Good afternoon, and welcome to Ambarella's Second Fiscal Quarter 2016 Conference 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, this conference is being recorded. I will now turn the call over to Ms. Deborah Stapleton who will introduce today's speakers.

Thank you. Thank you everyone, and welcome to Ambarella's second fiscal quarter 2016 financial results conference call. Thank you for joining us today. 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 second quarter. 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, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents that we file with the SEC, including the annual report on Form 10-K that we filed on March 30, 2015 for the 2015 fiscal year, and the Form 10-Q filed on June 8, 2015 for the first fiscal quarter of 2016. Access to our second-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 Web site. I'll now turn the call over to Dr. Fermi Wang.

Thank you, Deb. Good afternoon, everyone. We are very pleased with our Q2 2016 financial results. Our Q2 revenue was $84.2 million, representing an increase of 79.3% over the $47 million of revenue in the same period of the prior year. In addition to strong sales for our existing markets including IP security, wearable, and automotive dash cameras, we experienced rapid growth from drone or flying camera market, as well as several product introductions in the home monitoring camera category. During July, we announced the acquisition of VisLab, a privately held company based in Parma, Italy. This lab division and its intelligent systems laboratory are a spin-out of the University of Parma, is a pioneer in perception systems and autonomous vehicle research. The Company has developed computer vision and intelligent control systems for automotive and other commercial occasions, including advanced driver assistance systems and several generations of autonomous vehicle driving systems. As part of the acquisition, VisLab's 29 researchers have joined Ambarella advanced computer vision development team to help develop solutions targeting Ambarella's existing markets, as well as future markets, such as automotive OEM cameras. The acquisition of VisLab has added expertise gained from over 20 years of research and development and is greatly enhancing our ability to define, develop, and deploy future generations of computer vision solutions. In the professional security camera market, sales continued to be driven by Chinese security leaders Hikvision and Dahua, as well as by leading North American and European camera suppliers offering highly differentiated high megapixel UltraHD and wide-angle viewing cameras. Sales of Ambarella's new S2L and Ultra HTP S2 camera SoCs were particularly strong as customers ramped up production of new camera designs. In May, Pelco by Schneider Electric, a leading US supplier of security cameras, introduced its new Optera panoramic cameras based…

Thanks Fermi, and good afternoon everyone. Today I will start with a review of the financial highlights for the second quarter of fiscal 2016 ending July 31, 2015, and then move onto the financial outlook for Q3 of fiscal year 2016 that ends on October 31, 2015. During the call I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting we have eliminated stock-based compensation expense as adjusted for income taxes, as well as one-time costs associated with the recent acquisition of VisLab. The non-GAAP financial results include the operating expenses of VisLab from the date of acquisition, but exclude the one-time costs of approximately $1.2 million associated with the transaction. The one-time costs include approximately 800,000 of incentive bonus and non-compete payments to be made to employees as well as legal and accounting fees incurred in the transaction. As a reminder, we expect VisLab expenses to run at approximately $1.1 million to $1.2 million per quarter for the last two quarters of fiscal '16, most of which is classified as R&D expense. In the future, I do not intend to break out these costs from our other operating expenses. Our Q2 2016 revenue of $84.2 million represents an increase of 79.3% over the $47 million of revenue in the same period in the prior year. Camera market revenue is estimated to be 97% of Q2 revenues, compared to 93% for the same period in the prior year. There was an appreciable impact to revenue in the second quarter from several product launches in the wearable and flying camera markets, as well as the broad-based launch of our S2L chip in the IP security market. The wearable market, led by the launch of two new…

[Operator Instructions] our first question comes from the line of Ross Seymore of Deutsche Bank. Your line is now open please go ahead.

George, you talked about the timing of what's going on, on the wearable side of things. Can you give a little bit more color on, is this kind of a one-quarter adjustment or do we have a seasonality that kicks in, in the normal timeframe in January? How are you thinking this kind of smooths out given the difference in timing from what we've typically seen?

Well, I think the major change that you see is product launches occurred in Q2 rather than Q3. Historically, Q3 has always been our seasonally high quarter, but because the launches occurred in Q2, I think we really have to look at the average of Q2 and Q3 as to volumes in that marketplace. Other than that change, I don't see any difference in the seasonality going forward.

Okay. My second question is on the competitive front. During the quarter, there were a number of companies talking about getting into the drone market, some wearables et cetera. Have you seen any impact in either your discussions with your customers, the pricing, any sort of truly business impact as opposed to just slide shows from some of the competitors thus far?

Rob, this is Fermi. I don't think our competitive landscape changed at all in the last three months. In the drone market, we know that all of the Company who has viewed app processors has shown interest in coming, like Intel and Qualcomm, and are talking about coming to the drone market, but as we have talked about in the last earnings call, we believe and continue to believe that, because all of the guys that are using our solution really pay attention to the image quality, compression efficiency, and power, and we don't see their current app processor as we define right now is a strong competitor to our solution yet. So, and we continue to believe those companies may have revenue; they have a lot of asset they can invest. If they build video specific solution like ours, they can challenge our solution. But with the current app processor, I don't think that's the case.

Great. My last question quickly, on the IP security market, I'm a little surprised that was flat sequentially in the July quarter. And you talked about it ramping back up in October. Can you just talk a little bit about what was going on in July, and between the professional and the consumer side, what's driving the increase in October?

I think it's pretty straightforward. We had some inventory adjustment in Q2 at one of our large customers. So, it was reasonably flat sequentially, but it was strong year over year. And during Q2, we had a lot of our consumer-based customers start to build product for the holiday season. So, we're anticipating both growth -- that growth in both the professional and the consumer starting in Q3 again.

Our next question comes from line of Quinn Bolton with Needham. Your line is now open please go ahead.

Just wanted to follow up on Ross' question about the competition on the drones, it's still probably early days, but obviously some big amounts being invested in drone manufacturers by some of your competitors, can you tell whether they are targeting more the positioning or gimbal assemblies rather than the video processing? Could this be-- could you have multiple video and application processors in these drones over time, or do you think it's really one or the other, either Ambarella or Qualcomm or Intel in these drones?

Right. In fact, I think all our competitors are talking about SoC for drones. But I think we are a few steps away from that. If you look at the current other [indiscernible] of the drones, they're familiar components. Of course our chips are probably the biggest chip inside the drone, and they also have a flight control chip dedicated for the flying control. And also we believe in the future you will acquire a chip of the dual computer vision. So, we're talking about multiple solutions, and everybody has their strength and weakness. If you look at the real application for all the drones so far, it's video. Video capturing and also the using video to guide -- driving the drones, so video is really the dominant application for the drone at this point, and so that all our customers demanding the best video experience as the first priority when they do a design. So from that point of view from the imaging of video processing subsystem point of view, we feel comfortable than when we compete, and I think our competitor is talking about trying to integrating of control -- flight control portion, also addressing the future computer vision portion. So I think there could be two different applications at this point, but overall I think that in the short term, if we don't see that app processor is a challenge to our image or video processing.

Okay, great. Second question on drones, obviously you benefited from the ramp of a number of new models from your largest customer, just as you look forward to the holiday season, I sort of assume that the drone market is likely to follow a normal consumer seasonal pattern, can you make any comments? I know you're not going to guide out beyond the October quarter, but would you expect to see typical consumer seasonality in that market or do you think that the design activity is so strong that it could override normal consumer seasonal trends over the next several quarters?

I think we see two trends. First of all, we see many new designs coming up. For example, we announced Yuneec this time, and also we believe we still have a few more design win activity that we are working on right now. So this whole market is ramping up. The other thing is by working with our customer, we start seeing repeating order from our customer. That means we are selling through. So from a distribution point to data point, we're optimistic about this selling season for drones.

I think in certain markets -- just to add to that, I think in certain markets you will see an increase in the late Q3 and Q4 revenues associated with the US holiday season, for sure.

Our next question comes from the line of Ted Moreau with Barrington Research. Your line is now open please go ahead.

Thank you very much. Just a question, sorry about to beat a dead horse here, but on the drone side, when you go to 14 nanometers, does that make it incrementally that much better for you versus the CPU players? Or is 14 nanometers not going to be something that you're going to be targeting for drones?

Well, 14-nanometer definitely is also targeting for drones, among our other applications. 14-nanometer is bringing for more on the power side than the performance side. In fact, we can do multiple CPU at same time already with 20-nanometer, so moving to a process note doesn't change our architecture. But 14-nanometer video really provide is that we can scale up the performance without increasing the power consumption. I think that's the most important thing. If you look at the most biggest problem drone today is that they can only not the run time is roughly between anywhere 18 to 25 minutes, people are really trying to increase the run time. So the power consumption is a challenge. But at same time, people want to push the envelope on the video resolution. I think we only talk about 4KP60 with our H1 and also maybe even higher frame rate in the future, based on when we try to push performance and try to also optimize for power consumption, 14-nanometer is ideal solution.

Okay. Sounds good. Thanks and then just wondering what do you think your total end market sell-through exposure is to China? And particularly on IP security cameras business, I'm assuming that your China business there is largely tied to government spending. So do you view that as being more stable, or what do you view as puts and takes coming out of China for you?

I think there is a couple of different areas we have to track. On the professional security side, we do have large customers in China. Those customers, though, build for both export and for internal use. We don't get those stats, so it's very difficult to determine how those customers are proceeding through this sort of uncertain time. On the other side, though, we're seeing strong automotive aftermarket business in China and also our drone customers in China are strong. So I think if you look at the market as a total, we have some positives in drones and automotive and some potential downside for internal consumption on China professional. I think, though, it's a bit early to really make that call. Although our China customers are discussing some of the uncertainties in the marketplace, the only thing they're doing right now is just monitoring their inventory levels very closely. And the normal business cycle is still continuing.

Our next question comes from the line of Charlie Anderson with Dougherty and Company. Your line is now open please go ahead.

I just wanted to be clear on the wearable cameras, if it was all product timing or if there was also any sell-through trends or any change in your customers' forecasts?

We don't really discuss our individual customer forecasting levels, or we're not even privy in a lot of cases to sell-through information. So we're basically just alluding to our build plans in relationship to the total market.

Got it. My second question was about the H1 chip. I wonder if you could update us on design win activity there I think as I recall, drone customers are a primary target there, what we should be expecting in terms of uptake for that chip?

The H1?

Yes.

Obviously we are working hard to bring H1 into production with our customer at this point. And I do believe the drone market is the main target for this chip, but I do believe that the feature of the H1 is important for many other applications where we can drop the power to a lower level. So I think you're going to see drone to adopting our H1 first with then some other people will follow. But when we have lower power and H1 features, I think that will become mainstream at a time.

Great. Quick housekeeping one. As you tape out 14-nanometer, George, how should we think about modeling OpEx when you start that, and when will you start that?

14-nanometer tape-out costs have been amortized since third quarter of last year. So we incur those costs evenly over the development period. So those costs are incorporated in the current run rate. And as I've said before, we're looking at a few more tape-outs going forward, but it is incorporated. And I think we should be reasonably comfortable with a standard increase for the rest of this year in the low single-digit percentage-wise. And that would also include the VisLab acquisition.

Our next question comes from the line of Joe Moore with Morgan Stanley. Your line is now open please go ahead.

I'd like to follow up on a question of competition from traditional apps processor guys. It's clearly a question that we get a lot from investors. You addressed the limitations of that approach, of taking the traditional apps processor into this market. My question is, do you see companies like Qualcomm or Nvidia, do you see them introducing more form factor competitive products in the future? And can you give us an idea of how you'd handicap their capabilities if they were to do so?

We haven't seen they taping out any chips like our power number and the performance number yet. So today in the market, while the Nvidia or Intel or Qualcomm compete with us, we always see their app processor there. So that's the only thing we seeing. So whether they are doing something else, we are not quite sure. But at least they haven't talked to our customer about this.

Okay. Great. That's helpful. With regards to home security, can you give us some indication of the relative size of that market now versus professional? I know it's been pretty small historically but it sounds like it's starting to become relevant. And is that going to be a market that's driven largely by sort of consumer retail sold products or from service provider installations?

I think what we talked about in our Q1 call was the consumer IP security market going from low single-digit as a percent of revenue in the beginning of the year and we feel it will exit the year in the high single digits as a percentage of revenue. So that's a pretty significant increase for us. We are on track to see that growth. We do believe that service providers are going to play a key role in that growth as more of them introduce bundles with security cameras included, like the Comcast and AT&T. But with that said, we do see a broader base of customers in the retail channel moving towards higher level cameras. So I think service providers will provide the image and retail will also be involved. And we'll see that ramp up and exit the year in the high single-digit percent of revenue.

Our next question comes from the line of Kevin Cassidy with Stifel. Your line is now open please go ahead.

Thanks for taking my questions, just along those lines, are you seeing any service providers in other countries that are interested in the home security?

Well, I'll tell you as we do start seeing Chinese service providers going to introduce home monitoring systems for China market.

Okay. Thanks. And can you talk about any progress you've made with the automotive OEMs or factory-installed dash cameras or rearview cameras?

Right. So I think -- first of all, I think that progress is continuing and that we expect -- we haven't seen any roadblock on that. And we are doing well to engage with the customer. Also, we have been sending our product to be evaluated by those customers. So I think we are happy with the progress we've made so far. But also with VisLab acquisition, that really increase our credibility, and also showing our commitment to the market and that has been helpful, very helpful for us when we talk to the other OEMs.

Our next question comes from the line of Brad Erickson with Pacific Crest. Your line is now open please go ahead.

Hi, thanks for taking my questions, just a couple follow-ups here. First, George, you've talked historically about your longer-term targets, just growth rates in the 20% to 25% range. Relative to your current visibility in the new design wins, particularly in the action camera segment, can you talk about your confidence in those longer-term targets?

Yes. I had not altered any view of my long-term targets for, let's say, the next several years. I think what I normally do is as we get towards the end of this year, I update my target model. We're working on where those numbers are, both in the near term and longer term as we develop new products in auto space. So I think for now I'm very comfortable with the model. I think the profitability probably in the model in the near term's a little low. I have it in the high 20%s and that's probably closer to the low 30%s at this time. But I think I will update it in the Q3 conference call.

I'd also like to point out that overall Q3 guidance showing that the wearable market is going down sequentially and also year over year because of the product ramping up time different from last year. But even with that done, our Q3 growth is still 40% year over year. I think that's an indication that we continue to extend our business on other markets.

[Operator Instructions] Our next question comes from the line of Matt Ramsay with Canaccord. Your line is now open, please go ahead.

Thank you, Good afternoon guys. George, I think you mentioned in your prepared remarks that you expected, at least in the back half of this year, for the wearable market to return to what you would view as a more market growth rate. Maybe you guys could talk about what you think the growth rate of that sports or action camera market is over the long term as a market as a whole?

We didn't talk about the actual market growth rate. What I said is specifically around what our internal view is of the overall growth of that market in the holiday period run-up. We didn't comment specifically on the overall market growth. For those, we normally just go to the analysts that cover the GoPros and people like that, which has been reasonably close. And I think most of the analysts have them in the low to mid-20%s for growth rate.

Great and then I guess at CES this year it was a hot topic politically and in the news at the time, but you guys introduced some reference design around police and first responder cameras and the like. Fermi, do you care to comment on the progress you've seen there and how that market's started to develop? Thank you.

Yes. Like I said before, I think this market continued growth for us in China, and also we have a little design win activity in the U.S. And we do believe that we are on track to having revenue in U.S probably the end of year or early next year for this wearables camera for policemen.

Our next question comes from the line of David Williams with Ascendiant Capital. Your line is now open please go ahead.

I wanted to see if you could maybe give us a sense of where you're seeing the most design activity today? I know drones have been very strong, but are there of the areas where you're seeing a lot of design activity that you point to, outside of just the drones?

Well in fact we talk about consumer active cam we still seeing a lot of design activities and also drones and also even in the dash cams in China, we see many design activity like we said in our script. A lot of people, especially in the big brand coming out, they're demanding the highest possible resolution and the back-up feature set, and that's a driving the overall usage in China, and also China growth for this market. So we also see design activity there. I think that those three areas definitely is the key area we're seeing. Also we spent a lot of time talking to automotive OEMs after we acquire VisLab. And I think, although it's just a discussion and trying to build relationship, and also we already have some design activity on the e-mirrors and the surround views, those are continued ongoing.

One other area, and we talked about in the prepared comments today, is our S2LM security product. And if you look at the launches over the last four or five months there, it's probably been the highest number of launches we've had in a long time. So that product is doing very well in the marketplace.

Great. Do you have a sense maybe of your market share if we're thinking about maybe the consumer and even the service provider? Do you have a sense of what that market share looks like today?

Well, we only know our data, but every time we look at the data from the market research, I think most of them are still around because it's in the early stage and a lot of data is in China. So we haven't seen a consistent data point that we can calculate our market share. But we do believe that, like we said before, in the security camera side our biggest competitor is HiSilicon and we're just competing with them head-to-head in those markets.

Great. Lastly, now that you've had a chance to really look under the hood with VisLab, is there anything there that maybe has gotten you more excited about that? And maybe anything that you can incorporate maybe a little more quickly into your product lineup? And give us how you're thinking about VisLab after having a little bit of time to really look at it.

First of all, I think the integration went very well, and we think that this group of people are really very high caliber, outstanding researchers, and their work is really outstanding our opinion. And we have -- and after that, after the acquisition we're finalize the integration so when we assign those researchers with merging into our current team or current task by working on the tasks related to our next computer vision chip. And with the people and the quality and the work they have done, now we are confident that our computer vision chip is in a very good shape and should be -- we are planning to tape-out that chip and according to our plan.

I'm showing no further questions on the phone lines at this time. I'd like to turn the call back to Fermi Wang for closing remarks.

Thank you, and thanks to all for joining today's call. I want to send a special thank to all our current engineers for their continued dedication and work. Thank you and good bye for now.