Good day ladies and gentlemen, and welcome to the Ambarella First Quarter Fiscal Year 2017 Earnings 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 Instruction] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Deborah Stapleton of Investor Relations. Ms. Stapleton, you may begin.

Thank you. Good afternoon, everyone and welcome to Ambarella’s first fiscal quarter 2017 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 the information regarding our fiscal first quarter. The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, our 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 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 25, 2016 for the 2016 fiscal year. Access to our first 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. Now, I will turn the call over to Dr. Fermi Wang.

Thanks, Deb, and good afternoon. Our Q1 2017 revenue was $57.2 million, representing a decrease of 19.5% from the $71 million of revenue in the same period in the prior fiscal year. The year-over-year revenue decrease was driven primarily by a decline in a wearable sports camera market as we forecast during last quarter’s earnings call. Revenue from flying cameras was strong, and we also enjoyed continued revenue growth from new home monitoring applications. Design win activity was strong across all market segments with increasing adoption of Ambarella’s new 4K and HEVC SoC solutions. As we look forward, however, we anticipate that disruption in the availability of Sony image sensors caused by the April 14th Kumamoto Japan earthquake has and will impact our customers’ ability to build cameras. Ambarella is one of Sony’s most significant camera SoC partners for non-cell phone application. And as a result, this will impact the timing and the scope of demand for our chips, over the next several quarters. George will provide further information during the financial section of today’s conference call. In the drone market, we are enjoying solid sales growth as well as a significant design win momentum. Volumes are increasing as strong price points continue to come down as the consumers demand high quality video recording and photography and professional users develop more vertical market commercial applications. During the recent Asia CES in Shanghai, Ambarella demonstrated the industry’s widest range of flying camera SoC solutions, including its A12, A9SE and H2 SoC, all supporting 4K or Ultra HD resolution video at 30 or 60 frames per second and the advanced electronic image stabilization. In May, Chinese smartphone giant, Xiaomi introduced its new Mi Drone, which offer consumers the combination of a high quality video and affordability. The 1080p60 model sales for approximately…

Thanks Fermi and good afternoon everyone. Today, I will start with a review of the financial highlights for the first quarter of fiscal 2017 ending April 30, 2016, and then move on to the financial outlook for Q2 of fiscal year 2017 that ends on July 31, 2016. 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 for Q1, we have eliminated stock-based competition expense adjusted for income taxes. Our Q1 2017 revenue of $57.2 million represents a decrease of 19.5% from the $71 million of revenue in the same period for the prior year. In the first quarter, we had strong year-over-year growth in flying camera and home security revenues. In professional security, Europe was stronger than expected while China was weaker than forecast with total Q1 revenues ending with a moderate year-over-year decline. As forecasted on our Q4 earnings call in March, first quarter revenues from the wearable market were down substantially from the previous year, finishing the quarter at about 15% of total revenue due primarily to the significant decline in revenues from GoPro. The Q1 auto aftermarket revenues had a year-over-year decline but were in line with our expectations as the market continues to consolidate around the major manufacturers. Non-GAAP gross margin for Q1 of fiscal 2017 was 64.6% compared to 64.1% in the immediately preceding quarter, and 64.8% in the first quarter of the prior year. Gross margin in the quarter was higher than anticipated due to the strength in the drone market and less than expected revenues from the lower margin China security markets. Non-GAAP operating expenses for the first quarter were $24.3 million compared to $22.9 million for Q4 2016, and $20.2 million for…

Thank you. [Operator Instruction] Our first question comes from the line of Matt Ramsay from Canaccord Genuity. Your question, please?

Obviously, a lot of moving parts in the outlook. So, George, maybe I’d ask you to clarify or add any detail that you can, some of the commentary you gave there, just to make sure that all of us got all those numbers right. So, I guess maybe the sensitivity to Sony, I think you mentioned 40% to 44% of revenue, is that right? And then, if you could help us maybe quantify for the quarter -- the July quarter and for the full year, any sort of exclusive numbers that you guys have maybe excluded from the revenue line as regard to the Sony shortages?

Yes, it’s 40% to 45% of our revenue is directly connected to delivery of Sony sensors. We haven’t quantified in enough detail to actually give what loss businesses at this time. As we move forward and get more data, and then Sony is able to develop their delivery plans, it may become clear as to what specific projects cannot go forward. But at this time, we have not estimated that for our external consumption.

Maybe just a follow-up to that. Is there any way to think about the gross margin profile of the cameras that use the Sony sensors to ballpark it perhaps a little bit?

There is about 30-point spread between the different projects that use Sony sensors, all the way from the low end security, all the way to high end cameras, 4K cameras for drones and other markets. So, that was one of the reasons why I gave such a wide range on the gross margin going forward because the delivery schedule from Sony and the mix that results really could impact our margins. But, saying that, I am very comfortable that with the range that I gave, 60.5 to 63.5, we should be able to maintain that range.

And I appreciate the uncertainty there, so thanks for the additional details. Fermi, maybe if I could step back a little bit, just a couple of questions for you at a high level, I guess the first one being and maybe it’s better to let your customers to speak to this a bit, but, I guess how hard is it or difficult would it be for customers to multi-source or switch sources from the image sensor perspective, given the uncertainty at Sony? That’s question one. And then number two, obviously the primary competitor has been Huawei for some time, HiSilicon, [ph] but maybe you could give us an update upon the competitive dynamics in your business, particularly in Asia around some folks [indiscernible] trying to get into the high end, but also hope licensing IP based DSPs and going at lower end of the market, I think you guys are quite differentiated but any update in the competitive landscape would be helpful? Thanks guys.

Okay, so first of all, for getting a second source for our customers, obviously all our customers probably want to look for second source today. But if that’s you have kick off project to switch a different sensor at this point usually to three to four months of a project because we need to redesign the hardware, get a new sensor, new build, and after you get it done, we have to go in there to reach the video quality for that particular set. So that’s three four months delay. I really don’t think that at this point getting a second source will improve this short term problem. I think moving forward with our customer demand, second source is different question but I do say that Sony provides probably the best solution for the -- especially for the high end sensors, if you look at all of the high resolution 4K sensors that our customers using, majority of them are Sony based. So, it’s going to be ongoing problem, we’re going to continue to talk to our customer. But to solve this short term problem, changing sensor is not really option here. In terms of competition, I think in general, in the last three months, we don’t see the competitive landscape changed at all. For HiSilicon, we still that it’s our major competitor in IP camera. And the one thing we did is after we introduced our S3L and S3LM HEVC solution, we have a lot of design win momentum and that’s why we believe that we have a strong HEVC roadmap for our customer for IP security camera now. And for the Qualcomm [ph] competitive landscape didn’t change that much either, although they continue to try to approach our customer on the drone side, but I think they still either focus on the high end drone products like control [ph] portion, not a video portion or for a low end drone, they try to do a total solution. But, in our current latest roadmap to our customer that we show A12 and A9ES and H2 could cover on low end to mid end, to high end, we have a complete roadmap to grow against our competitors. So, in quick summary, in the last three months, we don’t see the composition landscape changed.

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

Hey, good afternoon guys. This is actually Matt Diamond on Ross’s behalf. I know that you stepped away from the former 15 to 20 and replaced it with a flat to down five; the flat year-over-year growth would imply a big second half. Is that solely a function of a go pro rebound or is there anything else to consider in that potential second half?

It’s obviously we’re expecting the wearable market to return to somewhat normal levels in the second half. So that’s the biggest impact. But we’re also looking at the other consumer markets. The drones we feel will be solid, our home security business will continue to grow as well as professional security particularly in China having some rebound for us. So, I think it’s a combination of multiple markets but with wearable being the biggest impact.

And with -- I want to ask a question that was asked a little bit differently by the last questioner. What exactly would the fiscal 2Q guide have been without the Japan earthquake?

We haven’t given a number there, and at this point, we feel it’s way too early to disclose that type of data.

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

Just sort of trying to get a sense on the Sony impact, obviously you guys don’t have perfect visibility but George, you sort of described, I think the production schedule Sony just starting to get on line here in late May and won’t be up to full production until the end of August, if I heard you right. Just kind of wondering, do you think the impact of the Sony shortage is greater in fiscal Q2 or fiscal Q3; I mean your guidance for the full year will be flat to down five, doesn’t sound like you’re going to see much of it impacting Q3 or the second half of the year, just because it implies a pretty big step up in the quarterly revenues but would seem to me the near term guys can pull Sony sensor out of inventory and that the shortage may have a bigger impact a couple of months down the road. Just wondering if you could give us some sense in terms of timing of when you think the impact would be greatest on your business.

If you look at a very level, the impact is as you know the end of Q2 and into Q3. So, it’s sort of a tail end of Q2 with the majority probably hitting Q3, as we see it today. The thing you have to really be careful about though, it is wildly different impact customer to customer. So, this is not -- it’s not a -- let’s call it a flat impact across every customer. Some customers have high level of inventories and are able to bridge the gap -- other customers may be short. Some customers have delayed projects. So, it’s really a mixture of impacts, we have to look customer by customer. But you can assume Q3 impact is higher than Q2 with both quarters having impact.

And even with that impact, the flat to down five percent guidance still holds and so obviously it’s -- if I read between the lines without the impact, it probably would have been better than flat to down five.

Yes.

And then, just you talked about a little bit of weakness in the April quarter for the low end China, it came in a little bit below your expectations; was that just for seasonal factors around lunar New Year, was it inventory digestion from the more aggressive buying patterns into year-end for those Chinese customers or was there another reason you thought that that business was a little weaker than expected in the April quarter?

No, I think it was primarily just market driven. There was -- first of all, it wasn’t that significant. So, I think probably burning off inventory due to market conditions is probably the best guess we have now. There was no major announcement and no major changes in market mix or dynamics out there, competitive dynamics that would indicate that kind of decline. And we see it really sequentially coming back in Q2. So, that’s probably more market driven.

And then, just it sounds it’s not having a big impact, given your outlook for the business to come back in the second quarter, but just wondering if you had any comments sort of on the mix between IP cameras and analogue cameras. It sounds like the analogue HD cameras continue to shift in -- there is a good upgrade market from SD cameras to HD cameras on the analogue side; just kind of wondering if you had any thoughts on where the mix was between kind of the analogue cameras or some IP cameras in that security business?

Yes. I think your observation is right. And the fact that analogue continued to be strong in last 12 months. And I was -- our latest guess is this year it’s going to be 50-50 between analogue and IP. And that’s our best guess, but there is no market data, or research data to support that yet. But, I think the -- if we talk to our customer, they all believe that because of infrastructure, all the people who use analogue camera is leveraging the existing analogue cable they already have. So, moving forward, [indiscernible] will use IP infrastructure. So, in the long-term, we still believe IP security camera will continue to grow but the short situation is that the analogue camera will continue to have a strong position in the security market.

Thank you. Our next question comes from the line of Kevin Cassidy from Stifel. Your question, please?

Thanks for taking my question. It seems you’ve got a lot of design activity going on and wonder if you could just give us a comparison of your 14nm products and the design activity versus some of your past product introductions, any type of order of magnitude difference that you’re seeing in the design activity?

Well, first of all, I think from a customer interest point of view, I think the 14nm product is we have to say is probably one of the best we’ve ever seen because not only we upgrade the performance and features and the quality but sometime we reduce the power consumption dramatically. So, I think we’ve got a very good feedback from customers, we can see that on design momentum. But from engineering execution point of view, this project definitely is more challenging than our previous project also, but [indiscernible] will be over the first half which is taking out 14nm chip and get back in a very healthy way. And we’re confident that we’re going to take our first paper into mass production, could speak very high volume for the quality of our engineering team to take out very complicated chip and get it done right in the first time.

And maybe could you give us an update on the -- on Computer Vision and some of your VisLab opportunity?

Yes. In fact, like we reported last time, I think that integration is now very well and we’re very happy with the technology and the engineers we got from VisLab. And today, I think we’re continuing to making very good progress on our Computer Vision technology. For example today, now our team’s really focused on engineering execution to deliver the paper of first Computer Vision. And it will happen before the end of year. And during the meantime we’re ramping up our software team for different applications, like we said before, this chip is not just for automotive, also for [indiscernible] also for other parts of location. We expect that the software team will continue to ramp in the next several months. So today, it’s all about execution and I think that’s under our control, and we’re also marketing to development but it’s early stage; we don’t have any comment on that yet.

Okay, great. And maybe just ask one other question; it seems to be constant concern in the market; are you seeing any unusual price pressures?

No, well I know that a lot of people are trying to compete with on the price, no -- the price pressure is always there, but also we move up and 4K, and 4K’s level over in 360 level, we don’t feel too much of price pressure here.

Thank you. Our next question comes from the line of Charlie Anderson from Dougherty & Co. Your question, please?

Yes, good afternoon. Thanks for taking my questions. I was thinking about the second half that’s going to be pretty big compared to the first half. I think usually you are down in Q4 seasonally, but if I think about the impacts in Q3 of Sony and may be a restocking effect in Q4 and then also I think some of the 14-nanometer stuff that’s sampling now more availability by then; is it possible that were a little bit smoother up in Q4 and that’s kind of what we’re thinking in terms of giving to the numbers?

Yes, I would agree with that. I think the impact of Sony might delay some buying decisions and Q4 -- Q3 to Q4 would probably be smoother than it has been in the past.

And then, you guys mentioned really good consumer security expectations in the back half. I wonder if you could speak to some of the underlying drivers there. And I think in the past, we’ve talked about a percent of overall security revenue. And could you give us any update on where that’s trend that would be helpful?

So, I think that the momentum is very good, because few things. First of all, which we expect -- we have been talking about Comcast, AT&T and [indiscernible] service providers continue to ramp up their project, in fact doing multiple projects and that helps. But at the same time, we are starting new application. In this announcement, we mentioned two applications, which I think is going to be a big market for different markets. And we have evaluated several major customers and we’ve announced two of them at this conference call. And beyond that traditional home IP camera, home security camera, continue to grow well. And overall, I think that this home security camera becomes a very healthy business for us. I’ll leave the percentage of total revenue to George to talk about.

Yes. I think as we said in the past, there has been from a mid to high-single-digits. And I think as we go into the second half, it probably should be in high-end of that range.

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

I want to understand image sensor issue. I know there is some big smartphone players that are dependent on the same image sensors. And we haven’t sort of heard the same concern out of that. Is that smartphones use a different image sensor, are they ahead of your customers in the queue; what’s that?

Correct. So thank you. First of all, they’re using totally different image sensor. We are -- our customer is typically using a much bigger optical size sensor. For example, the small size, will use well over 2.3 and most of cell phone guys use one-third inch sensor, which is much smaller sensor. So it’s totally different. For more importantly, majority of a Sony cell phone sensor is manufactured in [indiscernible] factory. The Sony had multiple sensor factories, the one got impacted the most, the one closet to the earthquake manufacturing majority of those high end sensors. That’s why we see a lot more impact than the cell phone guys.

Okay.

As a matter of fact, the sensor factory that delivers into our markets, was the only one that shutdown; all the other factories which were delivering into the cell phone market actually kept the production running.

Okay, that’s very helpful. And then with regards to the drone market, separate question, can you talk about the breadth they are seeing there? And obviously a couple of your customers are permanently doing very well, we’ve seen others -- not your customer, maybe with a little less revenue growth. Can you just talk about how many vendors are going to be relevant over the course of the rest of this year and how many launches during the pipeline, how broad do you think that business is going to be?

Okay. So, for drone market, I think you’re going to see many, many, many customers coming up. We don’t know who is going to win or who is going to stay. But, we try to bet on several customers that we think have the a best chance. In fact that we talk about TGI, [ph] Xiaomi this time and we talk about unique. And we have a strong design win momentum coming; we’re going to very wide range, from the low end to the high-end. But, we also believe that the consolidation will happen very quickly. Just look at the price point drop, with Xiaomi announcing 4K drones at $450, I will say that will push and speed up the consolidation on a drone on manufacturing side. So, we are -- our approach is we’re going to continue to work with the customer we think that has a differentiation, has capability to push volumes and hopefully they will be the one that stay at the end.

Thank you. Our next question comes from the line of Richard Shannon from Craig-Hallum. Your question please?

Well, hi Fermi and George, thank you. Thank you for taking my questions. Maybe I’ll follow-up on the last question here on the drone market, just very high level for me. How do you see the growth for, the parts of the market that you’re addressing or addressing better than others here? If you can talk about percentage terms or absolute units would be great to get your views there please?

Correct. So today, if you look at majority of our shipments to the drone market, it’s medium to high end -- basically is 1080p60 video to 4K video. So, this is very good into civilization and very good flight control? So that’s market that existing today. And also [indiscernible] using their own chip solutions that enable probably 299 to 499 using smaller drone also a strong products. These two basically are the two existing markets. But what we are seeing right now is the price point of the current high end drone, I’ll call 4K drone is pushing so low, is going down to the below 499 and probably over 399 range. Now, push everybody down and we have low end solution like A12 than we think we can enable any flying drone with a very good quality video at $199. So, today, we are dominating on the 4K drone but we do have a roadmap to serve all the way to a low end in the near future.

And when do you see the impact of some of these lower price solutions, you are selling into in terms of your revenue stream; the second half of the year or is it going to be later than that?

I think second half of the year, you’re going to start seeing it but I think the volume ramping up will be next year.

Okay, that’s great. I am sorry. I didn’t mean to interrupt you there.

Okay, I want to add one more comment is I think that from a revenue point of view, I think that the low end drones is going to give us value and revenue growth, although that was a market might be a little lower than our other drone markets but still probably at our corporate gross margin range.

Okay, perfect. My last question, Fermi, again for you. You talked about as well as mentioned in your press release that you’ve seen some great interest level and having success with 4K across all of your segments. I am wondering if you can give us your thoughts on where the trends are most dramatic in terms of adopting 4K; it seems like drones is an obvious one. If you can kind of talk about that maybe compared to other markets here and kind of give us a sense of adoption rates and trajectories of 4K versus HD?

I think drone is obvious, I think the sports cameras obvious; I think that for sports camera, all the cameras coming out will have 4K in the near future. And even on the high end professional security cameras, we start seeing very good momentum on the 4K, maybe not 4Kp30, but a lower. But the resolution -- 4K resolution definitely helps our high end security camera business. And also the other market that really requires 4K is a virtual reality cameras. In fact that -- if you look at most of virtual reality content all there, the one of the biggest problem they are facing is that lack of resolution. And because they are so many cameras you need to put them together and the lack of resolution means not only the content is not clear but also probably causing other viewing problems. So, we have seen a lot of interest having 4K and our VR cameras. So, I think that’s basically the momentum on the 4K side.

Okay, that’s helpful. Maybe just a quick follow up to that last comment on VR for me. Is VR a category that can be a meaningful one that you call out in some sort of percentage or relative terms here within say the next year, kind a grow that fast? I mean as example, a year ago drones really seemed to accelerate from nowhere to a meaningful amount, so VRs have the capability of doing the same thing?

Well, I have to say that I believe VR is the more hype than the reality at this point. So, I won’t say that VR camera will give us meaningful revenue as quickly as drone has done for us. But however we do see that that we have chips that built for other application, by changing software, we can really deliver a very good VR camera and we want to be a supplier in that business if the market becomes meaningful for us. So, our approach is -- we start seeing multiple companies using our chip to do 4K or VR camera, but I’ll not say that they will become meaningful revenue for us in a near future.

Thank you. Our next question comes from the line of Brad Erickson from Pacific Crest Securities. Your question, please?

Just a couple of follow ups, when we look at action cameras through the second half or sports cameras, I guess as you label them, I guess yearly outlook implies it’d be up fairly significantly. Is that basically all coming from go GoPro or is broader based from other customers sort of gearing up for the holidays?

I think, definitely GoPro continues to be important part of it, but we do see that’s a very broad customer base. Xiaomi [ph] already announced their 4K camera based on A9SE and also they have -- we do believe there are multiple other customers going to announce their products including GoPro. So, I think that wearable sports, we’re going to see broad-based customers.

And then just a clarification, within the new guided range for flat to down for the year or flat to down 5% for the year, is it fair to say drones will be more than 20% of total revenue now, or is that the 20% still the value for the year for the drone portion of the business?

I think, in the second half, we would expect drones to remain strong and potentially could go up above our previous guidance.

And then finally, regarding the automotive OEM when you mentioned in the prepared remarks, can you just compare I guess the ASP and margin profile between that solution and the dash cam, if there is any? And then just curious where that mix of that business given being sort of an incremental win, where the mix of that business in automotive overall goes in the next couple of years between OEM versus dash cam? Thank you.

First of all, the ASP side that OEM ASP is higher because mainly because that OEM has very demand on the temperature range of our chip and we need to do special screening and also the quality. So that makes the ASP better for the OEM business. And also we view that the strength of our business that we -- our chip do scale up on the temperature range and which is important for the OEM business. On the next point of view, that is still very -- on OEM business is still very small for us, but we do believe, and the momentum we’re seeing with our OEM business going to continue grow. And it’s not only just for the record -- the dash cam has recorder but also for the other application that we talked about in the past, the mirrors, the electronic mirrors, the surround view, and the hopefully eventually years down the road, we can do harmless [ph] driving. So that has been our OEM roadmap and that’s exactly why it’s very important direction that we’re putting together for the company right now. So, although the mix is low right now but we hope that it continues to grow in the near future.

Thank you. Our next question is a follow-up from the line of Ross Seymore from Deutsche Bank. Your question please?

Hey guys, apologies, just one housekeeping follow-up question. There is usually a breakout given between the camera revenues and the infrastructure revenues; that wasn’t given in the script from what I could see, could you provide that for us?

Sure. You can expect camera revenues to be 98% in that range.

Okay, as for the guidance for the quarter?

Yes, I haven’t guided for the year on that, but it’s ranging in that kind of consistent 1.5% to 2% of revenue now, at least in the near term.

Thank you. This does conclude the question-and-answer session of today’s program. I would now like to hand the program back to CEO, Fermi Wang.

Thanks for joining us today. And I want to have a special thanks to all our colleagues for their continued dedication and hard work; and goodbye for now. Thank you.

Thank you, ladies and gentlemen for participating in today’s conference. This does conclude the program. You may now disconnect. Good day.