Good day, ladies and gentlemen. And welcome to the Ambarella's Q4 fiscal year 2015 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions]. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Deb Stapleton. Ma'am, you may begin.

Thank you. Good afternoon and welcome to Ambarella's fourth fiscal quarter 2015 financial results conference call. Thank you for joining us. Our speakers will be Dr. Fermi Wang, President and CEO and George Laplante, CFO. The primary purpose of today's call is to provide you with information regarding our fiscal fourth quarter and full fiscal year. The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, market growth and demand for our solutions, among other things. These statements are subject to risks and uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties and assumptions, as well as other information on potential risk factors that could effect our financial results are more fully described in the documents that we filed with the SEC, including the annual report on Form 10-K that we filed on April 4, 2014 and for the 2014 fiscal year, the Form 10-Q's filed on June 6, 2014, September 8, 2014, December 9, 2014 and the Form 10-K for the fiscal year ended January 31, 2015 that will be filed shortly. Access to our fourth quarter results press release, historical results, SEC filings and a replay of today's call can all be found on the Investor Relations portion of our website. I would now like to turn the call over to Dr. Fermi Wang.

Thanks, Deb. Good afternoon, everyone. We are extremely pleased with our Q4 and the fiscal year 2015 financial results. Revenue for the fourth quarter of fiscal 2015 was $64.7 million, up 61.9% from $40 million in the same period in fiscal 2014. For the fiscal year ended January 31, 2015, revenue was $218.3 million, up 38.5% from $157.6 million for the year ending January 31, 2014. In addition to the strong sales from our traditional markets, including wearable, professional IP camera and automotive aftermarket cameras, we continue to see growth opportunities in new camera applications. During January 2015 Consumer Electronics Show, Ambarella demonstrated the breadth of its product portfolio to address many of this new applications including flying cameras, body worn security cameras and intelligent automotive cameras. During the show, Ambarella introduced the H1 camera System-on-Chip or SoC for new generation of action and quadcopter based cameras or flying cameras. The Ambarella H1 supports 4K UltraHD H.264 video encoding at 60 frame per second for high-speed live action recording with smooth slow motion capabilities. It also supports the new H.265 or high efficiency video coding standard for 4K UltraHD encoding at up to 30 frame per second, providing higher image quality and lower bitrates faster video uploads, higher resolution video streaming and reduced storage requirements. The H1 includes advanced electronic image stabilization for stable video recording during windy or high motion conditions. Also at CES, we announced availability of the Ambarella wearable security reference design kit based on our new A12W SoC. This enables the development of a new generation of compact, ultra low power, body worn HD video cameras suitable for police and security applications. The new A12W SoC can encode two video streams simultaneously for dual lens camera designs as well as streaming. The A12W also includes our…

Thank you Fermi and good afternoon everyone. I will start today with a discussion of the financial highlights for the fourth quarter and full-year of fiscal 2015 ending on January 31, 2015. I will then move onto the financial outlook for Q1 of fiscal year 2016 that ends on April 30, 2015. During the call, I will discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense as adjusted for income taxes. As we have discussed in the past, the company has seasonality to both its revenue and gross margin. So I will include year-over-year comparisons for certain key operating metrics to assist in the understanding of changes in our business. Our Q4 2015 revenue of $64.7 million represents an increase of 61.9% over the $40 million of revenue in the same period in the prior year. Camera market revenue is estimated to be 95% of Q4 revenue compared to 90% in the same period in the prior year. The wearable market, led by GoPro cameras, demonstrated strong year-over-year growth but declined sequentially as expected. The revenues associated with the successful launch of three new camera models from GoPro in the previous quarter continued into our fourth quarter underpinning the overall strong camera there. The professional IP security camera market demonstrated strong year-over-year growth in the quarter with modest sequential growth. Driven by strong results from Asia, our professional IP security revenues continued solid performance in the quarter, which is normally the beginning of a seasonal slowdown for the IP security market. Year-over-year and sequential revenue growth in consumer IP security was strong, but it remains a small percentage of our overall security market revenues. Although IP security continued to…

[Operator Instructions]. Our first question comes from line of David Williams of Ascendiant Capital. Your line is now open.

Hi. Good afternoon guys and congratulations on the quarter. My first question is, if we think about the surprise in the quarter, what was the biggest surprise? Was it more about the new products? Maybe some launches that came in? Or was it just better performing markets across the entire business?

Actually in Q4, we felt strength across all our markets. As we said in the script, the camera markets for our wearable cameras like GoPro was strong throughout the quarter. We had a very good security quarter and automotive quarter. So in all three of our core markets, we felt that customer strength was there.

And then there was also an announcement this week, it looks like the Google Helpouts platform is being canceled. I am just wondering if you have any thoughts on that? I know that there were some revenue potential for that falling into this year. Has any of that changed? Is there any type of, I guess, any event in the guidance that we should be thinking about, maybe not being there now?

Right. First of all, we never factored Helpouts in our forecast of revenue in the past and we have been continually saying that we believe the consumer wearable camera market, people are still looking for killer apps and you can see that people are trying out different ideas like Google Helpouts one example and we believe that out here people will find through an killer app this market will continue to be in a research level. But however at the same time, we believe the wearable camera market starts become strong, particularly in the commercial area, for example, in the policeman and security guard market, we will start seeing real demands and real revenue opportunity for us to grow wearable revenue. So from an Ambarella point of view, we will continue to invest on technology for wearable camera, particularly right now for commercial industry but hopefully in the future, we will have customer video figure out the killer apps for the consumer market, we hope that we can progress on there.

Thanks so much.

Thank you. Our next question comes from line of Matt Ramsay of Canaccord Genuity. Your line is now open.

Yes. Thank you very much for taking my questions and I would like to offer congratulations. I know you were in Barcelona and there was quite a bit of buzz around the Xiaomi launch yesterday. So congratulations for winning that socket. Maybe Fermi, you could talk a little bit about the interactions with that customer? What features they are really pushing forward as your traditional biggest customer in that market? And also maybe if you could talk a little bit, either Fermi or George, about the market's perception that as your larger camera customers go down market to chase price elastic demand, there is worry of second sourcing but obviously Xiaomi is coming out at a price point that's very, very aggressive and they are still using the technology. So anything you can give about how that relationship came together and how -- and those points would be rally helpful. Thank you.

Thank you. So from Xiaomi point of view, I think you can see that Xiaomi, in addition to their cell phone sales, they are trying to build a product portfolio surrounding their cell phone. And I think, based on competition, they believe that a sports camera is one of those device that can leverage their current hardware and software they build for the cell phone infrastructure and providing better experience for their customer. So I think that's they jumped into this opportunity and working with them is just like working with any big customers. We talk about the spec together and identify the potential components and how to implement this camera and working closely to make sure that this happen. So from a design point of view, it's just like any other customer we work with. In terms of your second half of the question, I really think that we didn't know the Xiaomi pricing structure until just early this week. And I think they keep that as a competition. So we are as surprised as everybody but I think that's consistent with their pricing strategy with the other products. I think that our pricing strategy for Xiaomi is the same that we apply to all the other customers that higher volume get a better price.

That's really helpful. And then as a follow-up, Fermi, maybe you could talk a little bit about the consumer IP camera market, not just the consumer retail channel sales but stuff you are doing with some service providers? I know there were some announcements with ACP and others and it seems like there is a pretty big magnitude on the revenue based on the strong guidance there and how much that market, particularly the service providers side of it, contributed to the upside of the numbers?

Right. So let me be clear. I think that service providers' side of consumer IP camera is still very little in terms of revenue on our forecast. They have a great potential. We believe they are going to grow fast but in terms of the total revenue, they still are a small percentage versus other markets. But however and you are right, we are very optimistic about this consumer IP security camera, particularly on the service provider side. We announced AT&T last time. We had multiple design wins that we are working on. We are seeing a lot of activity from different service providers who want to come into this market. So assuming that they continue to introduce successful products with a great cloud service, then I think this we can, at least, I personally believe, is going to be a huge market opportunity for us in Ambarella.

And if I could just squeeze one more in for George, the gross margin was better in the quarter, well above the mid-20 and the guidance was strong there as well. But you mentioned that seasonality in sports camera market was as you expected and the IP camera market in China grew. So what's sort of the missing factor there that drove the upside to gross margin? Or is there something, maybe you could walk us through that dynamic a bit? Thank you.

It is purely mix in gross margin. The high end of the product lines continued to be strong in the quarter. We had a very good automotive quarter which, again, is higher margin. So the overall mix is what drove the margins to the high end of the range that we put out.

All right. Thank you very much. Congrats again.

Thank you.

Thank you. Your next question comes from line of Kevin Cassidy of Stifel. Your line is now open.

Thanks for taking my question and congratulations. You mentioned new opportunities or opportunities in new car models for Europe and North America. Can you expand on that a little bit? Is it just dash cams? Or is there more functionality going into these?

I think for short term, definitely dash cams, we start seeing some of the U.S. brand then start trying to sell dash cams into U.S. market. But I think in the longer term, what I see is we have a multiple technology targeting the automotive OEM, like I mentioned, surround view, the electronic mirror and also maybe other techs for dash cam. All of that is designed for the OEM but the design cycle is longer, as you know, so that I think there is short term effect and there is long term effect and at Ambarella, we continue to invest heavily into the automotive market in terms of the technology and the marketing and hopefully we can go to the OEM in the future.

Okay. So you are saying that the new models might be two years out before we actually see it in the market?

I didn't say two years but definitely it is longer term than aftermarket business.

Okay. Great. And just to understand a little better, are you dealing with subcontractors or is the design with the automobile manufacturer themselves?

Well, we call to the OEMs, but I think most of the design will go to Tier 1. But we do also believe there is opportunity to go design with the OEM directly. So it's a mix. But I think majority is with the Tier 1 guys.

Okay. Thank you very much.

Thank you. Your next question comes from line of Ross Seymore of Deutsche Bank. Your line is now open.

Hi guys. This is actually Matt Simon, calling in on Ross's behalf. Great results here. I will just add my congrats. I want to ask about the inventory hike and it was mentioned in the script but if you could shed a little more light on that? Is it more on the security side? Or the Xiaomi side? A little more information there would be greatly appreciated.

Yes. As I said, you might not have picked it up in the script, but it's across all the markets. First of all, the inventory levels are brought up, it really gives us flexibility with the number of new product announcements and ramps to give the customers the ability to adjust to their run rates as they understand the markets better. So it is across all markets. It is, as you saw yesterday, with the Xiaomi announcement, there are product rollouts with our new S2Lm in the security market place and that will be across both professional and consumer. So inventory is really increased to help support those.

Okay and on the gross margin side of the equation, this looks like the 59% and 62% for the year, that's versus the 62% to 64% for the first quarter. With these low end customers raping up, should we expect a gross margin decline in the second half of the year? I think it was mentioned previously, but any walk-through of gross margin for the year would be appreciated too.

Yes. We continue, like is said on the previous call, to forecast the margin coming into our range as the year progresses. And that will really be directly related to the rollout in both consumer and in professional security in Asia at the low end. So that's the S2Lm product line rollouts will have the biggest downward impact on margins. So I think actual timing will depend on when the ramps occur, but you can expect that to happen sometime between now and the end of the year and we do believe second half will be within that range.

Okay. Great. Thanks.

Thank you. And our next question comes from the line of Quinn Bolton of Needham & Co. Your line is now open.

Hi guys. I offer my congratulations. George, just wanted to come back to the new annual guidance of 27% to 30%. If I understand it, it sounds like that is the forecast capturing really just your core markets and that upside from some of the new applications such as police or security guard cameras and/or flying cameras could push you at an even higher level or is 27% to 30%, does it capture some of those new applications well?

At the low end of that, it would not capture the new applications. It is really focused, those numbers, on our current markets. The biggest change since last phone call is both the automotive market and the security market at the low end. We are seeing a lot more activity there and we are probably more optimistic than we were there. So I am comfortable with those ranges for the current marketplaces. Again though, in these new markets, the ramp of those and the size of these new opportunities is really difficult to forecast. So we have not put a significant amount in for that at this time.

Got it. Okay. Quick, I just wanted to come back to the activity in the low-end security market. Two question there. Is that mostly China-based? And second, I think you said that the S2Lm and the ramp of that product is probably the biggest factor in driving down the margins or you actually didn't say driving down the margins but for your forecast for the margins to come back in the range in second half of the year. Is that right? And am I reading the S2Lm is tied into that low-end security ramp? Thanks.

Yes. You are correct there, both in the consumer security as well as the low end of the professional. And the low-end the professional security market is still being driven by China.

Great and then just one last one on the automotive business. I think that would have been a business historically that I guess I would have thought might have carried lower than corporate gross margins. You said earlier in the call that that is now better than corporate average gross margin. Does that really just reflect the mix, the higher end applications within the dashboard camera market? Or are there dynamics in the dashboard camera market that have changed to drive better margins? Thanks and that's it for me.

Yes. I think the higher end of the market we are selling into and that is expanding in China now. And that is our A7L-A chip which is being sold at above corporate margins on average. So it's a combination of market expansion and people going after higher resolution products and us being successful in winning those sockets.

Great. Thank you.

Thank you. Our next question comes from line of Charlie Anderson of Dougherty & Co. Your line is now open.

Yes. Thanks for taking my questions and my congrats as well on a great quarter and year. I wanted to ask about sports camera. I heard you say auto will be up sequentially and IP security bucking towards seasonally. Will sports camera as well? And if it is, or that's more modest decline, is it hyper-seasonal, meaning you are doing a ramp with Xiaomi and that it cools of and is less seasonal going forward? Just help us walk through the ins and outs there.

Yes. The normal seasonality to our consumer based products in the wearable area would be second half of our year. We do have the launching in Q1, which is supporting revenue in our Q1 guidance.

Okay. But is it up? do you expect them to be up sequentially, George?

It would be relatively consistent with Q4.

Okay. Perfect. And then for me, I had a question on R&D. You guys mentioned you had the $900,000 of customer funded R&D and it sounds like you are gaining operating leverage in the model and I imagine plays a part in there as well. Are you guys still feeling like you are hiring constrained? When I look at some of your larger customers, they seem to be growing R&D faster than you are. Do you feel like you are keeping pace with everyone?

Well, I definitely think that R&D is not a limiting factor for us to grow and we invest a lot and we continue to hire people in all of areas. But we focus more on the growing software engineering for different applications, particularly in Asia, in China and Taiwan, where the cost base is lower than here. So that's why you didn't see the R&D dollar change a lot, but we don't believe that our R&D is limiting our growth anyway.

Perfect. And then last one for me is, I wonder, we look at the drone market and I know it's a very new market, the flying camera market. And I think some of the smartphone SoC companies have started to express interest there. You guys have done a great job of simply staying out of market competing into those types of companies. I wonder, based on some of the weather [ph] you are seeing does that market still is attractive to you and do you think that you have particularly advantage over them, significant advantage over them in a market like that?

Well, I definitely think that some of the processor guys are trying to go to the flying camera market. I think the biggest limitation for that is their power and the cost. If you look at it, the power difference and the delta on them in terms of the total bond between the two solutions is quite dramatic. So I think what the other product guys are trying to sell is the problem of architecture and people can add features easier to the drones but I think at the same time while the power is critically important for drones as flying cameras as well as everybody that we know all this trying to pushing the price lower so they can hit bigger volume in the future. I think that we are meant to be very competitive in this market space.

Thank you. Our next question comes from the line of Ted Moreau of Barrington Research. Your line is now open.

Thanks and congrats guys. Given the Xiaomi win that you highlighted, can you talk about how you think your customer exposure will evolve in the wearable sports camera market outside of GoPro for fiscal 2016, be it with Xiaomi or any other camera customers?

Well, usually we don't talk about the customers that haven't announced their products. So right now, you know GoPro, you know Xiaomi. In fact we also announced like ION, it's a much smaller grant, but we haven't talked about any other people who hasn't announced their products yet.

Okay and then on the inventory bump. If I have it correctly, I believe you sell a lot of the same hardware chips across markets and then just layer on software on top depending on applications. So do I have the correctly? And if so, how challenging is it to move hardware inventory around within a quarter depending on demand fluctuations across end markets?

It's not difficult for us, because it's in the final test process that we configure the chips. So within a 15 to 20 day period, we can shift inventory between markets and part numbers.

Okay. Sounds good. Thank you so much.

Thank you. Our next question comes from the line of Jay Srivatsa of Chardan Capital Markets. Your line is now open.

Yes. Thanks for taking my question. Fermi, can you give us a sense of what the competitive landscape is in the IP camera market? I know HiSilicon has been jumping up a bit. What has shaken up in the last quarter or two? Any update would be appreciated.

Right. In fact, I think from a very high level, I don't think the landscape changed much. But sine we announced S2L and S2Lm, I think we believe we gained market share on the low end side because the S2Lm presents a much better chip and also with better quality and features. So I think from a competitive landscape in terms of the competitor point of view, HiSilicon is meant to be our biggest one. We haven't seen any newcomers trying to compete with us on the IP camera side. There is still quite a lot Taiwan Chinese guy trying to compete but I don't think they -- they are very, very far distant from us and HiSilicon. So from that point of view, I don't view that the competitive landscape changed.

Okay and then turning the automotive side, I know in the past, it has been lumpy, sometimes weaker. Do you believe you have reached a steady state of business on the automotive side? Or do you feel like the last innings did persist going forward?

Right. I think that, first of all, until two quarters ago, it was bumpy because our biggest market was Russia and everybody feels the Russian economic situation, but I think they partnered up and I don't think that the situation in Russia really improve a lot but all the market like China, Korea, we made a lot of progress winning designs with our both low and middle and high end products and especially in Korea in the past where we didn't have penetration, now we are winning multiple design wins in there. So I think all of that adds up together that Russia really stabilized and also we are winning in China and Korea help us to go back to growth and we continue to expect that growth will continue this year.

Okay and then the last question for me. Last year, Google did a lot of work, but then they dropped out. I know you guys were involved in it. We haven't heard much from them or yourself. Where do you think you are with that project? Any update there?

Which Google project did you say?

Yes, the Google, they did the Helpouts.

The Google Helpouts project. I think the first question in the call has covered that. I think they already canceled that project and like I answered that question, we never in fact put any revenue forecast into that project and also for the consumer wearable market, we believe that everybody our customers are looking for killer app and until they find it, it think that market will continue to in R&D mode. But again, I want to say that on the commercial business, the commercial wearable business is growing for the policemen, for the security guard and we do see real revenue and more revenue opportunity in the future.

Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Al Freeman of Clarity Capital [ph]. Your line is now open.

Hi. How are you doing.

Good.

Where is your tax rate going on a longer term run rate?

Great. Right now, we are forecasting high single digits.

And maybe two, three years down the road, any sense of where it would hopefully be? or not really?

Well right now, our U.S. portion of our income has been declining. So the rate has been coming down. We can see the rate probably sliding a little bit in the next couple years and after that, it's a bit difficult to forecast and that's all contingent on no changes in the government's tax laws.

Got you. So the rate pushing here is pretty sustainable for the foreseeable future.

That is correct.

Thank you.

Thank you. Our next question comes from the line of Brad Erickson of Pacific Crest Securities. Your line is now open.

Hi guys. Thanks for taking my questions. Just a few follow-ups. First, on the new launch you mentioned in IP security, was that a new vendor where you had displaced a competitor? Or was that just a new ramp with an existing customer?

Well, like I said in the past, we already have a lot of existing customers. So the S2Ladn S2Lm is mainly ramping up with existing customer but I would say that some of that is replacing a competitor's model. So I think we will continue to gain market share a little bit with the new introduction.

Got it. That's great. And then, over the last few quarters you talked about that business, the IP security business that is continually bucking trends or benefiting from typical seasonality and so now we are seeing sequential increase this year. Is this something we could just continue to see sequential increase here getting back to the back half of the year and stronger seasonality? Or is it something that you guys have seen a lot of strength here near term and may have to see a sequential decline at some point, albeit modest?

Right. Well I think that for this year, I think that the IP security market will continue to grow and we haven't seen any sign a slowdown anytime soon. Of course, you know beyond this year is everybody's guess, but I think that digital IP security camera continue to replace analog camera. On top of that, the consumer IP camera is really growing fast. With this two drivers, I think that in the near future we still believe that the IP security camera is going to be the strongest market in terms of growth for Ambarella.

Got it. And then lastly, you mentioned and I think George mentioned in the guidance that the automotive and the low-end consumer IP markets had picked up since last conference call, but gross margin target is effectively the same. Did anything else improve around the gross margin profile of business? Or is that just because those are just too small to move the needle? Just any help with sort of any of the other gross margin dynamics there within the updated outline?

Yes. I think the biggest gross margin driver is mix related to the high-end marketplaces. So we are seeing strength with the A9 across multiple markets. So that has probably been the biggest upside contributor. If you look at going forward to the low-end security market is what's going to offset the higher end products and bring that back our overall gross margin back down into the range.

Got it. That's great. Thank you very much.

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Mr. Fermi Wong for any closing remarks.

Thank you. And I also thank everybody for joining us today and a special thanks to all of our employees for their continued dedication and hard work. And thank you and good day.