Good day, ladies and gentlemen. And welcome to the Ambarella Third Quarter Fiscal Year 2019 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Louis Gerhardy, Director of Corporate Development and Investor Relations. Mr. Gerhardy, you may begin.

Thank you, Sonia. Good afternoon. And welcome to Ambarella's third fiscal quarter 2019 financial results conference call. Thank you for joining us today. Our speakers will be Dr. Fermi Wang, President and CEO; and Casey Eichler, CFO. The primary purpose of today's call is to provide you with information regarding our fiscal 2019 third quarter results. The discussion today and the responses to your questions will contain forward looking statements regarding our projected financial results, financial prospects, market growth and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward looking statements. We 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, 2018, for the 2018 fiscal year, and the Form 10-Q filed on June 8, 2018 and September 7, 2018, for the fiscal year ending January 31, 2019. Access to our third quarter results press release, historical results, SEC filings and a replay of today’s call can be found on the Investor Relations portion of our website. I will now turn the call over to Dr. Fermi Wang.

Thank you, Louis. Good afternoon, everyone. Our Q3 fiscal year 2019 revenue of $57.3 million was down 8% from the prior quarter, surveillance increased to 9% sequentially and automotive declined sequentially as anticipated. Revenue from and consumer other applications was down more than 14% sequentially and represented less than 15% of the total revenue. Our resource allocation demands heavily focused on computer vision opportunity in surveillance, automotive and other computer vision-related applications. In the surveillance camera market, we see strong interest for single chip solutions with integrated computer vision processing to support the latest deep neural network based algorithms. Ambarella’s SoC solutions based on our CVflow architecture offer industry leading CV performance with extremely low power consumption combined with advanced imaging processing capabilities required to operate in very low light and high contrast scenarios. Additionally, the CVflow family attracted the need for on chip power security features to avoid hacking and other forms of network attacks. Ambarella CV22 and CV2 CVflow SoCs have a Tier 1 designs or our other evaluations at each of the leading top 10 professional security camera suppliers. We now expect to make our first production volume shipments by the end of our fiscal fourth quarter this year with customer product introductions expected mid next year. In October, Ambarella participated in 2018 Security China Exhibition on Public Safety and Security in Beijing. At the event we demonstrated our new CV2 and CV22 SoCs from multiple new networks, as well as in multi-sensor and stereo applications. We also demonstrated home monitoring cameras, including solutions addressing the fast growing battery powered and doorbell camera segments, with third-party partner’s demonstrations of features including intelligent person detection and face recognition. We are seeing non-China security camera makers increasingly reluctant to design SoC for our main competitor HiSilicon, which is part…

Thank you, Fermi, and good afternoon, everyone. Today I'll review the financial highlights for the third quarter of fiscal 2019 ended October 31, 2018, as well as financial outlook for Q4. 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 adjusted for the impact of taxes. In line with our previous guidance, our Q3 revenue totaled $57.3 million, which represents a decrease of 8% from Q2 and 36% when compared to the same quarter of the prior year. GoPro revenue continued to be immaterial in the current quarter. In Q3, we saw growth in both professional and consumer surveillance markets when compared to the prior quarter. The increase in surveillance was led by our consumer security, although professional markets also increased. Auto revenue declined when compared to Q2, as a result of some customer promotional programs ending as we discussed last quarter and the overall tone of the auto market, which was more cautious than expected. Consumer and other product revenue continued to substantially decline during the quarter. Non-GAAP gross margin for Q3 was $60.9 million, compared to $61.4 million, excuse me, 60.9%, compared to 61.4% in the preceding quarter. Gross margins primarily reflect the shift in market mix to lower margin surveillance revenue in China and a drop in higher margin consumer revenue. Non-GAAP operating expenses for the third quarter were $28.7 million, compared to $29.9 million for the previous quarter. OpEx decreased when compared to the prior quarter primarily due to decreasing employee related expenses and general cost control as a result of lower revenue. Non-GAAP net income for Q3 was $7 million or $0.21 per share, compared to non GAAP net…

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

Thanks for taking my question and congratulations on the design wins for the CV chips. I just wonder if you could give us a little more detail on the design wins, say, first on the automotive for the ADAS wins. Is that to an OEM, is it North America based or if you just give a little more description, and say, who the company is?

First of all, I think, that the Tier 1 that we are working with is a -- has a very strong active safety presence, as well as they have very strong ADAS background. And what we have established is demoing our product, our CV22 product, and helping them to report their algorithm on our platform, and so that they can demo this platform through the several OEMs. And also this Tier 1 has established relationship with a number of global auto OEMs and we saw, and also because OEMs they are demoing the solution to the -- at this point. This is a non-Chinese Tier 1 that we are talking about and we hope that we can continue to offer you a more updates in the near future. But let me say one more thing, I think, the reason that CV22 is getting this design win is because our performance on CV and also that we are running all those algorithm in the power consumption around 2 watts, and more important, and also as important that we can using our video processing technology to help to get a better CV result. I think the combination of all this is a reason we won the design.

Okay. Great. Thank you. And maybe similar type of detail on the surveillance camera, you say so it's going one design goes in production at the end of this quarter, fourth quarter. Can you give us an idea what the ramp looks like? Does it accelerate through the year or…

First of all, I think, that that the one customer could start taking chip in this Q4 of this year and we believe they will, while they told us they are going to start shipping, probably, mid next year and they are one of the leading customer, this is a non-Chinese customer. And we expect to that the balance of the rest of other professional surveillance customer are going to gradually run by first half of next year and I hope that most of them will be in production by the end of next year.

Okay. Great. I'll get into the queue let others ask questions.

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

Hi, Fermi and Casey. I'd like to add my congratulations on the nice traction on the automotive front. Would you hope to follow up on Kevin's question around sort of the timing, it sounds like the Tier 1 OEM if you have for the ADAS system is more of a parts, Tier 1 parts manufacturers that has relationships with multiple Tier 1 OEMs, to the extent they are successfully getting their system designed into the automotive OEMs. When do you think you would see revenue in a model production? Is that still a kind of a two plus year window or could it happen sooner? And then I have got a follow up.

Well, so this particular, I think, we are looking at the 2021, 2022 OEM. Basically we are looking at those kind of design win opportunity with OEMs in those – in that kind of timeframe. So I think that we are talking about at least three years out from the ADAS revenue point of view.

Okay. And a follow up question was, I think, you mentioned that it's the customer software that they reported to the CV22 processor, but just wanted to confirm that your relationships with a lot of the ADAS and level 4 wins that you mentioned, it's going to be running customer developed models on your CVflow architecture. Is that right?

On the Level 4 design win we talked about is using stereo solution to do short range object detection and the classification and those software will be launched with us. So we are providing software and the hardware in this particular device.

Okay. Great. Okay. Thank you.

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

Hi, guys. I just wanted a follow up on the auto side as well and maybe even from a higher level on the CV side. Fermi, as you are seeing the chronology of how CV plays out, can you just walk us through, it doesn't have to be quarterly, but maybe even on an annual basis. How do you think the CV benefits will start to flow through the income statement at your company either by end segments or kind of the ASPs versus the unit side of the equation, any color you can give there would be helpful?

Right. First of all, I think, our CV's revenue on the surveillance camera, now I'm pretty confident that we are going to start seeing revenue next year. I think in the fiscal year ’21, kind of the year 2020 we should see material revenue from those professional surveillance cameras. For the consumer surveillance camera, I think, that will lag behind it, maybe by six months to 12 months, because that design win just started and we probably will give you more updates later on. But on the auto side, in fact, we talked about three new design wins, in fact four design wins in three different auto markets. We talked about one design win ADAS, one design win in Level 4 and two design wins in E-Mirrors for CV. And I believe those E-Mirror application has a chance to get into the revenue earlier than the other two, but still we are looking at two years to three years out from that point of view. So, on the revenue point of view, that's how the CV revenue workout in my opening. However, let me add one more thing, we didn't talk about is, there is a lot of CV opportunity in China, while it's also applied to ADAS Level 3, Level 4, as well as E-Mirror. I -- while we haven't talked about anything in terms of a design win in China, but I believe that the revenue opportunities in China is earlier -- somehow earlier than the outside China.

So does that count into last time you just said assuming your sort of resolution on the tariff side, I would assume that the Chinese customers that are staying within China don't really care over the tariffs, but with the adoption of CV into IP security get impacted anyway due to the macro and kind of government issues right now?

I think our customers in China are watching this progress as much as we do. However, I don’t’ -- we still continued to have a design win engagement and discussions with them, while I do believe they all worry about outcome of this situation, but I think at this point, the project is still ongoing and moving forward.

And then one final quick question for Casey on the OpEx side, I know you mentioned that you are going to keep running it tightly and you came in below your guidance in the quarter and below my expectations for the guide. How are you guys thinking about the OpEx side as we look into next fiscal year, I know you are not going to guide for the full year, but are you expecting to keep it tight or as the opportunity so large in CV that you would expect to continue to add headcount in strategic areas?

Yeah. I think that from an OpEx standpoint, obviously, we have got sales and marketing G&A in there, as well as engineering. And from sales and marketing G&A perspective, I think, we are going to try to keep it pretty tight and be pretty as prudent as we can in those areas. And in R&D, we are not let the opportunity to get away from us, so we are going to continue to invest in move resources over from our traditional products into the CV and also continue to hire. So as we see more and more interested like we have seen this quarter, I think, you are going to see us make sure that we have the right amount of resource supply to that, so that we don't let the opportunity to get away from us, because as you know, you have to make investments great for the revenue was – as Fermi has been talking about two years, three years and four years out.

Great. Thank you.

Thank you. And our next question comes from Adam Gonzales of Bank of America Merrill Lynch. Your line is open.

Hi. Thanks for taking my question. Congrats on the first CV design win in autos. Just wondering Mobileye has become a lot more vocal recently about opening up their platform, perhaps, allowing customers to point their algorithms over on to their platform, especially with the next IQ chip. Just wondering what your thoughts are and what this -- how this could impact your long-term ability to gain share and penetrate the market? Thanks.

Right. First of all, I think, what Mobileye has said, is really focused on IQ5, so IQ3, IQ4, which are mainly designed for ADAS are not open up for any Tier 1 OEMs. And IQ5 is pretty much focused on in my opinion Level 3 or above automotive cars. So that is definitely something we need to continue to watch, but from ADAS market, I think, that the strategy doesn't change. While I really think that by opening up the platform versus a close platform, the support structure, the software requirements are quite different and the – while they ask you to apply, we will continue to watch how they ask you to it. The -- but we tried to open up the platform on the amount of resources through on and try to make sure that our customers can pull that easily and making sure that they can -- they have enough visibility on hardware and software so that they can do differentiation, that not only the average non view, but at certain point you have to disclose not only just your software structure, but the hardware structure and we would like to see how Mobileye is going to do that.

Got it. And then just a follow up, if I were to look at your business over the next, say, four quarters or so, I think, prior to this quarter you had 15% or 20% of your business still in legacy consumer applications, if I had to fast forward, what percentage of revenues you do think that will be at the end of next year?

Adam, we are not going to guide out. I think it will definitely be lower, that market will continue to decline for us. We are not putting in our investment resource in it and any of our focus in it, so I think the tail on that goes for several years, but it definitely will be declining over that period of time.

Great. Thanks.

Thank you. And our next question comes from Joe Moore of Morgan Stanley. Your line is now open.

Great. Thank you. You talked about the ADAS win on the car side. Can you talk about autonomous, and I guess, I know it is going to take a lot longer to implement those solutions. But what's the timeframe for potential design wins kind of on the more autonomous side of equation?

So for that particular design we talked about our chip --- CV2 chip is used only for the short range stereo. I do believe that for autonomous driving there is -- there are multiple camera being used and right now people are trying to using camera to solve different problems. And I think that in this particular design CV to prove that they have a unique position to solve this particular problem so. And the revenue we are talking about is also 2022 in that timeframe when the level cars ready to go into production. So I think for any Level 3 or Level 4 car that it will take a while to gain there and we have patience and instead we are going to continue to develop technology not only on the long range stereo, but also on the chip side we knew that we need to continue to evolve and producing a more powerful and more direct chip for that kind of a market.

Okay. Great. Thank you. And then in terms of the trade potential issues, there has been, I guess, some conversation about AI specific limitations of Chinese customers to procure AI centric product and do you – and I don't think there has been a lot of detail provided on that. But do you guys have a sense for whether that could be an issue down the road or just if you could fit under that umbrella?

Right. So, first of all, this is a very vague. But if you look at the list in 12 items, AI is one of them. If somebody asks you for that 12 items, basically the whole semi conducting actually, probably, majority of them will be barred from selling to China. So I would like to see how that thing developed and how this is going to impact us. But from an AI particular point of view, I want to point out that we don't see AI algorithm particularly. For example, when we sell AI chip selling in [inaudible] engine, we don't do training, but we don't sell algorithm to our customer. So we really need to find out how the regulation to participate different AI functions in the end market and that all of details will impact us whether that would be part of that limitation.

Okay. Very helpful and congratulations on the design wins.

Thank you.

Thank you. And our next question comes from Suji Desilva of ROTH Capital. Your line is now open.

Hi, Fermi. Hi, Casey. I'll echo my congratulations on the design win here. In the auto market, you have four design wins, you have a CV win right now. What's the right pace of additional wins we should be thinking about in the next 12months, 24 months, did it take a lot of effort for the first one or a lot of them are going to work on from the back, I just want the level of the expectation here.

I think we are talking about the design wins that we are allowed to talk about. We definitely are working on more design win potentials and I definitely as soon as they are more, that we can talk about and will continue to provide you updates.

Okay. That's fair. And just real quick follow up there. How is the headcount scale as you add on more engagements, do you have to add headcount for each of these guys or do you scale the headcount you have now across multiple efforts?

Well, first of all, Casey, just said, we are aggressively moving resource from our traditional video product line to CV product line. So when we scale customer, we probably go to continue to use our resource on the video side to support new opportunities and gradually that will be a one-way to step up, of course, that if we don't have enough people, we are going to continue to hire to staff the new opportunities. But I think at this point, our current resources products are a little bit more will be enough to support the opportunity we are seeing right now.

That's helpful. If I could sneak one last question, can you just update us on the content per car for things like E-mirror versus ADAS, versus L4, just so we can get some numbers as to dollar per auto we can think about? Thanks.

Yeah. So every OEM has their own ideas, so let me be quick. I think for E-Mirror and for us, it's always a one single chip to design for all of the cover three mirrors. So it's a one powerful chip to do all the video processing plus the Blind Spot Detection. We haven't -- the ASP I will say in the CV22 range in a range of $15, $20 in that range. And for the ADAS, because there is ASL chip and the ASP a little higher, but that's going to be also, I think, that's one of the biggest market in 2021, 2022 for us and people talking about 50 million units car will use ADAS technology at a point and it's a single chip solution. So for PMS and CMS for copy monitoring is also single chip with multiple camera input and we handle all the video processing and the CV application. I think the autonomous car for Level 3 above is probably most difficult to answer, because every OEM or Tier 1 have their own idea. So everybody is talking about 10, 12 cameras. Some entirely use wide one huge chip, some people try to use multiple smaller chip to solve the problem. But I think that's definitely much the higher highest ASP opportunity for semiconductor companies.

Okay very helpful. Thank you.

Thank you. And our next question comes from Charlie Anderson of Dougherty & Company. Your line is now open.

Yeah. Thanks for taking my question and my congrats on the CV1 as well. I wanted to focus on Level 3, Level 4 and the win there. I think you said it was an autonomous vehicle OEM, so maybe non-traditional carmakers, someone is more of a start-up. I wonder if you could give us a little bit more detail there and maybe the region. And then beyond that, it sounded like they are using for short range, are they adding a sensor to what's sort of the traditional rate here, multiple cameras, plus radar and lidar or are they not going to have one of their existing sensors would be used to there and then I have a follow-up?

Right. So for this particular design win is non-Chinese design win. I think that the usage models are very clear, because we are in very congested traffic conditions. You need to know that that information among, for the older cars are around you and Casey you would like that to address the issue that means you have to do multiple light around the car become very expensive proposition. So then what we demo and show our capability short range stereo either as a very challenging like condition, which show people that we can correctly identify objects, as well as determine that that among older cars around the higher travelling. So I think that really show people we have a cost effective and easy enough solution to solve the problem. So you can imagine that you have a short range stereo camera around your car. Multiple payers so then, you need to put your cases of full payer event and those full payers so they can go to one CV2 and we process all of the information including the stereo processing, as well as the classification required to perform this function.

Great. And then for a follow up, it was great to hear about the potential to take some market share with HiSilicon. So I wonder if maybe you could quantify that to any degree in terms of from a total market share of the industry or…

Right.

… unit perspective, any additional color there will be very helpful? Thank you.

Is hard for us to give you a number, but I can give you a high level assessment. In the past outside China, although, we are market leader, HiSilicon still have design wins because every customer want to use two supplier, as well as that HiSilicon always try to offer a much cheaper solution than us and there are some customers that are using then as a first supplier and we are second. But I think recently after we demo CV and after the current trade war situation, I think, that we start seeing a larger design wins moving to us not only from the CV side, but also on the video product side, that used to use HiSilicon. So I'd imagine our market share outside China will increase and also that Hikvision and Dahua, because we got bans from U.S. Government, most new opportunity available to non-Chinese surveillance camera season vendors, I think, a portion of that will become ours too.

Great. Thanks so much.

Thank you. And our next question comes from Matt Ramsay of Cowen. Your line is now open.

Good afternoon, guys. Thank you very much. Fermi, I think, the team and lots of talks for a while about a number of angles of differentiation on your CV roadmap. You mentioned power envelope around 2 watts, on the fact that you do stereo, the fact that your video is human readable that you are doing the analytics on. And then some of the video stabilization and things that you have learned from the action camera market, maybe you could talk about like where your real, do you feel like the core of the differentiation is what is -- what if any competitive response that you have seen from other folks with similar architecture? Thanks.

Right. So in fact if among all of the advantage you are talking about, every different application enjoy different advantage for us. For example, for ADAS camera, this front facing ADAS smart camera, the most important features are one, because the form factor, your power consumption had to be small, two, with that limited power budget, you have to deliver as much CV performance possible. That’s really take off strength. In the Level 3, Level 4 design we just mentioned, power is important, but the most important feature enables us to win the design is our stereo processing and our video processing capability that process video at low light and associate with the stereo processing to make us win this design win. In the E-Mirror design, it's almost like combination of all that because the power consumption is a concern, CV performance is a concern and also the video processing, because it's not only for CV processing, it also still need to continue to display the video, while you do CV processing. So I think that's the market require all three of them. So for different market, they have different requirements. Fortunately, we have multiple advantages that can help different customers for different markets for their requirement.

No. Thanks. That's really helpful. Maybe, Casey, a question for you, we talked about over the -- all the Q&A on the call here about some of the really exciting long-term CV opportunisties in the automotive space. But you guys have a number of design wins for data recording cameras and 360 surround view and even some E-Mirror projects that are not CV based that are maybe nearer term in revenue. Could you maybe on the next six quarters to eight quarters, while we are waiting for some of the CV stuff to hit the P&L, could you maybe talk us through how you are thinking about the automotive business over that timeframe? Thank you.

So, Matt this is Fermi. I think that in the next six quarters, majority of our auto revenue will come from recorders, because that becomes so big and so quickly. Both we see huge opportunity in China, we will start seeing Japan become big and big and also we start seeing Korea having this kind of demand. So in China, we mentioned that Chinese government is putting a regulation together for the recorders. And in Japan, we see opportunity to call data loggers. So I think that because we have been working on the recorder business for four years with OEMs and Tier 1s, this is going to continue to be dominant auto revenue for the next four quarter to six quarters. And we believe we are going to continue to see revenue from E-Mirrors, AVMs, but that will be much less than the recorders in the near-term. But I do believe that for E-Mirrors, particularly CV will happens, the market size can grow quite dramatically than that's what enables new opportunity to us. But there is one thing I want to point out, we believe in the short-term, the CMS -- the TMS and CMS market is real and it can be short-term revenue for us. We are just starting here and we are putting a product together with them on CES, so please join us at CES, we will give you a complete the roadmap display at that time.

The only thing I would add to that is clearly there's a lot of interest around the auto market and the surveillance market, and in particular, a lot of interest in the promise in the long-term over the CV product line. That isn't to deemphasize the fact that we have a lot of products in the marketplace today and a lot of demand for that, it's going to continue. So to your point, we will continue I think to see good activity on our traditional products in our additional product lines. But, clearly, the focus for all of you and the focus for us is to continue to demonstrate the promise of the CBR architecture we have talked about. So that's just I'll add to it.

Thanks very much guys.

Thank you. And our next question comes from Richard Shannon of Craig-Hallum. Your line is now open.

Hi, guys. Thanks for taking the questions. I'll add congratulations on top of your analysis. A quick question on professional security, obviously, you started -- you talked about for shipments of CV into that market with one customer. I think you mentioned a few others coming later this year. How should we think about that professional security market in the context of that? Is there any substitution effect of other design wins, you have been in with these customers and do you think that market is definitely a grower next year, even with the geopolitical and tariff issues that could be lurking out there?

Yeah. So, first of all, let me quantify that, all my -- what I have said about surveillance market is assuming that this is no more tariff or other impact, because I cannot forecast it. So I'm assuming that the business will continue running under the current situation as first one. Second one, I think that what I just said is we are going to have one customer taking volume shipment this quarter -- in Q4 this year. I expect majority, while other professional surveillance customer will go into production by the end of next year, not this year, I just want to be clear on that and we are seeing design wins with almost all of the top 10 customers. And like I said in our script that we have design wins or under-evaluation will each one of that at this point and we are continue having design wins in the last three months and I hope that will continue. With that momentum, I am confident that we will continue to be a major player in this market. In terms of size of the market, first of all, I still think professional surveillance is a growing market, but of course, the growth rate is definitely not as high as before. In fact Hikvision and Dahua came out to say that they expect their growth start slowing down. However, my belief is this, although, while the growth rate of the whole market might not be as high as before, but I think the CV technology will trigger a new wave of refreshing cycle, because of the power, the performance and the functions that are enabled by CV really will trigger everybody quickly adopt this at the right pricing. So I think that through all the years, I think the CV function will trigger the whole surveillance market those refresh cycle just like when the IP security camera comes in and create a huge refreshing cycle against the traditional [inaudible] cameras.

Okay. Great for all that detail. Fermi, one follow-up question on the automotive CV win in ADAS, I guess it wasn't clear to me based on your commentary and answers to the questions, whether this design is with an automaker itself or a Tier 1 OEM supplying that and so if it's the latter, is there a design specifically within automaker that you are predicting revenue starting in 2021 or 2022?

We are -- the design wins are at Tier 1, but we know that they are presenting a solution to multiple OEMs, most of the OEM ask you is around 2021, 2022 at this point.

Okay. Do you have an expectation of timing of when that customer would have a win with an automaker then?

I hope as soon as possible.

Okay. I'll talk that one in future times and that's all the questions from me. Thank you guys.

I'll try to offer you more updates in the near future.

Okay. Sounds good. Thank you.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I'd now like to the call back over to Fermi Wang for any closing remarks.

Thank you. And in summary, I think, we are very happy with the progress we made with our CV products in our target markets. I really like to thank all of our colleagues to make this happen. And thank you for joining us today. I'll see you next time.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.