Our first question comes from the line of Gary Mobley from Wells Fargo Securities. Your questions, please.

Gary MobleyWells Fargo Securities — Analyst

Let me extend my congratulations on strong results, but as well the fruition of the transformation of the company, good execution. And my question relates to the progression of your quarterly revenue. You just grew revenue $9 million sequentially. You’re expecting to grow $11 million in the current quarter sequentially.

And so I have no doubt that the demand is strong, but are those sequential increases largely a function of a strong demand backdrop, a strong backlog and as well, better access to foundry capacity. And related to that, could you give us some sort of metric as it relates to unfilled backlog as at the end of the July quarter compared to the prior quarter?

Fermi WangPresident and Chief Executive Officer

Right. So first of all, our continued revenue increase is due to the strong demand of our CV portfolio. If you look at our revenue growth this year over last year, I think CV is a majority of that growth. Last year, we did $25 million CV revenue.

And this year, we do 25% total revenue from CV. And you can calculate the difference. And that basically come from two different reasons. One is we talk about this, our CV ASP is twice higher than the video processor.

So even just replacing the previous product, we are getting more revenue from that. But more importantly, I think CV take us into two things. One is new product cycles in existing markets. For example, our security camera.

A lot of the old video-only product is replaced by AI-based video cameras. And also, we are reaching into new markets. We talk about access control, we talk about in automotive, we have DMS, we have all kind of multifunction device that we’re penetrating into. So this combination of those other things on the CV side basically provide the majority of our growth.

On the supply side, Texas foundry was a problem in Q1 and Q2, but we will recover from the second half, like Louis said, and that will become less impact. And we still be impacted by other component shortage for our — because when our customers to build their products, it’s not just our supplies, everybody’s else supplies matters. So I think that’s going to be continued limiting factor. But however, I don’t see that become Q3, Q4 is more significant in Q2 impact from this point of view.

Go ahead. Go ahead.

Gary MobleyWells Fargo Securities — Analyst

I was just going to say my follow-up is related. And so if you have more supply coming on against the backdrop of strong demand. And I know your other business might be seasonally soft in the fourth quarter. All those things considered, do you think you can grow your fourth-quarter revenue sequentially?

Fermi WangPresident and Chief Executive Officer

We haven’t provided guidance yet. But however, like you said, our consumer — our traditional consumer business has a seasonality in there, the play industry we can consider that. But I do believe that our CV revenue continue to be strong, not only just for this year, but will continue to be strong in the near future because like I said, we see a huge amount of design win activity. We talked about 200-plus customers purchasing our CV silica wafer design of silicons and also only 60 of them are in production right now.

So you see there’s a big momentum on the CV side. So I would prefer to look at it as a long-term business, there’s going to continue to be a strength on the CV side for us.

Gary MobleyWells Fargo Securities — Analyst

Understood. Thank you.

Operator

Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please.

Joe MooreMorgan Stanley — Analyst

Great. Thank you. My question is on driver monitoring. You guys had a number of key wins there from KeepTruckin and Yandex and a couple of others during the quarter.

And that seems like something that can start to be in production vehicles fairly soon with you guys having a good presence. Can you kind of talk about where we are with OEM penetration of driver monitoring and when you might — when that might become a more material part of your revenue?

Fermi WangPresident and Chief Executive Officer

Right. So I think you’re talking about the fleet management that’s what we called it. And most of it is commercial vehicles. And first of all, I think that, that market is sizable.

I think the existing market is the vehicle is roughly 50 million, 60 million units and grow at 10% a year. And we believe that the old design win we just mentioned this time and in the previous time, most — majority of them will be in production this year and ramping up next year. So you should start seeing revenue this year and hopefully that we can see a lot more next year.

Joe MooreMorgan Stanley — Analyst

And in terms of passenger vehicles, I mean, it’s part of the European NCAP standards already. I mean it seems like there should be some adoption in luxury passenger vehicles relatively soon.

Fermi WangPresident and Chief Executive Officer

Well, first of all, we talk a lot about our Chinese design wins already. But for the Europe and U.S., we are not allowed to talk about, but I definitely think that’s a focus area that we continue to work hard to make sure that we make progress there.

Joe MooreMorgan Stanley — Analyst

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Matt Ramsay from Cowen. Your question, please.

Matt RamsayCowen and Company — Analyst

My first question, for me, it’s pretty obvious from the strong results and the momentum that you guys are seeing that one of the thesis points around HiSilicon being challenged in terms of their own production as one of your main competitors that you guys are picking up more and more design wins from — you announced, I think, a couple of new security customers from China on the call today, talked about the momentum with Motorola and all of their subsidiaries and a lot of folks that are shipping into international camera markets. And I guess my question, the first question is do you concur that, that’s actually playing out. And I guess, what inning of that sea change and you’re taking some of those wins are we in? And I guess second part of the question is, have you seen new competition starting to pop up? And what does the competitive landscape look like for CV now with the industry digesting that HiSilicon might be permanently impaired? Thanks.

Fermi WangPresident and Chief Executive Officer

Right. First of all, your observation on the HiSilicon and our momentum in China — outside China is correct. And even in the past, when we compete with HiSilicon, Hikvision use our silicon for export business mainly, right? So it’s not a surprise for us that we continue to have strong holding on the outside China. But inside China, we’ll start picking up some markets like we talk about that, while we talk about now 4 new Chinese duty camera customer using our solution for CVs.

So I think the momentum is right. In terms of competition, I can tell you that there are probably — I don’t want to exaggerate maybe 20, 30 different company start-up or existing company trying to compete and try to grab a share that HiSilicon left. But however, I would say, majority of them are fighting at the very low end, the $2, $3 ASP type of solution. And on the CV side, all of them are focusing on low end and I haven’t seen anybody build a platform that we do, right? When we talk about our CVflow SoCs, we talk about six different silicon cover a very wide range of performance, a wide range of ASPs.

We see strong competition on the low-end side. We see very little everywhere else. So I think that it continues to be our strategy that we want to leverage our platform and to cover the most important customers to convince them to use us from the bottom to the top. And it’s also our strategy to continue to maintain our leadership on the middle and high end moving forward.

Matt RamsayCowen and Company — Analyst

Got it. No, that’s really helpful color for me. As my follow-up question, it’s pretty remarkable to see operating margin in the guidance for your October quarter above 20%. I think it was down about 5% in the October quarter a year ago.

And obviously, there were some COVID headwinds back then. But I guess my question is, how do you feel like the company — I guess the question for all three of you guys is how do you feel like the company is staffed and funded right now, both from a sales marketing bizdev point of view and obviously, from an R&D point of view as it sounds like the company continues to expand and attack some of these markets. And what kind of margins are we talking about as we continue to get leverage? Thank you.

Fermi WangPresident and Chief Executive Officer

Right. So first of all, I think you already noticed that in the last 12 months, we have to start ramping up our business development staff, particularly in U.S. and Europe. And we hired a brand new team in Europe.

We hired a new automotive sales team in U.S., and we continue to size up our Asian sales team, particularly for automotive business. So from a business development point of view, we have been hiring for the last 12 months. On the R&D side, if you look at the headcount, we go from 700 plus last year to 800 plus this year, to give you a good indication that we’re also ramping up our engineering resource, which already is part of our R&D expenses in Q1, Q2 and continue to be in the future. Our strategy is we’re going to continue to invest more in terms of CV technology, as well as more development cycles into our next-generation phase product.

And also, at the same time, continue to develop the advanced nodes with our five nanometer. I believe there were multiple five-nanometer chip were coming up on our road map. And we need to start with — we need to go to — we need to go to four and three nanometers, and that’s all really investment we need to do. But by saying that, I also want to emphasize that I think that we have — we continue to have leverage on our operating margin is a very important factor when we look at how we’re managing our business.

So I think that we are in a position that we can continue to increase and improve our engineering and the business development investment while continue to see leverage on the operating margin point of view.

Matt RamsayCowen and Company — Analyst

Thank you for all. That’s it for me. Congratulations on the progress, guys.

Fermi WangPresident and Chief Executive Officer

Thank you.

Louis GerhardyCorporate Development and Investor Relations

Appreciate it.

Operator

Our next question comes from the line of Tore Svanberg from Stifel. Your question, please.

Tore SvanbergStifel Financial Corp. — Analyst

Congratulations on the strong results. I just had a question on the guidance. So just so I make sure I understand this correctly. So basically 90 million at the midpoint, that assumes all the sort of industrywide shortages that are going on.

So if there is some easing there there could be some potential upside. Is that how I should read it?

Louis GerhardyCorporate Development and Investor Relations

Yes. That’s our best judgment right now, and we think that’s the right guidance to have today. But as you’ve commented, and I think Fermi has as well, there’s still a lot of activity going on up and down the food chain, and we have to keep an eye on that as well.

Tore SvanbergStifel Financial Corp. — Analyst

Very good. And as my follow-up, could you elaborate a little bit more on CV5? I mean it sounds like from a product development perspective, it’s been a big success, very strong execution. When should we expect to see some production revenue and ramps for the CV5 product line?

Fermi WangPresident and Chief Executive Officer

Right. First of all, CV5 is very important because it’s going to be — it is our most advanced technology not only because of five nano but also from a performance point of view. So this chip now, you could do 8K video at two amp power but also we can integrate multiple camera into the silicon and so that we can serve multi-camera solution for automotive for security. So basically, this is really for anybody who wants to have a high-end system, this is a perfect chip for them.

And we have already secured multiple design wins with the chip. And I believe that first-half next year, we will start — see people start ramping up into mass production and material revenue coming in second half of next year.

Tore SvanbergStifel Financial Corp. — Analyst

Sounds good. Congratulations, again.

Fermi WangPresident and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.

Ross SeymoreDeutsche Bank — Analyst

Thanks for having me. And I go with the congrats to the strong quarter and the strong guide. Just wanted to get into the supply side again. Is the tailwind from the Texas fab coming back online, a meaningful driver of the upside in the October quarter? And do you expect that to be done in the October quarter? And I realize there are shortages elsewhere, but I’m just trying to localize that one dynamic.

Fermi WangPresident and Chief Executive Officer

I believe that the Texas foundry impact in Q4 will be minimal. I don’t think it’s totally end, but I don’t think that’s going to be a severe impact to us. And also, I would also add that throughout this process, we work closely with our foundry partner, Samsung, try to address those problems. And I think throughout this productive exercise, we know exactly where we are at.

We communicate to a customer proactively. So although it’s a crisis, but also definitely show not — we have a great supplier, but also show to our customer that we are a trustworthy partner with them by continue communicating the problem and working with them to solve their problem.

Louis GerhardyCorporate Development and Investor Relations

The other thing I’d reiterate again is those are the things we control, the things we don’t control are parts for other people that we have to kind of modify whatever parts that they’re getting restrained on as well. So we’re doing a great job. Our team is doing a great job of considering the things we can control that there’s obviously always things that we can’t control as well. So that’s why we have some caution to it.

Ross SeymoreDeutsche Bank — Analyst

Thanks for the color on that. And for my follow-up, I just want to return to the seasonality framework. And, Fermi, you mentioned earlier about considering the consumer/other category as we look into the fiscal fourth quarter. But if you put all the puts and takes into your two main categories, the IP security cameras and the automotive side of things, is seasonality even an issue in there? Or given the fact that more supply is coming on, shortages in a bunch of different places, a ton of new products design wins that you have and new product launches, etc.

Are those latter dynamics just overwhelming any seasonality in your core businesses as we look into the fiscal fourth quarter? Or is seasonality consideration that we need to have.

Louis GerhardyCorporate Development and Investor Relations

Yes. I think you’re right. As we look forward, we’ve been saying that we think that, that part of that business that you had talked about at the end was going to go over over the next two to three years, slowly decline. Now it does have some seasonality.

It can be up and down. But really, the focus point is what you started with. That’s really where we’re focused right now today. That’s where we’re getting the growth and the opportunities.

And the traditional business, I think we’ll have some quarters up in some quarters down. But overall, they’ll be continuing to deteriorate over the next two to three years.

Ross SeymoreDeutsche Bank — Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Suji Desilva from ROTH Capital. Your question, please.

Suji DesilvaROTH Capital Partners — Analyst

Hi, Fermi, Casey, Louis. Congrats on recovering to record revenues in the long road back, no pun intended. So a couple of follow-ups. On the auto semi fleet management, rather, a 50 to 60 million unit opportunity.

What do you think AMBA’s share opportunity there could be? And what’s the competitive landscape for fleet management?

Fermi WangPresident and Chief Executive Officer

Right. So first of all, I think the biggest variable is how fast this video — AI-based video camera will penetrate into this market, right? Right now, majority, majority, majority of the market still doesn’t have any video in there. So I think the biggest question is how fast the penetration rate is going to be. I think that’s a good question.

We don’t have an answer on that. But from the competitive landscape, I think the biggest competitor we are seeing is Qualcomm. They are selling their solution with 5G in there. So however, that with our power consumption of much better video quality of computer vision performance, we continue to achieve much better performance on this market.

So I think that we’re competing with Qualcomm on this market. But at the same time, this market is relatively small. I hope that penetration rate will increase dramatically in the future when this technology becomes more widely available and being required by regulations, then that will change the really market dynamics.

Suji DesilvaROTH Capital Partners — Analyst

That’s very helpful for me in terms of color.

Louis GerhardyCorporate Development and Investor Relations

Suji, it’s Louis. I was just going to add, the installed base, as Fermi said, is 50 to 60 million commercial vehicles in the world. And it’s a market where there’s a monthly reoccurring revenue for the service providers. And it typically is for telematics type applications.

And they view ADAS as very attractive because they can get incremental monthly revenue by offering ADAS features, whether it’s monitoring the driver or front-facing ADAS camera or both in the case of some of the announcements we’ve made. So this is an existing market. And they’re just adding additional services on top of the telematics service they already offer.

Suji DesilvaROTH Capital Partners — Analyst

OK. That’s exciting opportunity for them. And then a follow-up on the CV5S, 52S products multi-imager. I just want to understand, Fermi, the architectural difference here.

Your prior products could take in multiple video feeds, but that seems different from what you’ve done here. Is this maybe two separate CV stacks handling different images independently versus before they were all feeding into one? Is that the difference here? I’m just trying to understand the difference.

Fermi WangPresident and Chief Executive Officer

Well, it’s really about total CV performance, right? In the past, we can take in four 1080p 30 videos. Now we can take in four 4K video. So we basically quadruple the video performance without increasing the power consumption. And basically — and or you can look at it still on the 2K video, then we can take in 16 cameras and which really become — if you look at the current autonomous driving people talking about more and more video into one chip, but also even for security camera, there are other people working on multi-sensor multi-imager system for the security camera.

So I think this really plays very well for those customers who want to build a high-end system because they want to continue to scale the size of the image, as well as number of stream going to the chip.

Suji DesilvaROTH Capital Partners — Analyst

OK. Very helpful. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Quinn Bolton from Needham and Company. Your question, please.

Quinn BoltonNeedham & Company — Analyst

I just wanted to offer my congratulations, but then follow up on the automotive CV opportunity last quarter. I think you said you had surpassed 450,000 cumulative units. Wondering if you could give us an update on that figure? Or if you can’t, could you maybe just comment whether that rate is accelerating. And then I’ve got a follow-up.

Fermi WangPresident and Chief Executive Officer

Well, we can definitely offer you a number later, and we’ll make it public. We don’t prepare number. But definitely, the trend continues. It didn’t stop.

Also, for example, last time, we talked about our automotive revenue will double from last year to this year, I think that forecast continue to hold, and we believe that we can deliver that. So just give you another indication of automotive revenue continue doing well. right now.

Quinn BoltonNeedham & Company — Analyst

Great. And the second question is sort of related. With the fleet management wins starting production this year guiding to higher revenue, next year, it sort of feels like perhaps that Wave 3 opportunity you’ve talked about maybe starting earlier. In CV for professional, you certainly have some pretty good traction, but I haven’t heard as many consumer camera applications.

So I’m kind of wondering, are you seeing Wave 3 perhaps becoming a bigger opportunity and perhaps surpassing the Wave 2 consumer camera opportunity here over the next year or two?

Fermi WangPresident and Chief Executive Officer

Well, this year, we talk about Amazon doing consumer IP cam and there are others coming up which we haven’t announced yet. So we still feel comfortable that Wave 2 will be there. But you are right, Wave 3, we are ahead of schedule. And we do believe that we can deliver better results than we promised even fast.

Quinn BoltonNeedham & Company — Analyst

Great. Thank you.

Operator

Our next question comes from the line of Kevin Cassidy from Rosenblatt Securities. Your question, please.

Kevin CassidyRosenblatt Securities — Analyst

Thank you. Congratulations on the great results. Yes, I was going to ask about the Wave 2. Last quarter, you had talked about Ring introducing two new cameras based on CV.

And I wonder just how that launch is going? And can you talk about your pipeline going into the October and even into the January quarter for home security?

Fermi WangPresident and Chief Executive Officer

One thing I can say is Amazon is one of the largest customer because of the CV product line. I think that’s definitely a true statement that we didn’t say it, but I think that’s one thing to highlight here. And also, we believe that our consumer IP cam design win momentum is there. We are waiting for customers to be going to production this year.

And also more going to production next year. So I will say that our Wave 2 revenue is already materialized because of the Amazon’s design win and also that we will be more accurate later this year and early next year.

Kevin CassidyRosenblatt Securities — Analyst

OK. Great. And congratulations on being able to increase your inventory in this market. Is most of that CV product is the difference is because it’s a higher priced product that the days of inventory are higher?

Fermi WangPresident and Chief Executive Officer

Yes, that’s definitely the proper reason because you can see that the way we are growing our CV revenue, even as same unit number, our cost doubled. So that definitely adds to the total cost dollar size-wise in terms of inventory. But also, I have to say that, that also is a sign that we believe that we can continue to have a strong demand on our product lines and that’s why we continue to build up our inventory. And of course, the third thing is that we continue to worry about whether this industrywide short supply will continue, and it’s prudent for us to build up more revenue — more inventory just in case that the shortage persists.

So the combination of that is the reason we build out those revenues — inventories.

Kevin CassidyRosenblatt Securities — Analyst

Right. Yes, I think that’s very prudent. Thank you.

Operator

Thank you. [Operator instructions]. Our next question comes from the line of Andrew Buscaglia from Berenberg. Your question, please.

Andrew BuscagliaBerenberg Capital Markets — Analyst

So I just want to follow up on the security side, actually, so maybe two-parter, if you can, I don’t mean to cheat on the new rule here.

Fermi WangPresident and Chief Executive Officer

Go ahead. You got time. Go ahead.

Andrew BuscagliaBerenberg Capital Markets — Analyst

So security, yes. So your gross margin, you’re kind of tracking toward the higher end or above the higher end of the kind of that range. Can you kind of update us on some of those bigger professional guys coming back in a more meaningful way this year that you guys think you alluded that gross margin kind of backtracking eventually again? And then maybe like I thought 10% sequential growth in securities seems a little bit low considering you have this home security stuff coming. Can you talk a little bit more about that? Like I would think 10% in Q2 would be — I think that will be a little bit higher number up sequentially.

Fermi WangPresident and Chief Executive Officer

Well, first of all, I think that in China, I don’t think Hikvision will come back anytime soon. I think that we have talked about this before. And on the — one thing that we also like we talked about last time is on the high-end security camera, we were impacted by the substrate, and we continue to see that impact. Although the impact is not as big as Texas foundry situation, but we did talk about the substrate supplier shortage definitely impact our CV revenue on the security camera and that impact continued to be there.

So — and that also reflects on our revenue forecast on our high-end market. So that just give you information about why [Inaudible] continue is a problem for us.

Andrew BuscagliaBerenberg Capital Markets — Analyst

OK.

Louis GerhardyCorporate Development and Investor Relations

And again, it could be based on other supplies that are customary as well. And so part of it is an impact that we have and part of it is the other customers.

Fermi WangPresident and Chief Executive Officer

Right. From a gross margin point of view, I think we continue to see that although we believe in the long term, our revenue — I’m sorry, gross margin guidance continue to be 59 to 62, but because our momentum on the CV solution and it’s just been introduced recently, and we continue enjoying the first to again, gross margin. But eventually, I think you will go back down to 59 to 62% as our long-term guidance.

Andrew BuscagliaBerenberg Capital Markets — Analyst

Yes. OK. All right. Got it.

Thank you.

Louis GerhardyCorporate Development and Investor Relations

Great.

Operator

Thank you. Our next question comes from the line of Brian Ruttenbur from Imperial Capital. Your question, please.

Brian RuttenburImperial Capital — Analyst

Yes. So I’ll keep mine to one. So on the security and automotive, can you break down, that was 90% of your total revenue. Can you break down the difference between the two? What’s growing faster? Maybe give us a little trends, especially on the security side is where I’m more focused on what you’re seeing?

Louis GerhardyCorporate Development and Investor Relations

Brian, it’s Louis. So the automotive business was in the low 20% range, and that’s a business we’ve said is going to more than double this year. And so that’s clearly has the largest SAM for us, and we’re demonstrating we can take advantage of that large SAM and it’s growing at the fastest rate. For security, security is in the mid-60% range as a percent of our total revenue.

Think of two-thirds of that driven by what we call professional that’s enterprise capex driven, as well as public infrastructure spending. And then the other third of the mid-60% is coming from the smart home durable goods products like the Amazon devices that Fermi referenced earlier.

Brian RuttenburImperial Capital — Analyst

Right. Thank you very much.

Operator

Thank you. Our next question comes from the line of David O’Connor from Exane. Your question, please.

David O’ConnorExane BNP Paribas — Analyst

Great. Thanks for sweeping me in. Sticking to one question. Maybe just one on the 240 customers you talked about, Fermi, on CV, 60 of them, I think, in production in the first half.

What’s the expectation for the second half? How many of those remaining customers do you expect also to be in production in the second half? Thank you.

Fermi WangPresident and Chief Executive Officer

Well, first of all, I think we can continue to add to this 240 number because we are going to continue to go into new markets and even in the existing market, we will continue to talk to new customers. So that 240 number definitely will continue to grow. And I believe this — I don’t have a concrete number to say, but I think it’s going to be — for example, last time, we disclosed the number we’re at 45, now at 60. So in fact, that’s a pace we’re looking at from a historic point of view, I will say that the pace will continue.

Operator

Thank you. Our next question comes from the line of Martin Yang from Oppenheimer. Your question, please.

Martin YangOppenheimer & Co. Inc. — Analyst

Hi. Good afternoon. Thank you for taking the question. My one question is on Bosch.

That design win with three platforms seems quite meaningful. Can you perhaps give us more context around the design win? Did you run into any competitors? Or how long did it take you to bring that design?

Fermi WangPresident and Chief Executive Officer

Right. So first of all, for Bosch, when we started this business 12 years ago, Bosch, was the number — the first one — first customer to use our solution. And since then, we built a very strong relationship with Bosch. And throughout the years, they continue to use our product in most of their product line.

They also use other products like Qualcomm for some other product lines. But with the CV, I think right now, I think the [Inaudible] family series are the only products that have introduced for the CV product line, and they are all ours. So I think that our relationship with Bosch has been a long time. And I would say it’s very strong because we collaborate in many different ways.

And also, I’m happy to see that they are going to do this three families business, CV product line, and I hope, and I believe there will be more to come from Bosch.

Martin YangOppenheimer & Co. Inc. — Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question, please.

Tristan GerraRobert W. Baird — Analyst

Hi, guys. Question on your software. We’re seeing sensor companies that are basically doing association with software and notably for L3, L4 applications. And I think you’ve mentioned in the past that the software that you used was really for dual purposes.

So the question is whether — what is your strategy in terms of software? Is that an opportunity later on in terms of recurring revenue monetization? Or are you going to be solely focused on [Inaudible]?

Fermi WangPresident and Chief Executive Officer

Right. So first of all, right now, we focus on — I think you’re talking about automotive Level 2, Level 3 type of solution. Today, our solution is hardware only and — but also, we have shown many times that our software running our EVA car for demo purpose. We definitely believe that the software that we developed has value.

And I think at our coming Analyst Day in January at CES, we will probably disclose more the direction and the strategy direction that we’re thinking about.

Tristan GerraRobert W. Baird — Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Derek Soderberg from Colliers Securities. Your question, please.

Derek SoderbergColliers Securities — Analyst

Hey, guys. Congrats on the quarter. I wanted to bring it back to in-cabin monitoring quick, specifically around that infrastructure bill. Are you guys hearing from customers or seeing that bill sort of impact OEM design plans at all? And generally, if this moves forward quickly here, would you have the capacity to secure supply for that opportunity just given the tight supply environment? Are those products more constrained in your portfolio at all? Any commentary there would be great.

Fermi WangPresident and Chief Executive Officer

Great. First of all, we get involved a lot in cabin design win activities. And I think this is definitely a direction that become very — it’s a very hot topic at this point. And we’re involving discussion not only in Europe and U.S., but also in China, Korea, Japan.

Our strength is really for in-cabin monitoring, you need a great video quality because the lighting condition is not ideal. And also, you need to do CV performance. So you need a very power efficient solution. And also, more importantly, I think that in-cabin cannot be just one function product moving forward.

In-cabin need to be integrated by with driver monitoring, as well as ADAS as one unit box that integrate all the interior and exterior function so that you can have a global picture of what’s happening around the car. So I think this — from a direction point of view, I think we have a great position offering to this market. In terms of supply, I have to say that based on my observation, Samsung supply to their customer better than TSMC can. I think TSMC is lot full, a lot more capacity constrained at this point in Samsung.

So we — outside of this Texas foundry problem, although it’s tight, Samsung has never short supply on us on our demand. So I would believe that we continue to talk to Samsung about the delivery to us on the 10-nanometer and the 14 and 28-nanometer supply. I don’t see any constraint other than the Texas foundries at this point.

Derek SoderbergColliers Securities — Analyst

Appreciate the color. Thanks, guys.

Operator

Thank you. Our final question for today comes from the line of Richard Shannon from Craig-Hallum. Your question, please.

Richard ShannonCraig-Hallum Capital Group — Analyst

Fermi, your last response here — actually, two responses to go here about solutions that need not only in-cabin monitoring but DMS, ADAS, etc., and the importance of putting those together. Are you seeing any other competitors that have any of those functionalities put together for all of them? Love to hear the prospects there. And if not or if it’s limited, can you talk about the leverage you’re seeing in the market by having and be able to get that capability together?

Fermi WangPresident and Chief Executive Officer

Right. So first of all, I think a lot of our competitors claim they have the similar solution. But if you look at in reality, that in terms of the performance requirement, power requirement and also quality, video quality requirements, we’re definitely on top. So the — this trend is more obvious in China because China is really — they don’t have an infrastructure yet.

So they are definitely willing to pay for the more integrated solutions. So that’s why we believe that if there is any multifunction device happens, will happen in China first and gradually move into other spaces. But I also see a similar trend in Asia like Japan, Korea, but China definitely was the main driver for this one.

Richard ShannonCraig-Hallum Capital Group — Analyst

OK. Great. Thank you, Fermi.

Fermi WangPresident and Chief Executive Officer

Thank you.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I’d now like to hand the program back to Dr. Fermi Wang for any further remarks.

Fermi WangPresident and Chief Executive Officer

Yes. Thank you. I’m very proud of what our employees have achieved in the face of so many different challenges in recent years. And I am convinced, years from now, if we look back at fiscal year ’22, this is going to be a major inflection point for Ambarella.

And I am very excited about our future. And with that, I say, thank you, and goodbye for now.

Louis GerhardyCorporate Development and Investor Relations

Goodbye.

Casey EichlerChief Financial Officer — Analyst

Thank you.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Louis GerhardyCorporate Development and Investor Relations

Fermi WangPresident and Chief Executive Officer

Gary MobleyWells Fargo Securities — Analyst

Joe MooreMorgan Stanley — Analyst

Matt RamsayCowen and Company — Analyst

Tore SvanbergStifel Financial Corp. — Analyst

Ross SeymoreDeutsche Bank — Analyst

Suji DesilvaROTH Capital Partners — Analyst

Quinn BoltonNeedham & Company — Analyst

Kevin CassidyRosenblatt Securities — Analyst

Andrew BuscagliaBerenberg Capital Markets — Analyst

Brian RuttenburImperial Capital — Analyst

David O’ConnorExane BNP Paribas — Analyst

Martin YangOppenheimer & Co. Inc. — Analyst

Tristan GerraRobert W. Baird — Analyst

Derek SoderbergColliers Securities — Analyst

Richard ShannonCraig-Hallum Capital Group — Analyst

Casey EichlerChief Financial Officer — Analyst

More AMBA analysis

All earnings call transcripts

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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