Ambarella Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 30, 2023

There are 13 speakers on the call.

Operator

Thank you for standing by, and welcome to Umbrella's First Quarter Fiscal Year 20 24 Earnings As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Louis Gerhardti, Vice President, Corporate Development. Please go ahead, sir.

Speaker 1

Thank you, Jonathan. Good afternoon and thank you for joining our Q1 fiscal year 2024 financial results conference call. On the call with me today is Doctor. Fermi Wang, President and CEO and Brian White, CFO. The primary purpose of today's call is to provide you with information regarding the results for our Q1 fiscal year 2024.

Speaker 1

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're under no obligation to update these statements.

Speaker 1

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 we filed with the SEC, including the annual report and Form 10 ks we filed on March 31, 2023 for fiscal year 2023 ending January 31, 2023. Access to our Q1 fiscal 2024 results press release, transcripts, historical results, SEC filings and a replay of today's call can be found on the Investor Relations page of our website. Fermi will first provide a business update for the quarter, Brian will review the financial results and outlook, and then we'll be available for your questions. Fermi?

Speaker 2

Thank you, Louis, and good afternoon. Thank you for joining our call today. Our Q1 results was slightly ahead of our expectations despite the significant headwinds from the ongoing semiconductor industry's cyclical downturn. We are not allowing this difficult environment to distract us from further developing our AI business. Before I talk about the details of the quarter, With all the growth currents in the market together with all the exciting developments in the AI market, So this will be a good time to review our strategic vision.

Speaker 2

Simply put, our transformation into an AI company is well underway with AI already representing 45% of total revenue last year and an estimated 60% this year. Now with our CV3 platform, we are expanding into a new phase of AI market development. The AI market is at a very early stage. It is also dynamic with many technologies and vocation emerging. With all excitement about AI, the key to our continued success will be our focus and the degree to which we can leverage our unique core competencies.

Speaker 2

Even with our focus, our current serviceable available market or same is sizable, exceeding $4,000,000,000 this year and approaching $10,000,000,000 in fiscal comp. So what are we focused on? Ambarella is focused on deep learning AI processors and the software, which are replacing the legacy and the less powerful traditional machine learning approaches. With the deep learning market, The AI processor market has been dominated by training processors using servers typically for the cloud, Data Center or Enterprise. Our focus is on AI inference, which is where AI models get deployed and are practically utilized by end users.

Speaker 2

As the AI market begin to mature, most third party research firm forecast the size of inference AI to surpass training AI. We have already demonstrated how we can leverage our rich heritage in human perception, comp, also known as video processors into AI. Our CV2 family was our first move into AI and it targets inference AI perception processing At the age where cameras are the principal sensing modality, we continue to expect the CV2 family to be approximately 60% comp. The incremental processing to enable AI cost causes our CV2 blended average selling price, ASP, to be greater than 2x of video processor. This contributed to an over 20% increase in our phone wide ASP in fiscal year 'twenty three.

Speaker 2

This year, the CV2 family is expected to become the dominant driver of our revenue and remain a key driver for several years. The solid string of operating profit from video processors and the CV2 family of HAI processors is now being reinvested into the significantly more powerful CV3 platform targeting mobility applications. The CV3 platform builds upon comp. Our CV2 family experiences and utilize our proprietary 3rd generation AI inference processor. For the typical as well as the processing required in the fusion and the planning layers.

Speaker 2

The significant amount of incremental processing expected to facilitate CV3 SoC ASP to be 5 to 20 times higher than the CV2 SoC. It is also very important to understand CV3 is a platform as the SoC in the CV3 family can capture incremental value by running our own autonomous driving AD Sulfur Stack IP and or radar perception Sulfur IP. We enter bundle the Sulfur IP with our CV3 SoCs in a platform approach, providing our customers with the flexibility to pick and choose exactly what they need. Regarding our autonomous mobility partnerships at Continental, I'm pleased to share that we extended our partnership to Level 4 system development and confirm the 1st business award of our jointly developed stack as a complete level for fallback system. The system will be supplied to Continental for customer in the commercial vehicle industry.

Speaker 2

To be clear, the CV3 platform is a major leap forward in terms of our value proposition and it brings a new list of target customers, automotive OEMs. We are still in the early stage of building out the CV3's SoC portfolio and developing the market. However, we are not doing this alone With leading Tier 1s like Bosch and Continental porting their software to CV3, validating our superior efficiency, jointly marketing to auto OEMs using their scale and bring more credibility to our CV3 market development efforts. Additionally, For the AI server inference market, we have already evaluated running large language model, LLM on CV3 AD high, which has been simple for 9 months and we believe the LMM performance on this existing SoC to be as good as NVIDIA A100 with much lower power consumption and the superior total system cost. We are now establishing a software development effort as well as a business development program to engage with customers.

Speaker 2

Turning to new products and customer engagement in this quarter, In March at IC West Security Show, we announced our CV72S for mainstream enterprise and public class security cameras. CV72 utilized the same 3rd generation CVflow deep learning AI accelerator architecture utilized in the CV3 SoCs. This CV3 derivative SoC bring to the IoT market the high risk AI performance per watt, the fusion of radar and camera data, and it includes support for the latest transformer neural networks. Furthermore, CV2S offers 6 times the AI performance of CV2 family, enabling it to run Ambarella's groundbreaking neural network based image signal processing software for 4 ks color, night vision and HDR with plenty of headroom for additional concurrent neural networks. CV72S is now sampling to leading IoT camera companies.

Speaker 2

In IoT, there were a number of new enterprise and the public security camera introduced, including Motorola will introduce the H6 SL camera line based on CV25 as well as the V700 body camera based on our comps. And the VICADA introduced its TD52 VINVIO intercom featuring 5 megapixel camera based on our CV25. HiPro, formerly Panasonic and the Japan's largest security camera supplier, introduced multiple new product family based on our CV2, comp, including dual and quad multi image models. And the European market leader AXIS, comp. Part of Canada introduced its 3,905 rugged dome models designed for surveillance on board vehicles, such as buses based on our A6 OEM.

Speaker 2

Also in Europe, Dan Dahlmeier introduced comp. Domeroy E Series camera, which use our CV22 AI SoCs to enable imaging in total darkness utilizing adaptive IR illumination. Comp. In the home monitoring market, alarm.com introduced its ADC780 comp. I will now talk about the progress in the automotive market.

Speaker 2

As mentioned earlier, our new CV72 SSOC is an important CV3 derivative for IoT market. However, it is expected to also be an important derivative product for the automotive market and in April at the Shanghai Auto Show, We announced and demonstrate the CV72 8Q. This SoC targets multiple automotive application including Level 2 plus and other applications with up to 6 cameras and 5 radars running on the same SoC. CV72AQ demonstration at the show included an ADAS Plus parking system with a 5 camera configuration including an 8 megapixel front camera and the multiple 3 megapixel fisheye camera running Yodov V7 neural networks on each camera. We also demonstrated versus a leading GPU solution to peer performance and lower power consumption of CV72 comp.

Speaker 2

We received very positive feedback on CV72 8Q from Tier 1s and OEM in China. Also as of the Shanghai Auto Show, a number of other Tier 1s demonstrated CV3 based assistance. This included Continental Huja Show of 10 camera live demo with multiple new networks running on each video stream. And HyperView demonstrated its GT HyperMax platform featuring a sensor suite of 11 cameras, plus 1 LiDAR and 3 radars in a car providing CT navigate on pilot of advanced functions and leveraging the latest transformer network. In March, China's GAC introduced its electric ion y younger L2 +8 DAS SUV with an intelligent 1V1R driving assistance system based on our CV22AQ AI SoC.

Speaker 2

And in April, GB Zeekr introduced its Zeekr X Electric SUV with a face recognition access control system based on CV28 comp. In summary, a majority of our new customer engagement comp. .Com. .Com:] In activity continue to be our AI products. AI is expected to be a majority of our revenue for the first time in fiscal year 2024 and AI should continue to grow as a proportion of our mix.

Speaker 2

To bring our AI strategy vision together, first with CV2 and now again with the even more significant CV3 platform, We have leveraged our core competencies, cumulative knowledge and unique approach to establish strong presence in the AI deep learning domain. Our investment yield differentiated products that are very different, very efficient and open platforms that are scalable and flexible. The CV2 family is already very profitable and we are well into the development phase with the CV3 platform. In summary, There is still a lot of work left to execute to our strategy and the ongoing semiconductor industry cynical downturn pressure on near term financials. However, we are confident in a long term secular growth opportunity for Age Inference AI.

Speaker 2

We do not intend to comp. Our strategy vision and we are continuing to invest in our differentiated AI strategy. I will now turn it over to Brian to discuss the Q1 results and the Q2 outlook in more detail. Thanks, Fermi. I'll review the financial highlights for the Q1

Speaker 3

of fiscal year 2024. I'll also provide a financial outlook for our Q2 ending July 31, 2023. I'll be discussing 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 acquisition related costs adjusted for the impact of taxes. For fiscal Q1, revenue was $62,100,000 in line with the midpoint of our prior guidance range, was down 25% from the prior quarter and down 31% year over year.

Speaker 3

As expected, Total automotive revenue was approximately flat sequentially, while IoT revenue was down sharply driven by customer inventory reduction actions. Non GAAP gross margin for fiscal Q1 was 63.1%, in line with the midpoint of our prior guidance range of 62% to 64%. Non GAAP operating expense for the Q1 was 46,200,000 of $200,000 from the prior quarter and below our prior guidance range of $47,000,000 to 49,000,000 The lower operating expense was driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q1 net interest and other income was 1,300,000 This was higher than our original forecast driven by a higher cash balance and returns on cash invested.

Speaker 3

Our non GAAP tax provision was $300,000 or minus 5.5 percent of pre tax income. This was slightly lower than our original forecast driven by the mix of pre tax income across tax jurisdictions. We reported a non GAAP net loss of $6,000,000 or $0.15 loss per diluted share. Now I'll turn to our balance sheet and cash flow. Fiscal Q1 cash and marketable securities increased 20,500,000 to $227,400,000 DSO improved significantly from 57 days to 43 days as the timing of shipments throughout the quarter normalized after being back end loaded in the prior quarter.

Speaker 3

Ending inventory increased slightly, up 1.8%. However, days of inventory increased more significantly from $116,000,000 to $151,000,000 due to the sequential reduction in cost of goods sold on lower revenue. Cash from operations was strong at $22,000,000 driven by the decrease in accounts receivable and capital expenditures for tangible and intangible assets were $2,300,000 Free cash flow defined as cash from operations less CapEx was 31.7 percent of revenue for the quarter and 6.4% on a trailing 12 month basis. We had 2 logistics and ODM companies represent 10% or more of our revenue in Q1. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia came in at 49% of revenue.

Speaker 3

I'll now discuss the outlook for the Q2 of fiscal year 2024. Customer feedback on end demand remains generally healthy. However, at the same time, customers also continue to aggressively manage down and their inventory levels. Considering these factors, we estimate that our fiscal Q2 revenue will be flat to Q1 and in the same range of $60,000,000 to $64,000,000 that we guided for the prior quarter. By end market, we expect that both automotive and IoT revenue will be approximately flat sequentially as well.

Speaker 3

We expect non GAAP gross margin to be in the range of 62.5 percent to 64.5%, up slightly from Q1. We expect non GAAP OpEx in the second quarter to be in the range of $48,000,000 to $50,000,000 with the increase compared to Q1 driven by higher R and D tied to new product development activities. We estimate net interest income to be approximately $1,000,000 our non GAAP tax expense to be approximately 700,000 and our diluted share count to be approximately 39,700,000 shares. Ambarella will be participating in TD and Rosenblatt's Age of AI Conference on June 7. Please contact us for more details.

Speaker 3

Thank you for joining our call today. And with that, I'll turn the call over to

Speaker 4

the operator for questions. Certainly.

Operator

Comes from the line of Gary Mobley from Wells Fargo. Your question please.

Speaker 5

Hey guys, thanks for taking my question. I wanted to ask about inventory drawdown with customers. You mentioned that customer end demand appears to be healthy. Obviously, you're under shipping and demand. Could you give us a sense of by how much and by how much or how close we are Inventory is being back down to a normal level and then maybe you can comment as well specific to China related demand.

Speaker 2

Yes, this is Fermi. I think like Brian said, we haven't seen a huge change from the customer side. For example, last quarter, We talk about customer that has a healthy growth based on our silicon, but our silicon revenue from them is down 15%, 20% year over year. And that situation continues. And I think the customer continue to confirm that their growth and we continue to forecast lower revenue this year.

Speaker 2

So I think from that point of view, I think the situation is very similar to last quarter. And we have not seen Any indication that this inventory correction will end. So I think what we are looking for is really that The ramping up of new orders consistently from different customers, that will probably give us an indication that is recovered. We haven't seen that yet.

Speaker 5

And as a follow-up, I wanted to ask about comp. Your win that you captured in conjunction with Continental, is that an automotive

Speaker 3

grade win? And maybe if you

Speaker 2

can give us a sense comp. Right. So that's the automotive grade win. And like I said, it's a level 4 car and it's going to be auto grade chip and it's going to be its first design that comp. We work with after the announcement, we're working with Continental.

Speaker 2

And in this design, we involve not only our CV3 SoC, but also our sulfur IP, the sulfur stack that we county and others are co developing. So I think it's combination of software and the SoC win. If we do we are working on other design wins, for example, we talk about First of all, we'll continue to work with Tier 1s like Conti and the Bosch on any potential design wins. At the same time, we also mentioned that in China, I think We saw seeing that a lot of opportunity in Level 2 plus cars and especially at the Shanghai Auto Show, We introduced CV72 8Q. It makes us believe that we have plenty of opportunity there and we are comp.

Speaker 2

I want to close on design win this year there and also the time to revenue is much faster with those potential design win in China.

Operator

And our next question comes from the line of Ross Seymore from Deutsche Bank. Your question please.

Speaker 4

Hi, guys. Thanks for letting me ask

Speaker 6

a question. Fareed, you mentioned that you haven't seen any signs of end of the inventory digestion that's going on and that growth would really resume when some of the new products kick in. Can you, I guess, dive a little bit deeper into that? And so the 2 part question would be, where do you believe the revenue level would be for your company versus this $60,000,000 to $64,000,000 if you were shipping to true end demand? And to the extent it's dependent upon new products kicking in, when do you believe that occurs?

Speaker 2

Right. So first of all, I think that We are now waiting for new product to kick in. We believe the current inventory correction when they finish, the existing product line will come back comp. And it will go back to original level. So we are not counting on new product design win to fix this inventory correction problem.

Speaker 2

And for your first question in terms of level, last quarter when we look at just one example of a customer, we think that we are probably like 25%, 30% below the realistic level. So I think we still hope believe that's the level the difference is we're looking at. And hopefully, When the inventory correction finished and all the costs went back to normal, I think that should give you an indication where we think the normal level of revenue is.

Speaker 6

Got it. And I guess for my follow-up on the automotive side specifically, it's good to see the design win with Conti turn into products, etcetera. That business has been basically flat sequentially, I think for 4 quarters now, 3 quarters have reported and it looks like you're guiding it relatively flat. When is the timing where we should start to see that business picking up? You guys have talked about this investment.

Speaker 6

I know it's a longer term strategy for the company, but it seems like one that should yield some pretty strong tailwinds off the size company you're currently running at. So just wondered on the timing that we should look for and what the drivers of that growth should be?

Speaker 2

Well, I definitely think that's flat. If you look at there are few quarters before the inventory correction and now you're comparing to the inventory correction, Peter. So I think The last two quarters definitely been impacted by inventory correction in the automotive section. So I also believe that comp. Inventory correction finish, which auto should show some revenue growth from that point of view.

Speaker 2

But Like you said, the really big auto growth should come with the ADAS Market and also Level 2 plus market will not go into production.

Speaker 7

Great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Tristan Gerra from Baird. Your question please.

Speaker 7

Hi, good afternoon. Just wanted to have a follow-up on the inventory correction and also try to tie this with market share shift. So it's no secret that some Chinese companies have tried to diversify away from U. S. Supply either because there is a push from that for that from the Chinese government or because they're concerned about potential And I know you've very much give risk to your surveillance camera exposure to China in the past, but You still have exposure in automotive.

Speaker 7

So I wanted to know if there is any signs that perhaps The ramp in China is not expected at the pace that you thought will happen a year ago. Are you getting any feedback? And also just to the And that the inventory correction that you're describing seems to be a bit more pronounced than some of the other companies where it's been really more smartphone and PC centric for other companies. So any elaboration around that would be great.

Speaker 2

Right. So in terms of the geopolitical situation, I think for automotive market, it's Much less severe than security, right? Security is really being viewed as The safety of the country, so that's why I think people trying to avoid U. S. Components.

Speaker 2

But in automotive, In fact, if you look at the middle and high end, all the components in Chinese market today, all of them are U. S. Components. So I think that's because In automotive processing, I think that our solution among other U. S.

Speaker 2

Components still have better performance efficiency And we haven't seen a similar impact from Chinese government on mandating the Chinese automotive OEM use exclusively the Chinese component. So I think that's the 2 things. Add together, I think I still We believe that we won't see a severe downturn on the Chinese Automotive Business.

Speaker 7

Okay, great. And then as my follow-up questions, obviously, you've made that software acquisition, you have the sensor fusion chip. So do you think you have all the pieces you need to move into L2 plus and L3 application, are you getting any feedback about customers Looking at your company size versus a larger supplier or is it purely based on ship performance where obviously you excel. Is there any other consideration that and how you in terms of getting design wins and how you will address that? And that question comp.

Speaker 7

So tied to the product roadmap and whether customers are kind of wondering where would you be 5 years out in terms of product roadmap.

Speaker 2

Right. So I think from a product roadmap point of view, I think For level 2 plus level 3 car, I think we have all the contents that we need to go after this market. Of course, from the hardware and software point of view, I think we can offer a complete solution. But from the strategy point of view, as we said before, we are not bundling hardware and software together. We are trying to offer A software platform that customer can pick and choose and we can help our customer to build their own software stack and working with counties are probably the best example.

Speaker 2

And in terms of scale, it's always a problem. I try to compete with a bigger company is always a disadvantage for us. But I think that's the reason we continue to try to work with a bigger Tier 1s and using with their scale and with their expertise that will help us partially further to address this problem.

Speaker 7

Great. And clearly, the CompTIA and BOS should design and speak to that effect. Thank you very much. Very useful.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Tore Svanberg from Stifel. Your question please.

Speaker 8

Yes, thank you. First question, Fermi, could Could you just talk a little bit about the main difference between the CB3 AD and the CB3 AQ, whether it's Functionality or ASPs or any other color you could share with

Speaker 2

us? Right. So CV3 AD and CV72 AQ, First of all, they are all based on the same architecture, CV3 architecture, all of them using the 3rd generation AI processor. The difference main difference is CV3 AD is designed for the auto grade chip level ASO and CV72-8Q is designed for the system level auto grade. So I think that's the main difference.

Speaker 2

So I think the for example, CV72 AQ definitely is target for Chinese market where people are willing to accept System level ASO system versus chip level ASO system, that's the main difference.

Speaker 8

Very good. Thanks for clarifying that. And my follow-up question, you announced the design win for the software IP modules. Again, I was Hoping you could elaborate a little bit more on that. And it's surprising to me when I hear software IP module, Because I think hardware and software, so it's like how exactly is the accounting for this particular design?

Speaker 2

So, when we are interested I think I see as we announced this is a software partner with County. So basically, the idea is that we are contributing a portion of sulfur solution and we work with the county sulfur team to integrate those modules into a complete software stack, leveraging strength of both sides. For example, And whereas more strength is on the perception side, particularly today is video perception, radar perception. County definitely has a lot more system level that we can leverage both sides of our strength and build a software stack based on leveraging the both sides strength. So I think that's an approach that was different than the customer and also for OEMs that if they are anybody who want to do a similar business model, we are open to that too.

Speaker 8

And on the sort of revenue accounting for I mean is this a module sale or IP revenue?

Speaker 2

Oh, I see. That's basically sulfur revenue split. We need to decide how to share the sulfur revenue together.

Speaker 8

Understood. All right. Thank you very much.

Operator

Comp. Thank you. One moment for our next question. And our next question comes from the line of Kevin Cassidy from Rosenblatt Securities. Your question please.

Speaker 4

Yes. Thanks for taking my question. Comp. Maybe a similar question to what Tristan had about automotive, but in the AI server as you move to the adjacent market AI server inference and you said you have about the same performance as NVIDIA A100 but much less power. Can you say like do you have all the tools you need to move into this server market or into the cloud inference market?

Speaker 2

Right. So obviously, the similarity between our current automotive market and The new IS server market is they are really running a new network on our chip. So from tools point of view that we only develop many, many software tools to help our customer to port a neural network onto our chip. But obviously, LLMs different beast because they are much larger than the typical neural network that we are working with. So definitely there is optimization cycle needs to work on.

Speaker 2

But The reason we decide and we think we have a great opportunity here is, first of all, we have a working silicon can demo. 2, we have a bunch of expertise and the software tools available that we build for other market. 3, we just need to fine tune and comp. Optimize the current software for this LAM to achieve the best possible performance that we can get. So I think from that point of view, the effort for us comp is well is limited and also I think that we also believe that in the market very few people can claim what I just said that We have a working silicon, can show real performance and real low power consumption and also demo to the customer.

Speaker 2

So I think that's Our advantage and also believe that the extra resource we need to put on is something that we can handle.

Speaker 4

Great. And what would be the go to market strategy? Are you looking for a few maybe flagship comp. Customers to lead the way or are you going broad with lots of different customers?

Speaker 2

No, I think we have to be focused. I think we need to identify The sweet spot, I think we should talk about strategy later because we are in the process of talking to customers, but I think we need to focus on where our strength is and also focusing on companies that can leverage our chip and our sulfur immediately. And so I think that one thing we learned is to work with customer who has really the they feel the most painful experience with current solution will most likely to work with us and that's where we're going to focus on.

Speaker 4

Okay, great. Very interesting.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham and Company. Your question please.

Speaker 9

Hey guys, thanks for taking my question. I guess for me and Brian, maybe just your best guess, I mean we've been working down this inventory now for a few quarters certainly doesn't sound like it's you haven't seen any green shoots yet in terms of the orders. What's your best guess as to how many more quarters you think it will take to work down this inventory? Do you think we'll be pretty clear by the end of your fiscal year or the end of the calendar year, do you think it could take longer?

Speaker 3

Yes. Quinn, this is Brian. A quarter ago, we said that our guidance would for fiscal Q1, which was comp. $62,000,000 at the midpoint. We thought that that would represent the bottom as it related to impacts associated with and then it would likely not get worse from that point.

Speaker 3

And we're kind of sitting in the same place we were 90 days ago from the standpoint that we still believe that's the case. What becomes challenging is forecasting comp. When this thing lifts off again and at what slope, we certainly have visibility to backlog, But that backlog has been shifting, right? We've had reschedules, cancellations that we've had to deal with. So Well, in normal times, we can look at that backlog and have a lot of confidence as to how revenue might shape up, say, in fiscal Q3, Because of the movements that we've seen, our confidence in providing a forecast would be lower in this cycle than kind of a normal time.

Speaker 3

So we don't see it getting worse, But the visibility to the second half and just how that recovery plays out, I think it's hard for us to talk to at this point.

Speaker 9

Understand you're not getting to the fiscal second half. Historically, you've seen some stronger seasonal trends in the second half. I mean, can you just provide any framework how we might be thinking about if the inventory doesn't get any worse and you see normal seasonality that would imply a lift. Obviously, if you start to see the inventory correction and that would imply a lift. I mean, are you sort of suggesting, hey, keep it in the 60% to 64% range until you see the inventory clear or do you think you can see some seasonal upticks in the second half?

Speaker 3

Well, normally, we would see some uptick in the fiscal Q3 in particular. Comp. And we would hope that we do again, but we're just at a point where we don't have The visibility and the confidence to put a number out there and try to give you some You know, magnitude of directional increase at this point in time.

Speaker 9

Got it. Understood. Thanks, Brian. And then I guess for me, I guess, I was a little surprised to see your first win with Continental being a level 4 win. I think the initial partnership you'd announced comp back late last year, I think was for Level 2 plus And so can you just sort of maybe talk about how the Level 4 win came together.

Speaker 9

I know you'd expanded the relationship with CES and so maybe that was on the fast track. But comp. When were you surprised that the level 4 came before level 2 plus with Continental?

Speaker 2

Well, I think that The engagement definitely after we announced this Solpri collaboration with Tangy and us, which will happen at CES. And things go really fast after that. So I think definitely I'm surprised how fast this develop and also and I need to thank comp. I can't see that putting this whole thing together because the one important thing is that to sell that joint software stack and to get the confidence with customer is important for us and I think that's a great win for us. But at the same time, I want to say again on the Level 2 plus I think that When we look at 2 things, one is the momentum with County and Bosch that we're still working on and it's still there.

Speaker 2

But more importantly, I really think now with Shanghai Auto Show and with our CV72 8Q announcement and sampling the component and the software to a customer recently, that gives us a confidence that we're going to see CV72 comp. Q1, Q2 plus design win this year and maybe quick revenue returns. In China, you know that The design cycle is not full year, usually it's less than 2 years. So we are hopeful to see a really quick revenue return from the CV70 to 8Q and also that we have a roadmap continue to address this market. So I think overall I think Level 2 plus design win is we are continuing to be our focus and we think we'll continue to deliver what we think that we can do.

Speaker 9

Perfect. Thank you, Fermi.

Speaker 6

Comp.

Operator

And our next question comes from the line of Brian Ruttenberg from Imperial Capital. Your question please.

Speaker 10

Yes, thank you. Can you give me, first of all, Housekeeping D and A and materials, depreciation and amortization?

Speaker 3

Depreciation and amortization, is that the question?

Speaker 10

Yes, that's affirmative.

Speaker 3

Yes. For fiscal Q1, I believe it was 5,800,000

Speaker 10

Okay. Dollars 5,800,000 for the Q1. Also in terms of DSOs, do you anticipate DSOs stabilizing here? So in other words, trying to understand your cash situation probably will just go down, you probably won't have Airstep event again or do you anticipate DSOs continuing to go out?

Speaker 3

No. I mean what we saw in fiscal Q1 was a normalization of the timing of shipments throughout the quarter Versus say fiscal Q4 where shipments were very back end loaded. So we had a couple of quarters, fiscal Q3, Q4 were both very back end loaded quarters. Q1 normalized, DSOs came down. That provided about $22,000,000 benefit to cash flow in the quarter.

Speaker 3

As we move forward, we would expect DSOs to remain at similar levels. Thus, we would not expect to get a large benefit in a future quarter from another stair step down, for example. So as we move into Q2, obviously at the revenue level and the other metrics that we gave you, that would in fiscal Q2 versus Q1. And as we go through the year, cash flow is just going to be highly dependent upon the revenue levels. Yes, we've talked about the fact that we just we don't have great visibility at this point in time to the second half revenue.

Speaker 9

Great. Thank you very much.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Suji Desilva from ROTH Capital. Your question please.

Speaker 4

Hi Fermi. Hi Brian. Good to see the Continental win. I don't know if I missed this, but did you say the L4 commercial vehicle customer, what geography that was?

Speaker 2

We didn't. And we our customer doesn't want us to disclose that yet.

Speaker 4

Okay, Fair enough. And then, I think, Hermia, you talked about a range of ASPs, 5 to 20 times. Can you just talk about what drives the delta there? Is that More compute horsepower on the chip or is that compute plus software? Any color there would be helpful.

Speaker 2

I think that Comment is purely for silicon, not does not include the software. So the difference is really from the low end to the high end. So for example, The low end for the high end chip, we talk about $400 plus and the low end, for example, Our 655 ships that we're talking about are probably in the $100 range. So it's really that level of the different performance Price range that we're talking about. I also believe that for automotive roadmap, you need to have a family of chip to address different performance level.

Speaker 2

For Level 4, Level 3, Level 2 plus even multiple layers Level 2 plus require different chips. So I think that's where we're still talking about.

Speaker 4

Okay. Thanks, Fermi.

Operator

Thank you. One moment for our next question. And our next question comes from the line of David O'Connor from BNP Paribas. Your question please.

Speaker 11

Great. Good afternoon. Thanks for taking my questions, guys. Maybe for me, just going back to the question on the AI inference opportunity.

Speaker 8

Comp. Can you just give

Speaker 11

us a bit more detail there on what type of customers are potentially kind of you could engage with on the AI inference side. Is that data price or enterprise or any particular vertical that you think may be open to you? I know it's early days, but as you mentioned, you have a working chip and you need to rework the software. But what kind of timeframe do you think you could potentially get So revenue there, is that kind of 3 to 5 years out? Is it kind of is it before that?

Speaker 11

And anything around kind of content opportunity there would be helpful. Thank you.

Speaker 2

Yes. So it's a lot of questions. So I think like I said, the target market comp is really where I think our first target is really on the edge server side, which where you can focus on The enterprise and the people who are running their own neural network, for people running OpenAI or other very large model, That might not be the best customer at this point for us, but there are plenty other different software SUVs that use Driving different neural net model either for the own code or they are running the enterprise level. Those are the probably sweet spot for our Chip because we know that just like I said, the scale is that definitely matters in this market too. And we need to pick the best market to go after.

Speaker 2

And we're still in the process to figure that out, But I definitely think that's what I just said is our current thinking. But I think in terms of The content, I think, is obviously even better than our automotive ASPs because the competition out there is selling at a much higher level. And also we have a great advantage on both on the power consumption side. We're not talking about 5%, 10%, we're talking about Significant difference between power consumption, therefore, as well as the total system cost. So So I think from that point of view, it will help us to get a healthy content there.

Speaker 2

I think there is another question I forgot.

Speaker 3

Time to revenue.

Speaker 2

Time to revenue. So I think we need to get But that more running than software 2 running so that customer can port and then we can talk about design win, then we talk about revenue. So I think If you ask me today, I will say that's a 24 months process totally.

Speaker 11

Comp. That's a welcome question. That's quite helpful to frame that. Thank you, Fermi. And maybe just a follow-up comp on that for Brian, just on the ramping that sulfur development team.

Speaker 11

Just to clarify, that fits in with the current OpEx envelope or would there be some kind of a step up there to fund that new team? Thank you.

Speaker 2

Yes, our plan is to use our current expertise and team to facilitate this activity. The idea is simple because We have our internal team is helping many other customer to port their neural network onto CV3. And we understand LOM because it's so large and it takes extra effort. So that the best way to do this is fund it and And put internal resource on this project. Obviously, that it will take a trade off, right?

Speaker 2

We don't plan to add comp. So I think that we need to really focus on the area where we think is important. I think where it's important for us is definitely security came out to provide cash for us, maintaining our CV3 momentum with current design wins like a Bosch and County and try to secure CV3 design wins with OEMs and also try to find a resource to fund this LLM and everything else is a trade off that we need to consider.

Speaker 11

Very helpful. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Vivek Arya from Bank of America. Your question please.

Speaker 12

Hi, this is Blake Freeman on for Vivek. Thanks for taking my question. Just first on the cash side, just curious, I know you mentioned talking about R and D investments over the next few quarters. Just at your current cash level, are you comfortable there? Or do you Any needs to raise incremental cash in the future?

Speaker 3

No, we don't see any need to raise incremental cash. We have Strong cash balance, no debt and you've got a history of being positive from a free cash flow perspective. So no need to raise additional cash.

Speaker 12

Great. And then quickly as my follow-up, just given the current revenue levels you've seen relatively substantial range was kind of split between IoT and autos now roughly 65%, 35%. Gross margins have still kind of held up relatively okay and above this sort of the long term range of 59% to 62%. So just kind of curious if you can give us the puts and takes on sort of gross margin side and Maybe beyond Q2 out first line of the model.

Speaker 3

Yes. I think we stick with that long term model that we provided previously in recent history, we've been delivering higher gross margins than that. And we would expect that that would continue until we get into the impact of potentially very large automotive opportunities and that's is why that long term model provides for a slightly lower gross margin if we need to get there to secure those design wins. But For now in the foreseeable future, we should be at recent gross margin levels and probably a little bit higher once we get through this inventory correction and get back to slightly higher gross margin that we were posting last fiscal year.

Speaker 9

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Martin Yang from Oppenheimer. Your question please.

Speaker 12

Hi. Thank you for taking my question.

Speaker 1

Jonathan, let's go to the next question and then we'll give Martin another chance After this question.

Operator

Okay, understood. One moment for our next question. And our next question comes from the line of Matt Ramsay from TD Cowen. Your question please.

Speaker 10

Hi, this is Josh Pokalter on behalf of Matt. Thanks for squeezing me in. It's great to see that the CV3 win with Continental for commercial applications. I was wondering if you could provide some initial feedback on how it's going on the consumer passenger vehicle side. I recognize it's only been a few months since the partnerships have been announced, but you're going against some entrenched and large competitors in the central ADAS domain.

Speaker 10

And I was wondering how Conti and Bosch are positioning your CD3 based Solutions to win in that market? Thank you.

Speaker 2

Yes. I think, first of all, we have a strong relationship with both Bosch and County. And the County has given further up collaboration because of software relationship and you can see that software relationship already stopped paying off, not only on the level 4, but also we start building engineering collaboration on that. So I think that activity definitely is very helpful. And also on the business side, both sides are working with the content approach definitely help us to address the scale problem partially.

Speaker 2

And also we believe that working with we continue to believe that working in County and Bosch is the right thing for us to do to get design wins in the U. S. And Europe. I think that said that, I also believe that our first Level 2 plus design will come from China, like I said, Because the momentum we see after the Shanghai Auto Show is real and that we not only demo a Powerful chip, but also we demo something that very few people can do, which is running transformer neural network in lower end chip that just nobody out there can demo like the company you mentioned, Now then the lower end chip can demo transform efficiently and the transformer becomes such an important neural network And you've been used as benchmark everywhere, so particularly in China where AI is AI neural network performance is very much appreciated. So I think that's a momentum where we definitely enjoyed, and I think I hope that we can get several design wins in China this year.

Speaker 10

Appreciate the color. That's actually a nice segue to my follow-up. Can you talk about I think this is the first time you've mentioned auto being a source of inventory correction despite the results coming in line with your expectations. Did that get any comp. I know we've all heard about weakness in the China EV market.

Speaker 10

It would be helpful if you could help us understand your exposure there and if that worsened and drove, comp? I guess some incremental weakness during the quarter. Thank you.

Speaker 2

No. What we said before is we think our Inventory control in auto is much less than the inventory control in IoT. That's what we said. We didn't say auto was not impacted. Comp.

Speaker 2

We definitely see a few several customer got impacted, but not as bad as IoT space. So from that point of view, I think we still think that I still expect that when the inventory correction finish, also should go back to growth.

Speaker 10

Got it. Thank you.

Operator

Thank you. Comp.

Speaker 9

Hi. Sorry about my technical issue. Can you give me a minute?

Speaker 2

Yes.

Speaker 10

Yes.

Speaker 9

I have a question on CV72. So do you expect comp. Your automotive and IoT customers to most of them to opt and adopt the Oculi integration that comes with

Speaker 2

That's a good question. So I think for the IoT, the adoption of radar system will be slower because The whole market, the IoT market is moving toward to radar, but not as fast as auto. Radar in auto space is basically everywhere. Everybody realized that they need to have a radar solution in any Level 2 plus systems. So I think in terms of adoption that radar will go to auto space first.

Speaker 2

For CV72 8Q, I think that radar integration will come later because Right now, we're focusing on winning the video side. But however, as a second phase of software development, auto radar integration will come also.

Speaker 12

Comp.

Operator

This does conclude the question and answer session of today's program. I'd like to hand the program back to Doctor. Fermi Wang for any further remarks. And

Speaker 2

Thank you very much for you to join us today. I'm looking forward to talk to you next quarter. Thank you.

Operator

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

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Ambarella Q1 2024
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