Deborah Stapleton - IR Fermi Wang - President and CEO George Laplante - CFO.

Ross Seymore - Deutsche Bank Kevin Cassidy - Stifel Glenn Bong - Needham and Company Joe Warr - Morgan Stanley.

Good day ladies and gentlemen and thank you for standing by and welcome to the Ambarella’s Second Quarter Fiscal Year 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, today's conference maybe recorded. It's now my pleasure to turn the floor over to Deborah Stapleton. Ma’am the floor is yours. .

Thank you so much and good afternoon everyone and welcome to Ambarella's second fiscal quarter financial results conference call. Thank you for joining us today. Our speakers will be Dr. Fermi Wang, President and CEO; and George Laplante, CFO. The primary purpose of today’s call is to provide you with the information regarding our fiscal second quarter.

The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, our market growth and demand for our solutions, among other things. These are subject to risks, uncertainties and assumptions.

Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements.

These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents that we file with the SEC, including the Annual Report on Form 10-K that we filed on April 4 for the 2013 fiscal year and the Form 10-Q which will be filed shortly.

Access to our second quarter results press release, historical results, SEC filings and a replay of today's call can all be found on the Investor Relations portion of our website. I'll now turn the call over to Dr. Fermi Wang.

Fermi?.

Thank you, Deborah, and good afternoon everyone. We are very pleased to report our Q2 revenue was $37.7 million, up 35% from the $28 million we reported in the second quarter a year ago. Q2 non-GAAP net income was $7.7 million or $0.26 per diluted share.

This compares with the non-GAAP net income of $6.2 million or $0.23 per diluted share for the same period in fiscal 2013. I would like to discuss some of our products and the market highlights and then I will turn it over to George for more in depth discussion of our second quarter financial performance and our guidance for Q3.

The second quarter results was supported by strong performance in all of our core camera markets while the infrastructure market continue to reflect market softness.

Our camera growth in the quarter was led by strong performance in IP security camera markets and for the first time we estimated that IP security camera unit shipment exceeded all other individual camera categories.

We continue to benefit from a migration of analog to CCTV to high-definition digital IP designs as well as our range and the feature rich product offerings.

Successful customer penetrations with A5s family of SoCs is fielding our current growth throughout the introduction of S2 family of SoCs that enables 4K resolution and advanced analytics into maintaining our technology leadership position in this market. In the second quarter, we saw sales growth in our security business across all regions.

But in particular we experienced significant positive momentum from our business in China. This was driven both by professional high-definition IP camera as well as consumer camera designed for home monitoring use..

In the consumer IP camera market, we see new opportunities driven by Cloud based internet services and remote smartphone monitoring. This category includes both standalone Wi-Fi cameras as well as security systems that include a network video recorder bundled with high definition IP camera to provide video recording for multiple locations.

Swans recently introduced a platinum [ph] full HD security system based on Ambarella's A5s chip are actually example of this product category. Swans is a global leader in security monitoring systems and is based in Australia.

We believe Ambarella is well positioned to benefit from the growing trend to a higher resolution, increased analytics and a better video quality. Ambarella's A5s SoC family has seen widespread adoption providing an excellent combination of high quality full HD encoding with very low power and excellent low light performance.

Additionally Ambarella's new S2 SoC family enables resolution up to 4K and supports advanced analytics capabilities. In the consumer camera market sales of wearable sports and automotive aftermarket cameras continue to be strong in the second quarter.

The sports camera market continued to push for higher resolutions and faster frame rates to meet the performance demand of sports camera user. Revenues in the quarter were led by good growth in Q3 [ph] camera family that includes white, silver and black models, which use Ambarella's A5s and A7 SoCs.

All models support full HD recording and Wi-Fi connectivity while the black model introduced last November is the first consumer sports camera to support both 1080p 60 and the 4K for UltraHD TV resolution. In July, JVC Corporation of Japan introduced its TCSA2 action sports camera.

Based on Ambarella's A7L camera SoC, the camera supports 1080p 60 video, 16 megapixel still pictures and a Wi-Fi connectivity to smartphones. In addition various increasing design activity in wearable cameras outside of the sports category.

The benefits of hands free decoding combined with wireless connectivity through the Internet are driving new video sharing applications. Ambarella's A7 SoC family enables full HD recording with wireless connectivity and extremely low power. This is ideal for small form factor wearable cameras.

In automotive aftermarket Ambarella provides camera SoC solutions for video camera recorders or dash cams. These cameras are sold primarily in Russia, China, Taiwan and South Korea.

During the second quarter we saw continued developing momentum for our A7L SoC family driven by consumer demand for higher quality video, two channel camera supporting front and back views and analytics such as Lane Departure Warning System.

During the quarter we launched support for developing our A7L-A platform which allows the use of wide angle lenses for better viewing coverage. At the recent InterAuto Automotive Industry Exhibition in Moscow a large number of leading automotive camera brands were demonstrating new Ambarella based products.

Many of these customers feature Ambarella logo permanently on their promotional material and products as we have become known for outstanding video quality. Although the market continued to move toward high resolutions and more features, the low end of the market in China has become more competitive.

While we continue to sell into the low end, we expect to see revenue in Q3. With that said we have seen a strong adoption of our A7L-A products across all regions including China as we drive our growth in this market from Q4.

In addition we have successfully penetrated customers in Taiwan and added new customers in Korea that will begin to balance revenue in Q4 as well. We also believe that demand for higher end features like two channel solutions and a wireless connectivity will further expand the market in all regions.

In the video infrastructure business Ambarella provides solution for television broadcast head-end encoders and transcoders as well as the video contribution systems. As expected during Q2 we saw lower demand from traditional broadcast head-end markets, while continuing to see opportunities for transcoders and the video contribution systems.

Based on our customer forecast however we expect demand for traditional head-end equipment to improve in the second half of this year. In summary we are very pleased with our Q3 results. We see continued growth opportunities across all camera markets, IP security, sports, wearable and automotive and forecast improvement broadcast head-end market.

Ambarella is continuing to invest in new solutions leveraging the latest process technology and advanced architectures to expand its leadership in each of our market. With that I will hand over to George to discuss our financials..

Thanks Fermi and good afternoon, everyone. I’ll start with a discussion of the financial results for the second quarter of our fiscal year 2014 that ended on July 31, 2013 and then review the financial outlook for Q3.

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. In non-GAAP reporting we have eliminated stock-based compensation expense as adjusted for income taxes.

As we’ve discussed in the past, the Company has seasonality to both its revenue and gross margin. So I will include year-on-year comparisons for certain key operating metrics to assist in the understanding of changes in our business. With that in mind, let’s start with a review of revenue.

For our second quarter of fiscal 2014, the Company had net revenues of $37.7 million. The Q2 revenue represented an increase of 35% over the $28 million in revenue for the same period in the prior year. Camera market revenue was estimated at 90% of Q2 revenue, as compared to 77% for the same period in the prior year.

Our year-over-year growth continues to be fueled by our professional and consumer IP security, wearable sports, and automotive camera markets. The professional and consumer security markets demonstrated both strong sequential and year-over-year growth due to the successful ramp of several new customers as announced in past earnings calls.

The automotive market continued its sequential growth although we see increasing competitive pressures at the low end of the China market. The market growth in our security and automotive in the quarter were offset by sequential declines in sports cameras and infrastructure markets.

The sequential decline in sports cameras was expected due to the strong Q1 revenues associated with the launch of several new GoPro cameras with Q2 returning to anticipated revenue rates. As discussed in our last two calls, Q2 infrastructure revenue continues to be negatively impacted by macro market conditions in the U.S.

and Europe, recording lower revenues both sequentially and year-over-year. In addition, infrastructure revenues in Q2 of the prior year were positively impacted by the release of approximately $1.4 million of deferred revenue as a result of renegotiation of large customers’ contract.

Recent customer forecast lead us to believe that infrastructure revenues will experience some improvement in the second half of the fiscal year. Ambarella uses WT Microelectronics as its logistic partner for distribution to the majority of our ODM and OEM customers.

For the quarter ended July 31, 2013, sales to WT represented 59% of our revenues as compared to 72% of our revenues in the same period in the prior year.

Chicony Electronics Company, a manufacturer of camera products for multiple OEM customers, as well as for their own distribution, represented 28% of revenue for the quarter compared to 11% for the same period in the prior year. WT and Chicony were the Company’s only 10% customers.

Non-GAAP gross margins for Q2 of fiscal year 2014 were 61.9%, as compared to 64% in the immediate preceding quarter and 69.2% in the second quarter of the prior year.

In comparison to the preceding quarter, Q2 gross margin declined, primarily a result of lower infrastructure revenue as a percent of total revenue for the quarter as well as a small decrease in camera market margins due to the product mix.

As I previously mentioned, gross margin in the prior year second quarter was positively impacted by the release of $1.4 million in deferred infrastructure revenue as well as a higher percentage of infrastructure revenues even excluding the deferred revenue impact.

Non-GAAP operating expenses for Q2 2014 were $14.8 million, compared to $14.9 million for Q1 of 2014 and $12.5 million for Q2 of the prior year. R&D expense in Q2 of this year was reduced by $1 million as a result of a onetime payment from a customer for the development and delivery of a custom Software Development Kit or SDK.

As the SDK will remain under customer valuation for an extended period of time, we have no forecast or commitments of future product revenues or development projects with this customer. Total headcount at the end of Q2 2014 was 470, compared to 457 at the end of the previous quarter with about 342 employees dedicated to engineering.

Approximately 76% of our total headcount is located in Asia, primarily in Taiwan and China. Non-GAAP net income for Q2 2014 was $7.7 million or $0.26 per diluted ordinary share, compared with non-GAAP net income of $6.2 million or $0.23 per diluted ordinary share for the same period in previous year.

The non-GAAP effective tax rate in Q2 2014 was 9.5%. In Q2 2014, the non-GAAP earnings per ordinary share are based on 29.8 million diluted shares as compared to 9.1 million diluted shares for Q2 of 2013. The company is required to apply the two-class method to calculate earnings per ordinary share.

In periods prior to the IPO, the two-class method allocates a portion of our earnings to preferred stock as well as eliminates the preferred shares from the outstanding share count prior to computing basic and diluted earnings per ordinary share.

This accounting treatment makes it difficult to compare our currently reported EPS to those periods where preferred shares were outstanding for all or a portion of the period as in Q2 of the previous year. For fiscal 2014 and beyond, quarterly EPS will we computed on the basis consistent with that used since the fourth quarter of fiscal 2013.

Looking at the first half of fiscal year 2014, our revenues of $71.7 million and non-GAAP net income of $13.9 million represents increases of 33% and 45% respectively over the results of the same period in the prior year. We ended Q2 with cash of $118.3 million, adding $12.7 million of cash from operations in quarter.

Total accounts receivable at the end of Q2, 2014 were $21.9 million or about 53 days sales outstanding. This compares to accounts receivable of $23.5 million or 62 days sales outstanding in the prior quarter. Net inventory at the end of Q2 was $9.9 million, up from $9.3 million at the end of Q1.

Accounts receivable and inventory remained in line with the company targets. I would now like to discuss the outlook for Q3 of fiscal year 2014. We expect revenues for third quarter ending October 31, 2013 to be between $43 million and $45 million. This represents an increase of between 21% and 26% over Q3 of last year.

The Q3 camera revenues are estimated to be between 87% and 89% of total revenue for the quarter, as compared to 81% in the same period in the prior year.

Q3 revenues are being positively impacted by the growth of our consumer camera markets such as wearable sports and consumer IP security cameras adding to the ongoing strong revenue in our professional security markets.

We anticipate a sequential decline in revenues from the automotive market in Q3 due to the competition at the low end of the China market as well as delays associated with customer transition to Ambarella’s new A7L-A based products.

We expect our automotive market to return to growth in Q4 across all markets as result of the successful customer penetration in Korea and Taiwan and the adoption of our advanced A7L-A chip which supports the demand for more advanced features.

We estimate Q3 non-GAAP gross margins to be between 60% and 62%, compared to 61.9% in the preceding quarter and 64.5% in the same period in the prior year.

Gross margins in Q3 will reflect the normal seasonal increase in low gross margin consumer product revenues which is expected to be partially offset by some near-term recovery in higher margin infrastructure business. We expect non-GAAP net income for the quarter to be between $8 million and $9.5 million.

We forecast that operating expenses will increase by approximately $2 million in Q3 as compared to Q2, reflecting the return of R&D cost to normal levels as the positive impact of the onetime nonrecurring $1 million R&D reimbursement in Q2 is eliminated and increased cost associated with amortization of NRE expense of our chip development programs.

We are using an estimated non-GAAP annualized effective tax rate 10% for net income amounts. If you’re tracking GAAP net income Q3 will reflect an increase of approximately $800,000 in stock based compensation expense over Q2 as a result of a grant to employees of Restricted Stock Units or RSUs under our annual evergreen stock program.

We estimate our diluted share count for Q3 to be 30.7 million shares. In summary, our Q2 revenue gross margin and profitability continue to meet our expectations as we focus on increasing our customer and market penetrations in our core camera markets while at the same time investing in our technology to retain our competitive advantage.

Operator, we will now take questions..

Yes sir, ladies and gentlemen. (Operator instructions). And it looks like our first question will come from the line of Ross Seymore with Deutsche Bank. Please go ahead. Your line is now open..

Just a little bit of questions on the automotive's commentary that you’re talking about.

Can you go into a little bit more color on the competitive dynamic that you mentioned at the low-end? How severe is that? Is it something that you expect to spread? And then kind of any color on the magnitude of the decline in the quarter and the rebound that you expect in the fourth quarter please?.

Hey Ross its Fermi. As we said before that in the automotive market our main competitor coming from the Chinese and Taiwanese company like Novatek and Sunplus. They have been competing with us on the cost base and we are seeing them continuing using that so that we are expecting more and more severe price competition from them.

Saying that, that’s why we believe that our low end market we are going to see some revenue erosion, but at the same time we are transitioning our customer from our current A2s and A5s product line to our A7L-A which provided a lot of advanced features like I said in my script.

And we believe that we are continuing to sell our development [ph] in the mainstream and the high-end market of this market so that we are seeing that the revenue will stabilize again and start growing again in Q4..

Ross, I was going to say is, the decline quarter-on-quarter I would guess in the low double-digits..

And then the potential rebound in the next quarter, do you get back to where you started or will that take a little bit longer?.

Yes, I think it will get back to somewhere around our average for the first half..

And then just the segment guidance that you gave, it looks like both segments will be up nicely but the infrastructure side seems like it’s going to snap back pretty nicely, at least a $1 million up or 30% or 40%.

What’s going on there? How sustainable is that? I know it’s kind of a small dollar amount but that will mark the first up quarter in that segment in just about a year.

So it’s nice to see?.

Yes we see near-term strength and to be honest with you, we're not sure if it’s a permanent market directional change or just a project based change at this point.

So, we are really kind of holding off on our optimism at this point and we are looking really at the second half as being, remember what we call reasonably strong and then we still have not had a, we don’t have a firm opinion on next year yet..

Then my last question really quickly, the color you gave on your two main customers, if I do the math on that, your distribution partners seem to be up very, very strongly while your kind of fulfillment one or ODM I think is what you call it Chicony was also down strongly.

Can you just talk a little bit about what’s going on behind the scenes on that, especially relative to some of the concerns from a competitive and inventory perspective that others have brought to bare in the last few weeks?.

Yes. As we said, if you look, the total revenue for Q2 is up and the majority of that increase, we had a very strong quarter in IP security. A lot of that business or the majority of that business goes through WT. So you see them as becoming a bigger percentage of the revenue.

But on the Chicony side, they are still a main supplier to a lot of our camera customers and as you saw, some of GoPro’s business goes through there but that is not a significant down quarter for them from a dollar standpoint..

Our next question in the queue will come from the line of Kevin Cassidy with Stifel. Please go ahead. Your line is now open..

Speaking of outlook, George could you explain to us a little bit about how you come up with your forecast? Is it backlog and what percentage are that backlog and how much is forecast from your customers?.

Yes, I think as in the past, what we have said is in the near-term we have reasonable visibility, both from a backlog standpoint, as well as the cameras that are actually in the marketplace shipping. So, we enter the quarter anywhere between 50% and let’s say 65% or 70% in backlog.

The rest is turns business but it’s based on models that are already in production. So I think our visibility is reasonably strong in the quarter, in which we are in and actually probably the following quarter I have reasonable visibility also. After that what we look at is product launches.

So we will have anywhere from six to 12 months in design activity in process. So we are forecasting off the projected launch dates there and as you would guess, we don’t have exact volumes but we have a history in the market and we are able to give I think reasonable estimates out pass that..

And I recall, last quarter when you gave guidance you said it was a particularly wide revenue estimate because of some IP security that were coming into the market and now it looks like that came in at the high end of your expectations because of the successful ramp.

Is there more to that coming or has everything ramped that you expected or can you just give us a better feel of that comparison of what expectations were versus where you are now?.

I think the expectations were at the high end and I think as a run rate we feel comfortable going into Q3. We have no really significant launches during the quarter. So our base run rate from these customers is coming out of Q2 as we exited.

So I think the security business for the next couple of quarters will be reasonably strong but not at the same growth rate..

And then just one other. So also wearable category, it seemed to me like it was going to be further out and maybe that's coming in faster than expected.

Could you comment on that and is maybe Samsung and Qualcomm's announcements today, does that have an effect on the wearable camera market?.

Well I do believe those announcements will continue to encourage people to participate this market and like we said, we have been engaging in several design activities, but our exercise is we don't announce anything until our customer announce their products.

So we hold back on that but we do believe the wearable markets continue to be a main focus of our engineering development..

I think we have said in the past Kevin, that's really next fiscal year for revenue. Let's call it meaningful revenue..

Our next questioner in queue will come from the line of Glenn Bong with Needham and Company.

Your questions please?.

I was wondering if could comment, some of the concerns over the last couple of weeks as you were in a quiet period centered around both completion and some of the ODM revenue trends in the sports camera market. We save the Verve camera from Garmin being introduced and wondered if you could just address the competitive landscape as you see it.

And then secondly on the ODMs, especially for sports cameras are you seeing the major sports camera brands diversifying their ODM supplier base or are they sticking with kind of one primary ODM partner in your opinion?.

So first question is about the competition, that Garmin announcement.

When that camera come out to the end markets, we're going to buy one to compare to our cameras, but based on the published spec we believe those camera are at least one generation behind to the camera already in the markets in terms of the performance and video resolutions and so that we believe that the cameras that are in the market already will continue to sell well.

At least that's our opinion. In terms of other rumors around the company, our company policy is we don't address and comment on the rumors and we'll stay that way. I will let our financial performance to speak for itself. In terms of [indiscernible] our OEM was start looking for multiple ODMs. I think that's a natural next step for all our big OEMs.

For example we have been talking about GoPro has multiple ODMs working for them and we believe they're going to continue in that direction and most of our big OEMs customers are all looking for secondary suppliers. So I think that's a natural assumption..

And just, I think I asked this the last couple of calls but just any updates on design activity and the timing of the ramp of the A9 silicon? Is that still on track for early calendar 2014?.

Well we are still continuing to work with our customer on the A9 and the A9 development still there and we should expect the revenue next year..

And we do have time for one final question. Our final question in the queue will come from the line Joe Warr with Morgan Stanley. Please go ahead. Your line is now open. .

If you think about the sports camera market, there's been questions about product refresh.

Do you think you can product refreshes around the A7 family or do you think people will wait for the feature set of the A9 to do a complete refresh of their camera lines?.

Joe we don't usually comment on our customers product that they have planned [ph] but I do believe that A7L is a brand new chip and will also have new function with better quality and lower power numbers. It's natural for a customer to consider it as an option for the upgrade..

And then the other thing, I think I know the answer to this but just to clarify, should we look at Chicony business as being a netter of GoPro, of the bigger end customer but you mentioned that they're going to be diversifying.

As we look at those Chicony commentary over the course of the next few quarters, how should we think about that and should we try to read it into your business in some way or can you just give us any context to help if this comes back up again..

I think Chicony builds for multiple OEMs first of all. And second of all the comment on GoPro that we've been reading, GoPro has consistently used multiple ODMs. So by focusing I think on Chicony and trying to relate that into GoPro could cause you difficulty both from an historical standpoint and I think even more so going forward..

Thank you. And with that, that does conclude our time of questions. I'd like to turn the program back over to Fermi Wong for any additional or closing remarks..

Thank you and I want to use this opportunity to thank our employees worldwide for their dedication to making this a world class Company and I also want to thank all of you for joining us today..

Thank you presenters and thank you ladies and gentlemen. Again, this does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect..