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

Thank you, Christie. Good afternoon and welcome to Ambarella’s second fiscal quarter 2017 financial results conference call. We appreciate you 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 second 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 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 25, 2016 for the 2016 fiscal year and quarterly report on Form 10-Q for our first quarter of fiscal year 2017 that we filed on June 8, 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 website. I will now turn the call to Dr. Fermi Wang.

Thanks, Deb and good afternoon, everyone. First of all, I would like to point out that we released our official release and well realize here today, but NASDAQ has failed to put our release on their website. If you haven’t been able to locate one, please go to our official website www.ambarella.com you should be able to locate one there. Now let me transition to our quarterly call. In Q2 2017, our revenue was $65.1 million, down as forecasted of our last call about $84.2 million of revenue in the same period over the prior year. The decline in revenue was primarily due to a decline in the wearable sports camera market as we have discussed. We are seeing a near-term recovery in our China IP security camera business and are experiencing positive design win momentum in all of our current market categories. During our last earnings call, we discussed that a possible impact of the Japan earthquake on the supply of Sony image sensor to our customers and to our revenues and results. Close on impact has been felt during Q2 and continue into Q3, we believe that most supply issues will have been resolved by the end of the third quarter. In the film market we are seeing significantly downwind based on Ambarella's wide range of drone camera solutions. Our products has been the highest quality professional models to consumer models that continue to hit new low price points. Our A12, A9SE and H2 SoC families all offer 4K video resolution, high quality photography and then features such as high dynamic range processing and electronic image stabilization. Our ability to run many of these functions simultaneously provides us with a sustainable competitive advantages versus competing [Technical Difficulty] solutions. That are also failing to compete on video quality, features,…

Thank you Fermi and good afternoon, everyone. Today, I will start with a review of the financial highlights for the second quarter of fiscal 2017 ending July 31, 2016 and then move on to the financial outlook for Q3 of fiscal year 2017 that ends on October 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 Q2, we have eliminated stock-based competition expense adjusted for the impact of taxes. Our Q2 2017 revenue of $65.1 million represents a decrease of 22.6% from the $84.2 million of revenue in the same period in the prior year. In the second quarter, we had strong year-over-year growth in drones and home security revenues, offset by a substantial decline in the wearable sports market. On a year-over-year basis, overall revenues in the IP security market grew modestly with professional security experiencing a small decline offset by strong growth in the home security market. On a sequential basis, the IP security market grew modestly with growth in both professional and home security revenues. As forecasted on our Q4 and Q1 earnings calls, second quarter revenues from the wearable market were down substantially from the previous year and flat sequentially due to primarily to a significant decline in revenues from GoPro. The Q2 auto aftermarket revenues were flat year-over-year primarily as a result of some softness in China. The impact of the Sony sensor shortage was in line with our expectations with the most significant impact in the quarter on new product launches. As most new product launches have limited on-hand sensor inventory, purchases of other components were often delayed. We estimate of loss or delay in revenue was between $2 million and $4…

Thank you. [Operator Instruction] Our first question is from Kevin Cassidy of Stifel. Your line is open.

Thanks for taking my question and congratulations on a great results. I wonder if you could give us an idea of the percentage of total revenue with home securities, it seems like that market is starting to gain adoption. Can you give us an idea of what the percentage of revenue, it would be?

Yes. I think the home security side is probably in the high single-digit right now and will increase a bit in the second half as a percent of revenue.

Okay. I’m sorry.

Kevin, it’s Fermi. I just want to add one more comment. Because for example, the customer like [indiscernible] they took chips for both professional and consumer use. So the very top was to get accurate estimate. So we just have to give you some rough guess that we can come out.

I see. And maybe try to give another rough guess. Is this higher gross margin business or is it in line with what the IP professional business would be for gross margin?

Well, it’s at the low-end of the overall security business gross margin and that’s along with the China portion of the gross margin profile. There are other areas of security at the high-end, we do get margins up near our corporate margins.

Okay, great. Thanks.

Thank you. And our next question is from the line of Ross Seymore OF Deutsche Bank. Your line is open.

Hey good afternoon guys, good results here. This is Matt Diamond on Ross’s behalf. The first question, GoPro has mentioned that there on track with the new product for the second half. Are you see an anything to sway them or anything to either endorse or repeat that?

As always, we don’t comment on our customer product launches.

Understood. And on the gross margin side of things. It looks like your [indiscernible] the gross margin pretty nicely, what is behind that? Is that clearly a function of mix or is there something else to call out there?

Well, as I said in the earlier comments, we did have the recovery of almost a $1million of inventory that was previously written down through yield loss in the manufacturing process. And that happens when the chips go through tests and don’t pass at highest specification that go into a yield loss bucket. If we can find opportunities to use those chips at lower specification, we run them back through test and we recover those and sell them. So in Q2, we had an usual high amount of previously written-off inventory, which we were able to retest and sell. Normally we have that on a regular basis, but usually a much smaller number. So we just got, I think a couple of really good opportunities to reuse some of these chips and reprocess them. We will still have a little bit of that in Q3, but it will go back to normal levels after that. Yes, I was just going to continue. On the product side, our China security business was lower than we originally anticipated, which is our lower margin business. So therefore the mix itself was more positive than we had anticipated.

Great. Thanks so much.

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

Thank you very much. Good afternoon, guys. Fermi I thought, it was interesting in your prepared remarks that you talked about the momentum that you guys are seeing in design wins in the Professional Security space on 4K and HEVC cameras. I know that there has been some I guess debate and consternation within the investor ranks about how applicable 4K resolution and HEVC compression are in different tiers of that professional security market. I guess the question is how big are the different tiers? For what tiers are 1080P good enough and for what tiers you need 4K? Maybe you could give a little color on what you are seeing in that market. Thanks.

I think we need to separate 4K and HEVC to two different buckets and talk about. Let's talk about HEVC first, I think outside China HEVC is not popular at all due to the loyalty issues. But in China we start seeing that HEVC standard being well widely adopted and a lot of people are using them in for Chinese internal consumption. So I think that HEVC definitely is China market only. In terms of the 4K, while in fact what I would say is four megapixel. So even four megapixel is much higher than traditional full HD video. We do see that the trend for the professional IP security camera is to get higher pixel, because you want to get more resolution so you can do [indiscernible] and the resolution definitely matters for that purpose. So we start seeing a momentum moving forward to higher pixel we start seeing four megapixel become very popular. I think 4K is next trend. So we haven't seen a 4K being the mainstream yet, but I do believe four megapixel from next year could be a mainstream part.

Now that's really helpful. Thank you. And then I guess my follow-up question is on the automotive market. It was very interesting in your prepared remarks to hear about design wins and not just design wins but shipments into automotive OEM cameras. May be you could talk a little bit about the different applications there what kind of ASPs or margins you expect out of that versus the business that you have had in automotive aftermarket cameras up to this point and when that can be material to the overall P&L. Thank you.

Right. So for automotive OEM business there are multiple possible application for us. In the near-term application, the one that we talk about is being a video recorder function for the OEM business and we really announced several product customer products in our release today and we also have a lot of momentum on that. In terms of ASP I think it's a little higher than our aftermarket product, because the actual higher spec like higher temperature range and some of that require [indiscernible] auto grade chip. So we do believe that ASP gross margin is higher than our typical aftermarket dash cam. Outside of the video recorders, there are other video applications available for OEM business. We talk about AVM business around you, we talk about electronic mirror in the past. Lots of application, I would say the medium term opportunity for us. With that more technology I see us this year and we continue to demo to our customer and we have got very good feedback from the customers on this publications. So I think we talk about the end of next year we are going to start seeing some revenue from those two markets and we are going to stick to that. In terms of ASP and gross margin, I think it's too early to talk about it. The longer-term opportunity for us is really become [indiscernible] autonomous car, which I think is still four, five years away.

All right. Thank you very much for taking my questions. I will get back

Thank you.

Thank you. Our next question is from the line of Quinn Bolton of Needham & Company. Your line is open.

Hey guys. Let me offer my congratulations as well. Fermi just wanted to follow-up on sort of the comments on [indiscernible] and autonomous car opportunities knowing that it’s four, five years out. You guys have previously talked about taking out of your first machine vision chip later this calendar year. I’m just wonder, if you could give us any updates on where you are with that project and perhaps more importantly any hints you can give us on what sort of features you are going to be included in that chip. Is this going to be sort of the machine learning or deep learning solution, is it really going to focus on video preprocessing and trying to get the best video into the autonomous vehicle or drone? Thanks.

Right. So first of all, the target you know that we acquire is that and which is a company that very famous to do video analytics for autonomous car. So our intention to convert their complete self-respect in competition for autonomous car onto our first chip. But application for that chip is beyond just car, we believe the autonomous drone and other application will require similar functions that you can detect objects, you can do machine learning on that. All those function will be part of our chip and our goal is that our chip will be able to implement all of the functions that on the chip is available. We talk about late this year or early next year [indiscernible] chip was to on the schedule to do that. And we hope that some have next year we will be [indiscernible] of the chip.

Great. And then George, I know the gross margin is here benefited from some of the previously sold or previously [indiscernible]. But even with the China security business coming back in the October quarter plus the ramp of the consumer business. Their gross margins are still well above your long-term corporate average. Can you just give sort of sense, do you think that you are doing a better job with the operations team to keep those margins higher or is there something, you see say next year that will bring the gross margins back down into the corporate average range that you project?

Well, I haven’t done a lot of work on next year yet, there is a lot of variables still been looked at. For this year though, we are going to benefit a little bit from recovery of some written down parts in Q3, which helps. We also won’t see the real big ramp on the low-end of the China Security business until sort of the exit to the quarter and into Q4. So we will see, I think the margins flow down a little bit this year, I would expect to have a better picture of next year. I think right now the biggest wild card for next year is where is China Security headed, I mean we have a recovery, we are forecasting some recovery in the second half. But at this time, I don’t think we are willing to commit that this is permit in recovery in the China market, I think we will more toward year-end. So if that market expand some continues to recover next year, we would see our margin sort of flow down probably into the high-end of our target model in the early part of the year.

Great. Thank you George.

Thank you. Our next question is from the line of Joe Moore of Morgan Stanley. Your line is open.

Great. Thank you. I guess following up on that gross margin point. Can you talk about as roll 14-nanometer out into more end markets. What does that do for your sort of like-for-like gross margin, is there any big change there?

I think it's going to depend on the market and where we are, because we will be rolling out lower end 14-nanometer chips as well as high end. So it will be dependent on how those markets mature and at what rate. Obviously, if we think at the higher end our margin still should be very strong. But we will continue to compete at the lower end of these markets with 14-nanometers and we would expect those margins to probably in line with what we are selling at 28 and 32. So I think 14-nanometers probably not going to have that much impact just being 14-nanometers, it’s going to be more the mix of how those chips rollout.

And Joe this is Fermi, let me add one more comment. I think when we look at how we differentiate ourselves against our competitors we talked about before, we continue to improve performance without increasing the total budget. And 14-nanometers players we spot on that and just like George said, we are going to use 14-nanometers for lowering [indiscernible] we just take out second 14-nanometer chip just this month and we are going to continue to work on that. And that we are probably going to start talking about 10-nanometer chip very soon. So you can see that we are going to continue to invest highly on those process note, so that we will continue to be competitive on both performance as well as on the power consumption.

Okay, great. That's very helpful. Thank you. And then separately the $2 million to $4 million of last revenue due to image sensor problem for I guess the two consecutive quarters. What happens to that revenue, is there some of that that's regained as the supply chain catches up or is that sort of driving business to other image sensor suppliers and therefore other video processing suppliers?

It's a combination of both. In certain markets it would have driven the sales to other sensors and potentially suppliers particularly in China in the security market, but in a lot of the cases the new rollouts will just be delayed. So we will some pick up and roll through potentially some of that will come back in Q3 and Q4.

Okay, great. Thank you very much.

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

Great, thanks for taking my questions. I want to start with drone market, you did talk about how that was very strong in the quarter and you are expecting it to be down kind of take breather in next several quarters. I wonder if that what is going to be typical here was the spike in July abnormal. And then just kind of big picture the drones coming down to $300 to $500 level the selfie drones that you mentioned. What does that suggest about unit volumes going forward from here in terms of the momentum of that category?

Yes, I will take I guess the first part of that question where the timing of revenues in the drone market. The consumer portion of the drone market we eventually will expect to see that probably sort of go to the normal holiday season build. I think what you are seeing now in the drone market is companies attempting to get their products out as fast as they can regardless of the timing during the year. So as companies are building out new products, they are launching immediately. I would guess by next year you will start seeing more seasonality to that marketplace.

So this is Fermi. About that pricing point, I think we definitely continue to experiencing the fast growth in drone markets where we see a lot of design win activity, our customers are ramping up volumes. Also I think the fast growth is driven by two things, one is definitely the customer demand, the other one is the price erosion. There is 4K drone was above $1,000 this last year when DJI introduced their first drone. And quickly early this year [indiscernible] DJI took down the price. And so the 4K drone dropped way below the thousand and now we see selfie drone that we just talked about that ASP dropped to $299, $499 range. And we think with the price erosion the volume of ramping up is mainly associate with that and we expect that the $299 to $499 range of selfie drone will be the biggest market for drone in the next 12 to 18-months.

And then if I could sneak in one follow-up just going back to some of the questions around autonomous vehicle, there certainly been a lot of announcements over the past few months of people in that market. I wonder for me, if you could just kind of, in terms of where you guys fit. Do you feel like there is need for partnerships with other people with more processors in the car Tier-1. As you start to point for that market, what’s going to be required for you guys to be a player in that market?

Well, all upon will be in Tier-1 and also we need to work with OEM together. So for example, if you look at the software we acquire from VisLab we have a complete software stack and because this VisLab software can drive the car already. And it’s our intention to drive the software stack on our chip. So I don’t think we need to partner with another processor company, but we do need to partnering with the Tier-1 who is willing to use our solution we are ready. So I think that’s our intention, but like I said for autonomous car, we put a lot of efforts to enable it, but I do believe our near-term revenue opportunity is other market. For example, I do believe autonomous drone is going to be a very important market for us in the near-term and our first CD chip will be addressing that market also.

Great. Thanks so much.

Thank you. Our next question is from [indiscernible] of Craig-Hallum. Your line is open.

Thank you for taking the question. It’s [indiscernible] on behalf of Richard today. Our first question, so on the last conference call, it was assumed that Sony was going to give full utilization at the end of August. But it seems like they have actually reached that level at the end of July, so they are a month ahead of schedule. So I’m wondering what is the reason, why you haven’t changed your assumptions on the supply chain availability of the Sony image sensors. Whether its conservative on your customers and/or if you can provide some color on that will be great?

Yes. I think first, we didn’t say they would be full production by the end of August. From a standpoint of creating or fixing all the backlog situation. They said they would have the lines up and running full capacity by the end of August, which we use and we take numerous months after that to catch-up on the backlog. So it’s a little bit different interpretation. So it’s really kind of rolled out as we expected there.

Okay. And then one last question for me. So on your development of 14-nanometer products. Can you give an idea when do you expect to have those products on the market, whether that’s a near-term driver for your business or would it be more of a [indiscernible] story?

Well, I think the first cars will use our 14-nonometer chip will be in production probably early next year. But I think because the benefit of power consumption, I think there will be some cars more quickly transition to 14-nanometer product because of the power consumption is most critical demand for that. And also that we think that because of the performance we can upgrade for our first generation 14-nanometer chip that we see a lot of momentum for virtual reality cameras. So that we are going to see customer - really what we are going to pay for the power consumption as well was for customer who wanted the virtual realities, those two group of people will be the first one to adopt to 14 nanometer chips.

Okay that's excellent. Thanks guys. That's all from me.

Thank you.

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

Hey guys thanks for letting me get back in and follow-up. Fermi I wanted to follow-up on the drone market for a second. It seems to its bifurcating a little at the really high end you are seeing drones with two chip solutions sometimes with your chips alongside product from Intel and others at the high end of the market. And then in the lower tiers of the market and selfie drones, et cetera that you are talking about ramping in volume, I imagine it's a one-chip solution. May be you could talk about those two markets on how they differ and may be how your competitive position is different between the two? Thanks.

Right, thank you. So for the high end drone you are absolutely right, for example, the DJI [indiscernible] they use multiple chip solution in combination. They use our A9 chip for the 4K video capture and they use [indiscernible] for their Computer Vision and also fly control. So I think the high end drones will stay that way, because they have much less pressure on the price and they have a lot of - because of the price they have to prove to be the best quality in terms of the product quality and fly control quality and video quality. So I think it will probably continue to use multiple chips for solutions. On the selfie drone, it's a little different because it dropped to $299 and $499 the number so they can definitely become an important portion of your [indiscernible]. In fact that there was a first drone based on Qualcom solution was introduced just several weeks ago. So we have a chance to compare the Qualcom based drone with drones based on our low end solution A12 and for the first time and we believe that A12 based solutions has advantages on videos, resolution, EIS, power consumption, total system costs. And for example the Qualcom based solution carry around 10Kp30 compared to A12's 4K video while A12's power consumption is significantly lower than Qualcom’s. And also that integration that with all costs improved that they can use our low end chip to go down through that price point with a very good quality on the video as well as on fly control. So I really think that the selfie drone that we introduced was unique and we believe there are several more coming up in the near future with Ambarella Solution will prove that we are the leader in the selfie drone market.

Thank you very much. Appreciate it.

Thank you.

Thank you. And our last question today is from the line of Brad Erickson of Pacific Crest Securities. Your line is now open.

Hi guys. Thanks for taking my questions. Just a couple of clarifications here. Just first around the drones and the actions cameras obviously seeing it looks like significant builds ahead of holiday relative to your guidance. Can you kind of talk about your confidence level and visibility running potential for inventory correction and maybe any measures you have taking within the forecast ahead against that?

Yes. I think we are pretty confident on the near-term forecast for those two markets. Obviously we will have a lot of PL coverage and visibility of forecasting to customers. But I think with that said, you noticed we are having a reasonably strong Q3, but we have not changed our guidance for the year. And I think until we see sell-through in most of these consumer markets, we are going to say conservative.

Got it. And then just quick clarification on the $2 million to $4 million impact from Sony. Just wasn’t quite clear. Was that in line with what your forecasting assumptions were, was that at all incremental or better than expected?

Q2 is pretty much in line with Q3 being better than our expectations.

Got it. That’s helpful. Thank you.

Thank you and that does conclude our Q&A session for today. I would like to turn the call back over to Mr. Fermi Wang for any further remarks.

Thank you. I would like to thanks all our employees for their continued support and performance and most important thank you all for joining our conference today. See you next time.

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.