Ambarella, Inc. (AMBA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Ambarella's Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to VP, Corporate Development, Louis Gerhardy. Please go ahead.

Thank you, Latif. Good afternoon, everyone, and thank you for joining our third quarter fiscal year 2024 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO; Brian White, CFO; and John Young, VP of Finance. The primary purpose of today's call is to provide you with information regarding the results for our third quarter fiscal year 2024. 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 based on currently available information and subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We're under no obligation to update these statements. These risks, uncertainties and assumptions as well as other information on potential risk factors that could affect our financial results are more fully described in the documents we filed with the SEC. Access to our third quarter 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. The content of today's call as well as the materials posted on our website are Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now 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?

Thank you, Louis, and good afternoon, everyone. In a challenging market, our fiscal Q3 revenue was slightly above the midpoint of our guidance. Our business appears to be in the process of stabilizing as our customers seem to be making progress with their inventory management efforts. We expect our customers to emerge from the cyclical downturn at different times throughout the next year. And considering all of the dynamics at this time, we continue to anticipate we will return to growth in fiscal year 2025. We remain determined and focused on our strategic R&D priorities for the introduction of a portfolio of AI SoCs and software, targeting more sophisticated AI inference workloads. Our confidence in the secular growth opportunity for inference AI processors and software remain high. And our long-term serviceable market opportunity CAGR estimate has not changed. Our CV2 family of SoCs is expected to lead us out of a cyclical downturn and represent a larger portion -- or proportion of our total revenue in fiscal year 2025. As a reminder, this product family established Ambarella in the AI inference market, and these SoCs are expected to approach 60% of our total revenue in fiscal '24. In a single chip, the CV2 products typically provide both the video processing and AI inference processing for one or more cameras. The average selling price of these products is close to $20 with a range of below $10 to above $50. In particular, I want to point out that CV5, the flagship of CV2 family and Ambarella first 5-nanometer SoC, is forecast to generate meaningful revenue next year with more than 10 customers in production. Our CV3 platform is expected to generate production revenue from the automotive market in calendar year 2026 and beyond. The CV3 platform includes a family of SoCs as software, and we began to sample the CV3-AD SoC a year ago. And today, I'm pleased to announce during Q3, we received the first silicon for CV3-AD685 SoC, the flagship of our CV3 portfolio. And we are in the midst of a successful bring-up of this extremely sophisticated $10 billion-plus transistor SoC. We expect to deliver engineering samples to customers in Q1 next year, and we are on track to the previously announced award from Continental to the first OEM start of production in calendar year 2027. CV3 SoCs are based on our third-generation AI inference technology and serve significantly more challenging AI inference workload such as a partial or complete autonomy in vehicles. In addition to providing, in a single SoC, the perception processing for multiple camera inputs, CV3 SoCs for the first time enable centralized processing of raw radar data as well as deep low-level fusion with data from other sensing modalities. The CV3 family of SoCs range in price from $50 to more than $400 per SoC. There are 2 additional elements of our CV3 platform, both of which are software. This includes Oculii adaptive AI radar perception software and our complete autonomous driving software stack, both optimized to run on CV3. Since November '23, we have been providing demo rides to OEMs and Tier 1s based on CV3 SoCs and our autonomous driving stack with centralized radar processing, low-level fusion and the Oculii radar perception software. And we will continue to demo this at the CES in January. Now I would like to provide an update on our gen AI plans. During the last quarter, with the implementation of new LLM software building blocks on CV3-AD, we have now successfully demonstrated inference running Llama2-13B model with the SoC using LPDDR5 memory instead of high-bandwidth memory and operating at a fraction of the power consumption of incumbent solutions. Some of our existing customers are evaluating how they will implement gen AI and large language models at the edge of their networks. With our successful LLM demos and additional analysis, we have concluded the powerful and highly efficient AI inference processor embedded in our CV3 SoCs is well suited for these edge markets. We will have more updates on our LLM strategy at CES 2024. Once a year, we update our automotive funnel, which is meant to be a reference for our automotive customer engagements over the next 6 years. We completed the funnel update in November, and it increased 4% from $2.3 billion to $2.4 billion. The funnel is comprised of won business of about $800 million and pipeline of about $1.6 billion. With our automotive business expected to generate about $80 million in revenue this year, the $2.4 billion 6-year funnel is an indication of the strong growth we anticipate from the auto market. There was a significant number of upward and downward revision in the funnel calculation this year, including forecast changes and project delays from both Tier 1s and OEMs, projects won or lost in the pipeline and the addition of new projects. CV3 represents a large portion of the current funnel even though CV3 revenue is not expected to commence until calendar year 2026. I will now discuss representative customer engagement in this quarter. In automotive, we are continuing to win new designs in China, the world's largest automotive market. The open architecture of CVflow AI SoCs enable leading Chinese Tier 1s and ADAS software providers to develop highly differentiated fully featured solutions. During the quarter, GAC introduced 4 new passenger cars models incorporating Ambarella's CV22AQ automotive SoCs in intelligent ADAS systems. These included GAC Trumpchi E8 and ES9 and Aion Hyper HT and Aion S Max. Also, Hycan introduced its V09 minivan with ADAS system also based on our CV22AQ. And SAIC introduced its Maxus Dajia 7 minivan, including a camera monitoring system, replacing left and right mirrors and based on our CV22FS functional safety SoC. In the automotive aftermarket, Asian market leader Thinkware introduced its QXD DVR based on our CV25A AI SoC and the F200 PRO 2-channel DVR based on our A12A SoC. And the European market leader, Nextbase, introduced its iQ smart dashcam product line using our CV22 automotive SoC, featuring 4K resolution and advanced AI-based threat detection. In the enterprise security camera market, a number of leading manufacturers introduced new cameras based on our flagship 5-nanometer CV5 and the CV52 families. Motorola introduced its new H6A product line featuring AI-based video analytics and up to 8-megapixel resolution based on our CV52 AI processors. And Japanese market leader, i-PRO, announced its new X Series featuring a total of 9 models spanning box, indoor dome and outdoor dome models up to 8 megapixels based on CV52 SoCs. And the Korean market leader, Hanwha, introduced its C34404 multidirectional outdoor camera based on our CV5 SoCs. Also during the quarter, Verkada introduced its CP52-E pan-tilt-zoom camera based on our CV22 SoC, offering camera operators dynamic coverage of wide areas and featuring 5-megapixel resolution and 28x optical zoom. And Germany's IDS introduced its first Ambarella-based camera, the NXT malibu, for live imaging analysis based on our CV22 AI SoCs. In the smart home segment, Signify, the Philips Lighting spinoff known for its Hue lighting products, announced its Philips Hue Secure cameras. Based on our CV AI SoCs, the cameras can work with Hue lights to control lighting and sound alarms to deter intruders. Also during the quarter, ecobee, a leading home automation companies, announced its Smart Doorbell Camera based on our CV28 AI SoCs. In November, Insta360 introduced its Ace Pro and Ace action cameras based on our CV5 and the CV52 AI SoCs. The Ace Pro is the first 8K consumer action camera, and both cameras include advanced AI features such as neural network-based noise reduction, 48-megapixel computational photography, voice and gesture control and automatic video editing. Collectively, you can see overall design win activity is healthy across 13 different representative customers for 17 different projects, 9 in auto and 8 in IoT. Furthermore, 16 of the 17 representative engagements utilize our higher-value AI SoCs. You can also see we are successfully implementing more sophisticated AI workload in our SoCs as highlighted with the identification of 4 different CV5 customer engagements. Looking forward, we believe our newer products such as CV5, CV72 and CV3 are well positioned to support increasingly sophisticated AI inference workloads. As these new products ramp and as we also capture more software value, we believe we can capture more value per design win. Now I would like to give an update on changes to our management team we previously announced in October 18, 2023. Brian, our CFO, will retire from his role as the CFO at the conclusion of the current fiscal year ending January 31, 2024. I would like to thank his contributions to the company, including helping navigate the challenging inventory correction the semiconductor industry is currently experiencing as well as continuing to strengthen our financial team and position us for success as we continue our transition into larger markets. I'm also pleased to announce that John Young, currently our VP of Finance, will assume the role of CFO on February 1, 2024. John has been with Ambarella for more than 6 years, serving in a variety of finance and accounting roles, and we are confident that he will continue to be a valuable contributor as we seek to drive our transformation forward and grow shareholder value. Now I will hand it over to Brian to discuss the Q3 results and outlook in more detail.

Thanks, Fermi. Before I begin, I'd like to thank Fermi and the Board for the opportunity I've had to be part of the special team here at Ambarella. The timing of my upcoming transition is facilitated by the progress we've made in developing the people, processes and tools to support Ambarella at the next levels of growth and profitability. I have complete confidence in John's ability to take over as CFO and the team he has to support him. I look forward to their ongoing success. I'll now review the financial highlights for our third fiscal quarter and provide a financial outlook for our fourth quarter ended January 31, 2024. 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 along with acquisition-related and restructuring costs adjusted for the impact of taxes. For fiscal Q3, revenue was $50.6 million, slightly above the midpoint of our prior guidance range, down 19% to the prior quarter and down 39% year-over-year. As expected, the sequential decline in revenue was driven primarily by our IoT end market. Non-GAAP gross margin for fiscal Q3 was 62.6%, in line with our prior guidance range. Non-GAAP operating expense was $44.1 million, down $1.9 million from the prior quarter and below our prior guidance range of $46 million to $49 million, driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q3 net interest and other income was [ $1.9 million ], and our non-GAAP tax provision was approximately $650,000. We reported a non-GAAP net loss of $11 million or a $0.28 loss per diluted share. Non-GAAP EPS was $0.11 better than the implied midpoint of our prior guidance range driven primarily by lower operating expenses. Now I'll turn to our balance sheet and cash flow. Fiscal Q3 cash and marketable securities increased $5.8 million to $222.3 million. DSO improved from 45 days in the prior quarter to 42 days, while days of inventory improved from 147 to 145 days, down $4 million from the prior quarter. Cash from operations was $7.9 million and capital expenditures for tangible and intangible assets was $2.4 million. Free cash flow, defined as cash from operations less CapEx, was 11% of revenue for the quarter and 6% on a trailing 12-month basis. We had 3 logistics and ODM companies represent 10% or more of our revenue in Q3. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 54% of revenue. Chicony, an ODM who manufactures for multiple IoT customers, was 12% of revenue, and Hakuto, a logistics partner who primarily supplies multiple automotive customers in Japan, was also 12% of revenue. Now I'll discuss the outlook for the fourth quarter fiscal year 2024. The near-term revenue outlook appears to be stabilizing. While customers continue to manage their inventory levels and some pockets of end demand softness persist, ordering patterns and customer feedback suggests that our revenue is leveling out and likely to resume growth in our next fiscal year. For fiscal Q4, we estimate that our total revenue will be in the range of $50 million to $53 million, with IoT up slightly and automotive about flat. At this time, we anticipate the sequential revenue growth will continue in our fiscal Q1 in the low to mid-single-digit percentage range. We expect fiscal Q4 non-GAAP gross margin to be in the range of 62% to 63%. We expect non-GAAP OpEx in the fourth quarter to be in the range of $45 million to $48 million, with the increase compared to Q3 driven by CES marketing activities, R&D tied to new product development and less favorable foreign exchange impacts. We estimate net interest income to be approximately $1.5 million, our non-GAAP tax expense to be approximately $600,000 and our diluted share count to be approximately 40.4 million shares. Ambarella will be participating in a fireside chat and hosting one-on-one group meetings on December 5 and 6 at NASDAQ's and Morgan Stanley's London Conference. We also will be participating in Nomura's CES one-on-one conference in Las Vegas on Monday, January 8. We expect to host more than 20 investor groups during our CES 2024 exhibition from January 9 to January 12. Please contact sell-side analysts to make reservations. We will also present and host one-on-one and group meetings at the Needham conference on January 17 in New York. Please contact us for more details. Thank you for joining our call today. And with that, I'll turn the call over to the operator for questions.

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

I wonder if you could talk about the adjustments, Fermi, that you discussed to the funnel. You had said that you saw some business kind of coming out, and I know you had a number of businesses there that were probability weighted. What's happening to that when that happens? Is that because the programs are just moving more slowly? Is it competitive? Is it supply chain? Can you just kind of give us an indication of why there would be those adjustments?

Yes. Thank you, Joe. I think -- let me address that question. In fact, in the script, we talked about 4 different factors. The first factor is the forecast change from Tier 1 and OEMs. For example, for some of the projects that we have won, the forecast of those projects would reduce. Particularly in the last several months, we started seeing that trend. So that's the first factor. The second factor is we started seeing project delays. For example, for some of the projects that we have won, the production date is pushing out. And also for some projects that we are in an RFQ phase, the decision of those -- of the final -- the decision of the award is also kind of pushed out. So I think that's the second factor. But also there are -- the third factor is really that we continue to have a new project or RFQ that we're bidding on, and we have different multiplier, like you said, different confidence level for different projects and that new project will be done. The last factor is really the project that we won and lost at the end. So if you ask me, I think the first and second factor really negatively impact our funnel number, but the third and fourth -- the net effect in the third and fourth probably help us to continue to add numbers into the funnel. So that's the reason we have this minor increase on the funnel numbers.

Great. That's helpful. And there's still an awful lot of growth over multiple years -- in 5 years. How does that profile look versus a year ago? I know you've talked about a lot of success in China. Do you see more of a China skew to your numbers in the -- as you start to ramp the advanced CV features?

Right. So I think that first of all, this funnel -- first of all, on the one portion, this is the first time we start seeing CV3 contribution there. In the pipeline, definitely CV3 continue to getting higher and higher percentage of funnel number. One thing I can say that in addition to the first CV3 design win we announced last -- 2 times ago with Conti, we add extra non-Chinese commercial vehicle design wins with CV3 and -- in this pipeline. So we definitely continue to make progress on that. And the trigger for those design wins is after we demoed the working CV3-685 chip and also demoed this software stack we talk about, our AI software stack that can integrate all from the fusion to the radar as well as all the path planning. So we successfully demoed those things to OEM Tier 1s. Those 2 factors help us to secure the design wins we just talked about.

Our next question comes from the line of Tore Svanberg of Stifel.

This is Jeremy calling for Tore. I guess first, I just wanted to follow up a little bit more on the adjustments you made to the funnel. Can you talk about how maybe, on a broad level, did the overall market in terms of maybe SAR impacted and how much that might have impacted the slight increase in the funnel? And then I've got a follow-up after that.

I think the global market definitely impacts 2 things. One is the forecast of the run rate of the project [ that we won ]. But also, I think you can read a lot of articles talking about for the Level 2+ or Level 3 cars, a lot of the new project, the decision got pushed out because people are having different thoughts about their software stack, what's the functional features and particularly how to compete with China with their aggressive product line. So I think all of those contribute to the first and second factor I just mentioned.

Great. And then moving to the AI inference accelerator business that you've successfully demonstrated. Are we right to read into it that it sounds like this is something that you're moving forward with? And can you talk about maybe your competitive positioning relative to whether it's the current incumbents, the number of private companies that are in the space and maybe other large competitors that might start to move in? Can you just talk a little bit about...

I think you are referring to the LLM. So I think first of all, this time a little bit different than the last time. Last time, we kind of talked about global, a lot of the different applications because we haven't spent enough time on the marketing side. This time, we're kind of zooming to say while we understand our strength is edge devices, particularly because we are in the market and we know a lot of customers in there. And we've also done enough demos and also talking to customers to understand our strengths against our competitor, both for larger companies, also start-up companies. And our strength is, first of all, we have a working silicon that we can give demo at a very good performance, a very low power consumption. I think that's the key. The second thing is, for us, it's not just silicon. In fact, we also have bundled software. We're going to show a development environment that we already introduced our customer, we'll publicly introduce to the CES about how we're using a software environment, bundled with our current solution that enable edge device or edge servers quickly moving to LLM model to help edge applications. So I think that's where we're focusing on right now. And it's not that we don't want to focus on bigger cloud or much bigger application. It's really that I think with our current silicon and our current resources, we would like to focus on areas that we know, that we are familiar with, and we want to know that we can win, right? So I think that's where we are sitting on with the current plan. Of course, we are not -- we definitely need to build a road map. But however, like we said last time, our current commitment to LLM is using our current engineering resource, which is enough to do demoing system, developing the application, developing software for edge applications. Those applications are using current resources. Had we decide to extend our road map or doing other applications, we probably need to talk about different engineering resource, which we haven't committed to that yet.

Our next question comes from the line of Christopher Rolland of Susquehanna.

This is Matt Myers on for Chris. So you guys talked about first quarter potentially growing low to mid-single digits. Maybe it's a little bit slower than we were thinking about. So I was curious, is this more end demand-driven or inventory-driven? And how should we think about inventory dynamics into the April quarter by auto or IoT within enterprise or consumer too within there? And then how are you thinking about the shape of end demand into the first quarter and then through next fiscal year?

Well, I think that the data points that we're looking at in support of the growth we talked about for fiscal Q1 is based on, number one, looking at our bookings and backlog trends, which have absolutely improved. So our book-to-bill was much better in Q3 than what we've been experiencing for a number of quarters. And as we look at the backlog build into Q1, it's tracking well above the prior quarter, and it's supporting the growth range that we talked about. And so when we combine the data from bookings and billings and we compare that to the feedback that we're getting from our customers as well as the requests that we're getting relative to pushouts versus pull-in of shipments, which have become much more balanced than they have been in the past, that gives us the confidence to talk about the beginning of growth in fiscal Q1 and then growth for the full fiscal '25. But certainly, we have a ways to go. And so that recovery is certainly helped by the turnaround of the inventory situation. End markets also seem relatively healthy and in support of that growth. But I would say the primary driver at this point is getting to the bottom of that inventory cycle and getting through that excess material at customers.

Got it. And then I also wanted a question on video processors. So based off of you talking about CV2 being about 60% of revenue, there's clearly a big drop-off in video processor revenue this year. And if CV2 is going to continue increasing next year, what's your outlook here, particularly for video processors? Are you still investing a lot in this business or getting new wins here? And how should we just think about this particularly in the next year?

Right. So first of all, I want to point out, although we haven't really [ taped out ] video processing-only chips, but video processing technology continues to be a very important part of offering in our AI chip. So CV2 -- all the CV family chip has a big portion of the -- sorry, the image processing or video processing technology in there. So I just want to clarify that. So this year, our CV total revenue approached 60%. Obviously, it was what I just said and also, if you look at the design win momentum we have, majority of that is CV. So I think the potential continue to go to favor of CV. But however, I think the decline of video processor will slow down because that we have a big jump -- big reduction in the last 2 years, but we still have a long tail of a video processor chip that sell into different markets, including the enterprise security camera as well as automotive. So I think that we should expect much less reduction on the video processor and with a very long tail.

Next question, which comes from the line of Kevin Cassidy of Rosenblatt Securities.

This quarter, Hakuto, the Japanese auto distributor, came up as a 12% customer the first time in a year or more. Is there anything happening there or is it just because the overall revenue is down? Or is there some new designs happening in Japanese automotive?

Well, I think it's really that if you compare to the previous quarter, our other business dropped quickly. And Japan automotive, usually, they just take at a fixed rate and is seldom to change the forecast. So it's not particularly anything happening in Japan but it's really that outside Japan, the drop is significant.

Okay. And just as you're going forward with the consumer, and even as we -- consumer surveillance cameras and with large language models being used, is there a time when the input for the consumer will be just their voice, they can program the device? Is that something you're working towards?

We are working [ not just with ] language, we're working on multi-modality. I think in fact, we think that the LLM for us, for our customers' application, most important thing is processing text, also speech as well as image, all of them together. That adds the biggest advantage to our customer, and also that's probably one unique function that we can really differentiate against other LLM suppliers.

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

This is actually Neil Young on for Quinn. Wanted to ask, so it's been about a year since you announced the partnerships with Continental and Bosch. When do you believe we'll start to hear about design wins from these partnerships?

Well, we already announced a design win with Conti. We couldn't mention the OEM then, but I think we already did that. And you should -- in fact, I would say that our relationship with the Conti continue to improve, and we are bidding on projects with OEMs together. In fact, that -- we cannot announce OEM design win without a customer's approval. But one thing I can say is that activity with Conti is heavy. And also we continue to believe that engagement between Conti and us are getting tighter and tighter, both on the hardware design as well as the software design.

Okay. Great. And just another follow-up. So there's been some press reports suggesting that Continental is considering divesting its automotive assets, including its autonomous mobility business. How would a divestiture of this business affect your guys' partnership?

Well, yes, we heard similar reports. I think one thing I can say is based on our conversation with Conti, we continue to believe this division that we're working with is -- continue to be strategically important for both Ambarella and also Conti. And like I said and with the close development that we continue to have, we didn't see any signs of slowdown on the Conti side. So we continue to believe this relationship is important and also the product that we're working on is continually important for both Ambarella and Conti.

[Operator Instructions] Our next question comes from the line of Martin Yang of Oppenheimer & Co.

Just one question. Can you maybe comment on the progress for customer design engagement regarding your CV72 products in automotive market?

Yes. CV72 automotive product is designed for Chinese market because it's not ASO, so that only -- so it's only applicable to the Chinese market. And also last time, we talked about we have multiple Tier 1 design wins, and also, at that time, last time, we talked about multiple -- all of the Tier 1s are working on building a demo system to show to OEMs. In fact, one of our Tier 1, just yesterday, demoed live, broadcast live demo driving a car based on CV72 ECU from the Shanghai airport to the downtown Shanghai, autonomous driving. So I think that we continue to make huge progress and we are ready to -- in fact, we already started demoing to OEMs. And also, like I said before, I think CV72 position in a very favorable price performance for the middle end of Level 2+ solution in China. And we continue to believe that we have a competitive solution for that particular market. And we are working closely with Tier 1 to talk to OEMs. Hopefully, we can announce some design wins soon.

A quick follow-up on the CV22 activity. Can you maybe remind us on the expected time frame of design win and shipments?

All the projects we're bidding on is production the end of 2025 and the revenue coming from 2026. So the design win has to be maybe first half next year and spanning 18 months of development cycle to get it done.

I would now like to turn the conference back to Dr. Fermi Wang for closing remarks. Sir?

Thank you, and thank you, everybody, for joining us today, and I'm looking forward to talking to you soon. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.