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

Thank you, Sara. Good afternoon, and thank you for joining our fourth quarter and fiscal year 2019 financial results conference call. 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 fourth quarter and fiscal 2019 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 filed with the SEC, including the annual report on Form 10-K that we filed on March 30, 2018, for the 2018 fiscal year, and Forms 10-Q filed on June 8, 2018, September 7, 2018, and December 7, 2018, for the fiscal year ending January 31, 2019. Access to our fourth quarter and fiscal 2019 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.

Thanks, Louis, and good afternoon, everyone. Fiscal year '19 was a pivotal year in Ambarella's transformation from a pure video processing company to a computer vision company. In addition to human viewing, our CV products extracted and processed valued data for rich video streams, enabling our customer assistant to make intelligent decisions. During the year, we tabled out and assembled 3 CV devices, CV2, CV22 and a CV25, each integrating our new CVflow Deep Neural Network AI processor with our video processing into a single 10-nanometer SoC. Within 7 months of sampling, we commenced CV22 mass production, and we are experiencing strong CV design activity globally. For the year, revenue from security camera and the automotive markets both increased in the mid-single-digit percentage range. Security camera revenue represented about 60% of total revenue for fiscal 2019, with the auto approximately 20%. Consumer electronics revenue declined faster than expected throughout the year and accounted for more than 100% of year-over-year revenue decline. For the full year ending January 31, 2019, revenue declined 23% to $227.8 million. Our Q4 fiscal year 2019 revenue of $51.1 million represented a 28% decline from the $70.6 million of revenue in the same period of fiscal year 2018. Revenue from the security camera market increased about 10% from a year ago quarter, led by the professional security market. For the quarter, consumer electronics revenue represented about 100% of the year-over-year revenue decline. During the recent Consumer Electronics Show, CES, in January. Ambarella successfully demonstrated its latest solution for automotive and the home monitoring applications focusing on CVflow computer vision technology. This included demonstration of solutions addressing each of the 6 different automotive camera applications we are now targeting. These are OEMs and aftermarket drive recorders, electronic mirrors, interior drive and the cabin monitoring, Around View Monitor…

Thank you, Fermi, and good afternoon, everyone. Today, I'll review the financial highlights for the fourth quarter and full year of fiscal 2019, ending January 31, and provide a financial outlook for the first quarter of fiscal 2020. 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 and the reversal of a valuation allowance on certain deferred assets adjusted for the impact of taxes. The fiscal 2019 revenue declined 23% to $227.8 million with more than 100% of the decline attributed to the legacy consumer electronics business, while the automotive and security businesses increased in the single digit on a year-over-year basis. For fiscal year 2019, non-GAAP gross margin was 61.2% and non-GAAP operating expenses increased 10%, primarily due to the continuation of our strong R&D investment into computer vision technology and platforms. Despite this high level of R&D investment, our operating cash flow was a positive $24.5 million for the year. With no debt, cash and marketable securities totaled $359 million or $10.97 per diluted share. We repurchased 99.9 million of stock in fiscal 2019, resulting in our fully diluted non-GAAP share count declining 5.4% compared to Q4 of 2018. In line with our previous guidance, our Q4 revenue totaled $51.1 million, which represents a decrease of 11% from Q3 and a decrease of 28% when compared to the same quarter of the prior year. In Q4, we saw solid growth, both sequentially and on a year-over-year basis in professional security cameras, our largest project segment, with all other major product categories declining. Auto revenue declined as we experienced the anticipated impact of a decline in a major customer's promotional activity and as the…

[Operator Instructions] Our first question comes from the line of Joe Moore with Morgan Stanley.

I wonder -- so you said stable in the first half. I assume that means Q2 kind of sequentially flat. And then if you could characterize -- you said the trade-related tensions. What bucket would you put that in? Is that sort of inventory build around trade issues that's affecting you? Is it design activity? Is it demand? Just what's the direct impact of the trade tensions?

Yes, I guess, I'd generally say yes. I think all of those are -- and I'll let Fermi comment in a minute, but I think all those are factors that we're seeing in the world. We're in China, discussing the second half and just the overall year with our customers. It's hard to put any emphasis on one over the other, and obviously, we were hoping we'd be talking in this call about some resolution, but it seems to continue on. And so the volatility that we're, I think, anticipating we might see, it's hard to put it on any one factor in particular.

Well, Joe, this is Fermi. I think there are 2 things particularly important for us. One is, we identified some strange ordering pattern from customers we've never seen before. We truly believe that the trade war issues caused those ordering pattern. At the same time, as you recall, the second important thing that have noticed is that last year, I think that on November 19, our government, the U.S. government, Bureau of Industry and Security published a recommendation to put some kind of IP control protocol. I think that a lot of our Chinese customer gasped on that and they start worrying that it's going to impact our shipment to them if this recommendation is being adopted by the U.S. government. So I think these 2 things definitely is -- generally sound quite uncertainty to us. One is on the revenue. The other one is on the design win moving forward. However, even with that uncertainty, we continue to see that our Chinese customers are moving forward with our CV design wins and the building, engineering activity with us. So we are cautiously to point out that could eventually impact us if it becomes reality, but I haven't seen that. The second one impacted us directly, yes.

Great, okay. And then just on automotive bottoming out, can you characterize which segments are growing? Is it OEM versus aftermarket? And are you seeing tangible progress on the rearview mirror side yet?

Yes, so first of all, when we say auto revenue, I think we definitely refer that to the OEM side. Even for aftermarket, we still see -- also see flat -- a little bit of growth, but OEM definitely continue to have a significant growth for us. But from revenue side, majority of our OEM revenue -- auto OEM revenue come from recorders today. But at the same time, for engineering activity, I think that we continue to see a lot of activity. Just give you one example that we announced that in December, we are partnering with HELLA Aglaia on the ADAS design. Following that, there were multiple things happened after the announcement. First of all, we mutually demoed the various system at the CES in our booth and got some really good feedback. And in parallel, demoing the same system to their customer, multiple OEMs at the same time. In fact, the demo they're giving to OEM is not a demo anymore. It's installing on the car and do a live demo. The third thing happening is HELLA Aglaia has a Capital Market Day just on February 14, just a few days ago. In that event, they generated the following quote, it is I quote, "Our mutual demo at CES was referenced as a successful demo of new AI-based L2, L3 perception functions on ultra-low-power SoC." So basically, what -- I think they are -- there are 2 things. First of all, this is the first time our customer come out to confirm what we have been saying that we have a very powerful CV processing performance chip while at a very low power consumption, and this is the first time a customer confirmed that. Second, the comment they had made is after they see our demo compared to the same software running on different competitive solutions and come to that conclusion. So I really think that's a very important milestone for us. And also, at the same time right now, I think, HELLA -- there is a currency marketing the solution to a leading Tier 1 OEM together at this point. So I think this is one example we made in progress even after we announced in December with HELLA Aglaia. We've continued to make progress with them on the [ mainstream front ].

Our next question comes from the line of Adam Gonzalez with Bank of America.

First, just looking at your base automotive and security camera business, which, I think you said, grew mid-single digits year-over-year the most recently completed year, what's the right way to think about just that base business, the growth -- sustainable growth rate in the mid-term? Is that mid-single-digit rate the right trajectory? Or is that too low, could be higher or lower? Any puts-and-takes.

Yes, I think that's -- again, we don't guide beyond the current quarter, but I think we said that we're going to continue to have growth in the automotive business over the course of the year. The CV product line that we're focused on, obviously, won't contribute to that growth until we get out beyond this year. But we've had a lot of projects underway with our video-based products that, I think, continue to get adopted and provide growth for the year. And so that -- the way you're thinking about it's probably a good way to think about it.

Got it. And then more of a high-level question on the strategy with CV in autos. Could you outline just the different camera areas within the car, whether it's driver monitoring, ADAS or camera surround view, e-mirrors? What the relative opportunity is in each and the timing for revenues?

Okay. So in my script, we talked about 6 potential opportunity for automotive OEMs. The first one is recorders, which are already generating revenue. We continue to see more opportunity in Asia, and we believe this is a growing -- revenue-growing market for us in the interim. And the second one that we mentioned is electronic mirrors. And we already have video-only solution in production with one Chinese customer, and we are working with other projects. But at the same time, last quarter, we announced that electronic mirror with blind spot detection enabled by our CVflow functions. And I think that is probably -- we believe this become mainstream in the future. So video-only product is going to be, I would say, intermediate product but in a slowdown. Any e-mirror will have blind spot detection that's what we believe right now. So that -- I think that is going to fall into the regular automotive design cycle so that we're going to see short-term video-only revenue from the e-mirror but not a lot. But in the long term, I think that our CVflow solution will enable us to become major player in the electronic mirror for OEM business. We think this is definitely an area we'll have a focus on. The interior driver monitoring, the DMS basically for interior driver and cabin monitoring, this is an interesting combination because we see 2 different approach on this market. One is the video camera do nothing but do driver monitor, which is a reasonable market, and there are a lot of people asking for the solution today. And definitely, we'll try to play in there but -- however, we think the long term for the market we really want to play into is the driver monitor system combined with ADAS because all…

Our next question comes from the line of Matt Ramsay with Cowen.

Fermi, a couple of additional questions on sort of the Level 2-plus opportunity in your automotive business. I guess, first of all, if you could give us a little bit of an understanding as to how -- why you believe that the HELLA folks are demonstrating your, I guess, integrated solution to their customer base and what that breadth looks like? And second, if there's any progress report on your connection and potential landing of other Tier 1s across the automotive industry. I know HELLA has a pretty wide berth but there's also, obviously, other guys that you could be working with.

Right. So first of all, we have a regular meeting with HELLA in terms of engineer review as well as a business review. So we know that he can't provide us updates on the OEM they are engaging with, and sometimes, we probably need to help them to deliver something special. So we do know who they are talking to and the progress. And more importantly, we continue to provide engineer support at their request. So although we cannot say or cannot talk about the OEMs that we are talking to, but I feel confident that we are moving forward positively with HELLA Aglaia because they -- now they can demo [ also ] in a car. In terms of other Tier 1 and other potential OEMs in this space, that's definitely -- this development effort we continue to move forward. Although we didn't mention any new ones but you should assume that we continue to talk to multiple potential customers, and hopefully then, we can give you update later.

Got it, fair enough. And then obviously, the big focus on China and some of the unusual ordering patterns, but I wanted to sort of focus on the 2 top enterprise security customers over there in Hikvision and Dahua. How are you seeing those folks in their adoption of CV into their mix? And as we progress through the year, any sense of computer vision versus human vision revenue splits with those 2 customers just to understand how that CV penetration is happening there would be helpful.

Right. So first of all, I -- we have a lot of interaction with both customers. And like I said, we do have engineering activity kickoff for our CV project based on CVflow chips. And last year, Hikvision talked about they shipped roughly 1 million units of CV cameras. And I believe they plan to be very aggressively promoting this product line. However, I didn't know their target plan and split between video and the CV. However, based on when I talked to them last time, they made it clear that they believe the CV market has become real and they believe they're going to continue to provide different price point -- different price-performance point product into this market. So that make me believe that they are not only serious by investing a lot of money on that, they also see opportunity in China on those kind of product. In terms of split, really, I don't have the visibility on their split yet. In fact, right now -- because most of our activity [ was announced on ] engineering side and we really haven't gathered their feedback on their product planning in terms of how -- when they're going to introduce the product, how they ramp up and what's the pricing. So it's hard for us to make a guess at this point.

Got it. That's fair enough. But congratulations overall on the progress on the automotive side and we'll sort of stay tuned for updates as we push through a bit of a turbulent time, but appreciate the color.

We will. Thank you.

Thanks.

Our next question comes from the line of Kevin Cassidy with Stifel.

This is John Donnelly on for Kevin. Can you talk about the advantages that the 10-nanometer process gives you for the CV products?

Well, I think that 10 nanometer really benefit us for multiple reasons, but the most important reason is power consumption. Our assumption -- we have a very unique silica architecture, which give us our power consumption advantages. But just like in the past, we knew that if we fall behind on the process node, if this -- we fall behind for more than 2 process node, the power consumption advantage of our silica architecture will disappear. And we are assuming we're going to compete with Mobileye, Qualcomm, HiSilicon, all of them moving to 10-nanometer and probably already have plan with 7-nanometer. So I knew -- so that's why moving to 10-nanometer is a must for us for -- to keep our power consumption advantage. But when we -- because of our investment on 10-nanometer solution, when you compare our CV solution versus competitors now from the fact I which just mentioned, then it really gives a huge amount of power consumption advantages. Because now we're talking about not only just our architecture advantage but also the process node advantage that help us tremendously to win design wins in those categories. For example, in a week, we start seeing many RFQs from consumers, security camera, leading suppliers, and all of them require powerful CV performance. And sometimes, they want to build as well as powered -- or battery-based security camera, which require very low power consumption. And our 10-nanometer becomes significantly important in that category.

Okay, great. And have you seen any change in terms of the popularity or the attach rate of the dashboard cameras from maybe some different geographies or push from insurers or regulators to promote greater use of those?

Yes. In fact, we do see that. In fact, in the past, the major driver was China, and last year, gradually China and Korea. Last year, we talked about Japan become very popular especially on OEM space. Now we are seeing multiple camera taking -- multiple customer taking this camera concept to British and gradually going to Europe, and we start generating revenue there. So it's driven by the insurance company like you said. So although it's a small number compared to other areas -- but we do think that -- we are hopeful that those market is going to drive new adopt rate for us.

There -- just to add to that, there are some countries that out over the next year, are going to start to require new cars have recorders in the cars. And so that's going to be the kind of regulatory basis. So that will also be constructive and helpful to that market.

Our next question comes from the line of Suji Desilva with Roth Capital.

Casey, you talked about the growth areas, security and automotive growing at single digits. I think, Casey, you kind of -- you indicated that's what it might grow longer term but you're a little bit kind of circumspect on that. The other consumer area, you talked about declining next 2, 3 years. What kind of rate of decline could we think about there and understanding kind of how the overall revenue nets out as that headwind plays out?

Yes, as I talked about, as we exited the year, that business represented kind of the mid-teens as a percentage of total revenue. So a lot of that is adjusted out through the course of last year and, in particular, in the second half of last year. There is a tail to that business though, and we do continue to see revenue and I think we will, as I mentioned over the next 2 to 3 years -- well, I think it will decline over that period of time. But I think because of the level that it's at today, it's not going to have a meaningful impact like it really did last year, where it contributed more than 100% of the decline for the full year off of that legacy consumer business. And so the takeaway there is, I think, we work through the majority of that last year and it was really a headwind in the second half. It will continue to decline, but I don't think you'll see it be anywhere near the headwind that it was last year.

That's helpful color. And a bigger picture question on your CV products. You have a 22 now in commercial in CV2 and 25 coming. Can you talk about the relative size of the addressable market for CV2 and CV25? How much those add on versus the CV22 addressable market?

So you should consider CV2 as our high-end CVflow solution, CV22 is mainstream, and CV25 is really targeting the cost-effective solution. So for market, for example, you can think that for automotive, most of company customer will use CV2 or CV22, mainly CV22; professional security will use CV22 and CV25; and consumer IP can -- will use mainly CV25. That's just a rule of thumb. And so in terms of total revenue, I think that ASP-wise, of course, CV2 is a high risk but low-risk volume while CV25 has low-risk ASP but consider volume can be much bigger; so hard for us to make a forecast right now but I will -- we see a lot of CV25 interest from our customer right now, considering the competitive cost and the performance.

Our next question comes from the line of Charlie Anderson with Dougherty & Company.

Maybe I just want to start with a big one -- big picture question for Fermi. As you look at the automotive opportunities that are out there, you sort of had the 2 initial wins, HELLA, and then the other one. I wonder what are your reasonable expectations for this year, Fermi, in terms of design win activity based on some of the improvements that you made and some of the interactions you've had now with the industry?

Well, we had a board meeting just last week. We signed up some goals, which is more than what we just have talked about, obviously. So we -- our internal goal is we need to continue to make progress not only on the engineering side but also on the business development side. We are very happy with HELLA and the other [ tiers ], but we are not -- that's not enough. We need to make a lot more progress on that direction. I am sorry that I cannot really talk about the names and the design win potential, but I know that we have a lot of activities with other customer. That's what give me confidence that we will continue to do well in this area.

Great. And then you guys mentioned stable revenue in the second half but then growth in the second half. I wonder if you maybe could just rank order for us some of those contributors to growth in the second half relative to the first half.

Yes, I mean, certainly, it's going to be the auto space and the security space that are going to be the drivers for the year and, in particular, in the second half. As I mentioned, there'll be a little bit of headwind in my mind from the consumer side, but I think most of that is behind us at this point. But when we're looking at growth drivers, in auto, it is the non-CV products this year but then we'll start to ramp in, in the future. And as we've talked about, the real CV opportunity, they start to show some growth in the second half. That's really in the security space, and as Fermi mentioned in his script, we're seeing quite a bit of good activity there.

One thing might be worth to mention is we mentioned that we start winning design from HiSilicon design win in the past, and we do believe we're going to see those revenue -- impact to our revenue probably at the end of this year, so definitely driving some of the second half growth on the professional security camera side.

Our next question comes from the line of Quinn Bolton with Needham & Company.

I wanted to ask a couple of questions just on actually guidance, the second half comment for growth. Was that kind of sequential growth off the first half base? Or is that year-on-year? And then I've got a few follow-on questions.

Yes. As we look out -- as we mentioned in the script as well, it's a little difficult with the kind of macro environment and some of the things going on, in particular with China, to understand exactly how that growth will model out. I think what we're seeing with our customers in a lot of the discussions that our engineers and that Fermi is personally having with our customers that we see some of the markets -- for example, I mentioned that the auto market looked like it had kind of bottomed out. As you know, there's been some pressure on that market and we see that growing. When you think about sequential versus year-on-year, year-on-year is a little difficult because we had such different makeup in our revenue last year with some of the consumer tailing off as well as just some of the other markets ramping in, and so it's hard to do a year-on-year comparison. But when we look at the growth that we see, as I mentioned before, it's definitely going to be from the automotive, non-CV and from CV and the video products in the security side of the business. And then it's again hard to gauge a little bit how much the question earlier that the consumer continues to tail off, but it's at a point in the revenue that I don't think it will be a material headwind. And in some quarters, it could be kind of relatively stable, as we indicated, in other quarters it can drop a little bit just depending on how the design wins roll out -- [ or should ] the designs roll out into the future.

Got it. So I know you're not giving annual guidance, but if you're kind of $47 million plus or minus 3% in Q1 and kind of stable in Q2, what's -- you even grow 10% sequentially in Q3, Q4. Kind of still looks like your total revenue for fiscal '20 would be down on the order of 10-ish percent. So I'm just trying to reconcile that kind of growth for the year versus where you're saying, you've got mid- to maybe high single-digit growth in 85% of your revenues. Is the disconnect simply that the consumer business, on a year-over-year basis, is down significantly but from the April quarter level, it's flat to down slightly on a sequential basis and that's kind of the big difference between the core business and the consumer business?

Yes, I think that's a fair way to think about it. As we said, I mean, we had some customers that were, in the beginning half of the year, in particular last year, that are totally out of the revenue today. And then we have other products that are still going on but at a lesser level. Some of the markets -- take the drone market, for example. There was a fair amount of in-sourcing to their own solutions. And so while in some of those lines we're doing as good or better than last year, we're participating less broadly in some of those markets, and I think that adds to the year-over-year piece as well. Auto is growing off of a fairly small number, and then the CV will contribute smaller this year in security than we'll see in the future just because it's ramping up, but I think all of those things combine to get to that guidance.

Got it. And then just a question on the security market. I know you're expecting, in the near term, professional will be down, but it sounds like consumer business for you is pretty strong. I've got a number of questions about Arlo, and obviously, Arlo had a pretty ugly outlook for their business and they tend to be more consumer-focused. And just wondering if you think it's a kind of a reflection of the specific products that Arlo has or why you may be doing so much better in the consumer segment of the surveillance market?

Right. So first of all, Arlo is not our customer. So we don't know what their problem is, but we do not see -- we have many other customer in the consumer security camera. We do not see similar problems in those -- our big customers in that category.

Got it. And then last one from me, Fermi, just you mentioned Hikvision in 2018 made -- shipped about 1 million CV cameras. Are those using kind of very high-end application processors that really aren't kind of high-volume solutions? Or what are the...

They use NVIDIA PX2.

Our next question comes from the line of Richard Shannon with Craig-Hallum.

This is Joe Flynn on for Richard. Just hoping you could expand on the consumer -- on the security business a little bit. And we're wondering how broad the pickup would be and if you have more visibility into the 10 design wins that you mentioned. Is this something that we could see, like the majority of them late this year or early next year entering production?

Right. So let me -- yes, definitely. Among -- our business model for professional security cameras are focused on the top 10 customers. And among those top 10 customer, we have 1 customer already start shipping in -- early this year. And also, in the remaining months, we have design and engineering activity with the majority of them except 2. For those 2 companies, we are negotiating with them to decide in terms of pricing and engagement model and -- so they can take over the project. So that 2 is undetermined yet. So that's the situation with professional security camera. So because we have a lot of engineering activity among those majority of the IP security -- professional IP security camera customers, we believe we're going to start seeing people renting up even later this year or early next year. It really depends on their product planning and their marketing plan. So like I said, we know we have a lot in engineering engagement, but we need to understand their business plan, like rental time, rental volume, or we can give you more actual guidance for the -- our revenue, which we have -- we don't have enough information yet.

Okay. That's helpful. And a quick question on gross margin. You mentioned the strong growth in second half. Should we expect gross margin based on mix like-- around steady 59%, 60% levels and then, I guess over time, increasing as the ASP is increased with CV entering more mainstream?

Yes, I think for -- right now, the guidance that we have on the lower end of our overall -- our traditional range is the right place to be. As we see the mix on CV out into the next fiscal year and beyond, whether or not that improves back up to the high end of the range, we'll just have to -- it will remain to be seen. But I think that that's a pretty good place to be right now. It's in the low end of the range, which -- the bottom of the range that we've talked about traditionally and 59%, and so the 59% to 60% is a good place to be.

My feeling is that CV will be a gross margin helper instead of dragging down our current gross margin.

This concludes our question-and-answer session for today. I would now like to turn the call back to Fermi Wang for any further remarks.

Again, I would like to thank our stakeholders, especially our 750 employees for their support and commitment in the last year. Thank you, and I'll talk to 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.