Deborah Stapleton - Investor Relations Fermi Wang - Chairman, President and Chief Executive Officer George Laplante - Chief Financial Officer.

Matt Ramsay - Canaccord Genuity Quinn Bolton - Needham and Company David Williams - Ascendiant Capital Markets Ross Seymore - Deutsche Bank Ted Moreau - Barrington Research Jay Srivatsa - Chardan Capital Markets Charlie Anderson - Dougherty & Co. Joe Moore - Morgan Stanley Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

Brad Erickson - Pacific Crest Securities Suji Desilva - Topeka Capital Markets.

Ladies and gentlemen, thank you for standing by. And welcome to Ambarella's Q1 FY2016 Earnings 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, this conference is being recorded.

I would now like to turn the conference over to our host Ms. Deborah Stapleton..

Thank you. Good afternoon and welcome to Ambarella's first fiscal quarter 2016 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 information regarding our first fiscal quarter.

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

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

These risks, uncertainties and assumptions, as well as other information on potential risk factors that could effect our financial results are more fully described in the documents that we filed with the SEC, including the Annual Report on Form 10-K that we filed on March 30, 2015 for the 2015 fiscal year.

Access to our first quarter 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 like to turn the call to Dr. Fermi Wang..

Thank you, Deborah and good afternoon everyone. We are extremely pleased with our Q1 2016 financial results. Our revenue was $71 million representing an increase of 73.5% over the revenue in the same period in the prior year.

Revenue was strong in all our existing camera markets, including professional IP cameras, wearable and automotive dash cameras and we continue to make progress in new markets including consumer for monitoring cameras and drones or flying cameras.

In the professional security camera market increasing demand for cameras with higher megapixel resolution and the wide angle viewing capability continues to drive sales of our IP camera SoC families.

During the first quarter we saw strong revenue growth driven by China security dealers Hikvision and Dahua and significant volume shipments of our new S2Lm camera SoCs. At April ISC West Security Conference & Exposition many of the world’s leading security camera makers demonstrated 4K or UltraHD cameras based on Ambarella’s S2 SoC.

Ambarella also demonstrated its new S3 IP Camera SoC the first to support the new H.265 video standard at 4K or UltraHD resolution. Also during the show Ambarella announced availability of its S2Lm based battery powered IP camera reference design.

The reference design enables fast development of a new generation of a small high-quality battery-powered for HD security cameras suitable for both professional and home monitoring and security applications.

The reference design enables cameras that can start recording full HD 1080p30 video in less than half a second from wake-up, and provides up to six months of battery life.

In the consumer home security and monitoring IP camera market, we are enjoying strong demand from our retail customers as well as continued expansion into service provider channels.

In this market segment Ambarella is a highly efficient leader including enables a very little bitrates to minimize network bandwidth requirements and to reduce cloud storage costs.

During the first quarter, FLIR Systems announced the availability of FLIR FX, a compact, versatile Wi-Fi enabled HD camera that integrates unique cloud-based analytics and flexible application-specific amounts. Based on Ambarella’s S2Lm camera SoC the FLIR FX provides 4K UHD video with a wide 160 degree photo view.

[Indiscernible] motion triggers and the ability to review a day’s worth of events in a single minute through its rapid recap feature. And U.S.

service providers are interested in offering home monitoring cameras as part of their services and during the first quarter Comcast began shipping its high-definition Xfinity home camera based on Ambarella’s S2Lm camera SoC.

The weather resistant camera can be used either indoors or outdoors to enable complete home monitoring including doors, backyard and pools. It includes a wide-angle field of view and a night vision to enable monitoring in the dark.

The camera supports the viewing of live video streams on any Internet connected smartphone, tablet or computer while an enhanced video monitoring service provides video clip storage and video alerts. In the automotive aftermarket Ambarella provides camera SoC solutions for video camera recorders or dash cams.

During Q1 revenue increased based on primarily on growth from both China and Korea. At the Hong Kong Sourcing Fair in April, Ambarella demonstrated its new dash camera reference platform based on the latest A12A camera family of SoCs.

The A12A family provides improvement in image quality in low light conditions which support for High Dynamic Range processing. It also includes our powerful arm A9 Cortex CPU to run more events A dash Hikvision and dual camera input for two channel dash camera configurations.

In April, Garmin International announce its movie cam and all-in-one 6-inch premier navigator was build in dash cam and event alerts to enhance drivers awareness on the road.

Incorporating Ambarella’s A7LA camera SoC the integrated dash cam continuously record and automatically save files on impact offering the protection of having an eyewitness that records exactly where and events occurred. The movie cam can also includes a full collision warning and lengthy departure warning driver assistance.

Also during the quarter Qihoo 360 Technology a leading Chinese Internet security company announce it’s first connected dash camera product. The device includes super HD high resolution, 160 degree viewing angle and Wi-Fi connectivity for video streaming to IOS or android handset. Qihoo 360 dash camera is based on Ambarella’s A7LA dash camera SoC.

For the flying camera or drone application we saw significantly increased activity in Q1. The market leader DJI introduces its new Phantom 3 models the new models capture professional quality footage from our new perspective with camera mounted on three access cables, real-time HD video display and intuitive flight control.

The Phantom 3 professional model features of 4K UltraHD camera with 12 megapixel photos for the Phantom 3 advanced model features our 1080p60 HD camera also with 12 megapixel photos. Both models are based on Ambarella’s A9 camera SoC family.

And in Q1 we continue to enjoying strong sales in wearable camera market led by GoPro as well for new market entrant Xiaomi. At the end of May, GoPro announced its new Hero Plus LCD camera, featuring an LCD touchscreen, Wi-Fi and Bluetooth connectivity 1080p60 video recording and 8 megapixel photos.

The Hero Plus LCD is based on Ambarella’s A7L family. And in April, [Garmin] also announced it next generation of HD action cameras, the VIRB X and the VIRB XE.

The cameras combine HD video with data for sensors for speed, altitude, g-force and GPS position and include both Wi-Fi and the Bluetooth collectivity as well as the electronic image stabilization. The VIRB X supports 1080p60 HD video recording with 20 megapixel stills and up to 30 frames per second.

While the VIRB X supports 1080p30 video and 20 megapixel still at 10 frames per second. Both models are based on Ambarella’s A7L camera SoC family. In conclusion we are very pleased with our Q1 results and our continued progress in our various markets. For details on our financial results, I will now turn the call over to George..

Thank you Fermi and good afternoon everyone. I will start today with a discussion of the financial highlights for the first quarter of fiscal 2016 ending April 30, 2015. I will then move onto the financial outlook for Q2 of fiscal year 2016 that ends on July 31, 2015.

During the call, I will discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense as adjusted for income taxes.

As we have discussed in the past, the company has seasonality to both its revenue and gross margin. So I will include year-over-year comparisons for certain key operating metrics to assist in the understanding of changes in our business.

Our Q1 2016 revenue of $71 million represents an increase of 73.5% over the $40.9 million of revenue in the same period in prior year. Camera market revenue is estimated to be 96% of Q1 revenue compared to 90% in the same period in the prior year.

The wearable market, led by GoPro and the launch of the new Xiaomi camera, demonstrated strong year-over-year growth and as expected was flat sequentially. The year-over-year growth numbers were bolstered by the soft Q1 revenue in the wearable market last year.

The professional IP security camera market demonstrated solid year-over-year and sequential growth in the quarter. Our Asia customers continue to drive growth in IP security revenues led by market leading customers Hikvision and Dahua.

The year-over-year and sequential revenue growth in the consumer IP security reflects continued traction in the retail markets and initial penetration into the service provider channels. Q1 automotive market revenues continued the positive trend with both sequential and year-over-year growth led by customers in Korea and China.

The automotive market in Russia remained soft due to weak economic conditions in the country. First quarter infrastructure revenues were down compared to the previous year and quarter. Infrastructure systems manufacturers continued to experience soft markets in most regions.

Non-GAAP gross margin for Q1 of fiscal 2016 were 64.8% compared to 64.3% in the immediately preceding quarter and 62.7% in the first quarter of the prior year.

Gross margin in the quarter was positively impacted by a favorable product mix resulted from solid penetration of our high margin A7L SoC in the automotive aftermarket and wearable camera markets. Non-GAAP operating expenses for the first quarter were $20.2 million compared to $18.9 million for Q4 of 2015 and $16.9 million for Q1 in the prior-year.

This year's Q1 OpEx reflects the benefit of approximately $935,000 of payments for development work performed on behalf of customers. Excluding the development payments received OpEx increased due to higher chip development costs and employee compensation costs.

Non-GAAP net income for Q1 2016 was $23.7 million or $0.71 per diluted ordinary share, compared with non-GAAP net income of $7.8 million or $0.25 per diluted ordinary share for the same period in the previous year. The non-GAAP effective tax rate in Q1 2016 was 8.4%.

In the first quarter the non-GAAP earnings per diluted ordinary share are based on 33.5 million diluted shares as compared to 31.8 million diluted shares for Q1 of fiscal year 2015. Total headcount at the end of Q1 2016 was 543 compared to 524 at the end of the previous quarter was about 81% of our employees dedicated to engineering.

Approximately 75% of our total headcount is located in Asia primarily in Taiwan and China. We ended Q1 with cash and marketable securities of $235.2 million adding $24.8 million of cash from operations in the quarter. Total accounts receivable at the end of Q1, 2016 with $39.2 million or about 50 days sales outstanding.

This compares to accounts receivable of $40.2 million or 57 days sales outstanding in the prior quarter. Net inventory at the end Q1 was $25.8 million or about 86 days compared to $21.7 million or 72 days at the end of Q4.

During the quarter the company continued to increase inventory levels in our high volume parts to support anticipated customer product launches across multiple markets. In addition, we began volume production of our new S2L and S2Lm and SoCs in support of multiple new product launches in Q2 in the security market.

Accounts receivable and inventory remain in line with company targets. WT Microelectronics, our Asia logistics supplier represented 64% of our revenue in the quarter compared to 69% for the same period in the previous year.

Chicony Electronics a manufacturer of camera products for multiple OEM customers as well as for their own distribution represented 27% of revenue for Q1 of fiscal 2016 compared to 17% for the same period in the prior year. WT and Chicony were only 10% customers. I would now like to discuss the outlook for Q2 of fiscal year 2016.

We expect revenues for the second quarter of fiscal year 2016 ending July 31, 2015 to be between $79 million and $83 million. This represents an increase of between 68% and 77% over Q2 of last year. We expect Q2 revenues to be strong across both new and established camera market due to the initial ramp of product from a wide range of customers.

New product introductions such as wearable cameras from GoPro and Xiaomi, two new flying cameras models from DJI, as well as a broad-based launch of products incorporating our new S2Lm, SoC in the professional and consumer security markets are expected to accelerate growth in the quarter.

In Q2, we are forecasting meaningful revenue contribution from both a consumer IP security and flying camera markets. The initial launch of the drones with integrated cameras expected to push Q2 flying camera revenues over 10% of our total revenues for the first time.

The unusual line number of new product launches we are experiencing in Q2 have historically occurred in our third fiscal quarter. Therefore, we anticipate that our second-half quarterly growth profile will more closely follow our historical seasonal trends and year-over-year growth will moderate.

As we have said in the past, the initial ramp of products may not necessarily be indicative of the sustained run rate for the products as it takes several quarters to determine market acceptance. We estimate Q2 non-GAAP gross margins to be between 63.5% and 65% compared to 64.8% in Q1 of this fiscal year and 65.1% in Q2 of the prior-year.

Margin from camera products are expected to remain strong as an increase sales in the lower margin S2Lm base security business are offset by the increase in flying camera revenues and the continuing transition to the A7L SoC in the auto aftermarket. We expect non-GAAP net income for the second order to be between $26 million and $28 million.

We are using estimated non-GAAP annualized effective tax rate of 9% for net income amounts. We estimate our diluted share count for Q2 to be approximately 33.9 million shares. I would like to thank everybody for joining our call today. And now I will turn it back to the operator to manage the Q&A session.

Operator?.

Yes. [Operator Instructions] And our first question or comment comes from the line of Matt Ramsay with Canaccord Genuity. Sir, your line is now open..

Yes, thank you very much, good afternoon guys and good morning from Taiwan. Congratulations obviously on the strong results and particularly the guidance. I guess George you gave some very good color on the end markets that are driving not just the strong Q1 results, but the Q2 guidance.

Maybe you could give an update on your view of the full year topline growth rate because I know that something that you discussed in the past relative to your comments or maybe some moderating growth in the back half of the year observation on first half. Thanks..

Yes, I think the best way to look at the second half is probably moving closer to our traditional seasonality and that would be Q3 increasing over Q2 in the low teens and then Q4 dropping in the mid teens and that would you give you based off my guidance an indication of what the full year revenue number should look like..

Okay great. That’s helpful. Fermi obviously there is some new markets that are taking off pretty quickly here particularly drones, but I want to see if you can talk about the security camera market a little bit in detail.

I think that market is if I am correct was up over 100% year-over-year the last two years, maybe you could talk about what you expect from a growth per year security camera business, that’s number one and number two I noticed you announced the Comcast camera in addition to AT&T are there other ones in the pipeline and maybe in regions outside of the United States.

Thanks..

So first of all you are right that for last two years our professional IP security camera revenue have grown more than 100% year-over-year. And for this year we continue to see strong growth from our big customers from Hikvision and Dahua.

And from that point of view we still think that professional IP security camera will continue to provide growth for us and coming above our company growth rate. But I think the biggest growth from a security camera point of view is only from consumer side.

Although the revenue number is low at this point, but I do believe that the potential growth rate from that market is going to be big.

Considering that [indiscernible] AT&T and Comcast and also we have some of the retail channels going for example earlier we mentioned we have Dropcam in the past and we’ll continue shipping to Dropcam and also top of the nest.

And all those channel guys also doing well and so I think from the security camera point of view, I still think this market going to continue to give a strong growth particularly in the customer side..

Great. Thank you. Let me just sneak one more in for George and I’ll jump back in the queue.

I think George when you started giving your initial fiscal 2016 guidance and you could imply operating expenses in $88 million-ish range and then if you haven’t update to that – your Q1 number came in a little lower than I would have expected given some costs that were covered by partners.

And maybe you could talk about that the OpEx rate so we can expect for rest of the year relative to leveraging the model? Thanks.

I think my previous forecast for OpEx is probably still valid. We are slightly behind in hiring, but I would expect us to catch up as the year progresses. And we’ll continue to invest at similar levels that I had forecasted for the new chip development. So I'm still comfortable with the annual OpEx number. .

All right, thanks very much guys. Congrats again and I’ll get back in the queue..

Thank you..

And our next question or comment comes from the line of Quinn Bolton with Needham. Your line is now open..

Hey, guys, let me add my congratulations to the strong numbers and outlook.

Question for you Fermi, just last year I think you saw a nice uptick in the drone market in the July quarter certainly sounds like you are seeing that again with drones revenue exceed 10% of sales in the July quarter can you give us some sense what seasonality is like in that market especially since drones carry such rich gross margins since Q2, do you think that’s going to tend to be the peak just given sort of the build ahead of the holiday season or do you think you can see continued sequential growth in the second half of the fiscal year and then I could ask couple of follow-up questions..

Okay, for flying camera market last year Q2 was definitely because our DJI was running how quickly to prepare for the selling season. However, this year I think it's a sustainable business the Q3, Q4 will have a continual high growth rates are meant to be seen because this is really [indiscernible] their new model Phantom 3 with professional events.

We are eagerly waiting to see whether they can – they are a sales through number, we haven’t done that, but right now we are optimistic.

The whole market go to continue to grow based on few facts, so first fact is that we continue to see a lot of these activities which depend the customers, but more importantly I think DJI has shown a strong growth year-to-year based on all shipments so I think based on the information I think I'm confident that this whole marketable will continue to grow for us..

Great. And then just shifting over to the sports camera market historically GoPro has been the vast majority of that revenue stream for you, you’ve announced a number of new cameras including Xiaomi and Garmin.

I was wondering as you look forward do you see that business becoming more diverse across the customers that are as GoPro continue to represent the vast majority of that business going forward..

Well, in the past GoPro has – it was a majority of business and I think was Xiaomi ramping up I definitely think Xiaomi start shipping a very good values and we like to see the sell through number before we make a comment about your question, but I think for this particular quarter we do see Xiaomi start become a bigger percentage our sport camera..

Great. Thank you very much..

Thank you..

Our next question or comment comes from the line of David Williams with Ascendiant. Your line is now open..

Hey, good afternoon guys and again let me add my congratulations on the quarter, I wondered to see if maybe we could think about your roadmap and as we kind of think about the generational performance enhancements that we see with each new iteration of your chips, when do you get to a point maybe along that curve that you start really pushing up against an inability to further progress the chip and maybe where do you start seeing some competitors catching up to you Is there something else in the roadmap perhaps say with analytics or something that we could look at that helps you in the longer-term stave off the competition that is surely become over the next couple of years?.

Right. So, yes, you’re right. Of course in the past, we continue to pushing the envelope on the performance based on the resolution and frame rate. I think that suppose there is other angles you need to look at.

For example there’s a huge transition from H.264 compression to HEVC, HEVC provides 50% compression efficiency improvement, but our estimation the [indiscernible] size and on the importer side is five times more complicated.

So after that if you want to continue improved performance based on HEVC and higher frame rates, high-resolution really create another barrier to entry especially if you want to maintain the power number as a reasonable numbers of our portable cameras customer can fit HEVC say full HD camera into the same form factor.

So there are multiple angles that we are addressing right now. In addition to that many features that we talk about has new topic on cameras. We talk about high dynamic range, which is twice higher performance, which is compared to low dynamic range and high dynamic range solution.

We talk about low light performance, we talk about video analytics in fact video analytics in my opinion going to get bigger and bigger in fact. We did quick as we mentioned about the performance required to implement all of the video analytics feature that we need to implement in next few years the number is a mind-boggling.

So I think there's many other ways in addition to just a frame rate and the resolution that we can continue to push the performance and so that we can continue to introduce higher end products in the future..

Thanks. And then if we think about maybe these new growth factors that have in the come in the flying drones and some this wearable cameras products. How big do you think that can be the percentage of your overall revenue. We kind of think about the newer stuff is kind of been I guess that’s come up in the last two, three quarters.

How big do you think that can become as part of your business say in the next year?.

Well, first of all I think George just gave the guidance for Q2. We believe the drones going to be more than 10% of our total revenue and I think I'll stay there and if not bigger. My personal opinion because you know the market just start developing.

There's a lot behind it and a lot of activity, I believe there will be a lot of consolidation in the near future, but if let me put comment on the market side, I really think the market can be - as potentially can be as big as wearable sports cameras..

All right, thanks again, guys. I appreciate the time..

Thank you..

Our next question or comment comes from the line of Ross Seymore with Deutsche Bank. Your line is now open..

Hi, guys. Fermi, my congratulations as well. George when you talked about in the past what the gross margin might do in the second half of the year and the confidence that you had that I might fall, sure it doesn't sound like that's coming into the mix.

Can you talk us through similar to that the rough guidance you gave for revenues in the second half what you now expect the gross margin to do?.

Yes, I would anticipate now with the change in mix with drones as well as the step increase in the A7L products which is ramping faster than we originally anticipated. I would expect the margins although they will still decline some I would expect them to be stronger than my earlier guidance.

We’re looking probably at the high end of my target model or slightly above now I think for the second half..

And just to confirm that the old target was 59 to 62 so you’re saying kind of add or slightly above the 62?.

Yes..

Great. And then longer-term question Fermi for you on the infrastructure side obviously it's not the market now, but it does carry really, really nice margins for you.

When do you expect HEVC, H.265 all of the 4K transition in general to start showing in the infrastructure line?.

Well, that’s cool question. I think because every time I talk about this I mentioned 18 months. I still think 18 months away. I think this traditional book as the industry is – has it make enough investment to push this format forward because basically involve a lot of set-top-box infrastructure and huge money investment to get HEVC and 4K in place.

So I sometimes start seeing that the Internet service provider and Netflix start talking about HEVC and 4K. So I expect that will happen first instead of traditional broadcasting customers..

If I can seek in one last one, the answer to this all was in the past has been that you haven’t seen anybody but HiSilicon, but given the success you’ve had in these explosive end market that you are doing such a great job of addressing.

Have you seen any emerging competition coming in to the equation?.

Well, in fact that, when you talk about drones market if you able to see as you see a lot of app processor guys start talking about they want to participate in the strong market because the drone need a high-end solution in the last group of performance you can say that, if you talk to a Intel core company, all say they’re going to come into the drones.

So I think because like you said this market becomes very visible especially flying camera market becomes so much visible so that I won’t be surprised that those people who has video solution on the app processor like we talk about before having interest in this market..

Great. Congrats again, thank you..

Thank you..

Our next question or comment comes from the line of Ted Moreau with Barrington Research. Your line is now open..

Thanks for taking my questions and all for congratulations again.

Guys, the stock is recently strongly particularly in the last couple of weeks how do you think about potentially using your stock or maybe either to raise capital and that’s something that you have and interest in doing or even for M&A maybe even trying to expand your R&D expertise into the software and analytics that you’ve been talking about?.

This is George. We had said in the past that we are definitely interested in M&A activity primarily around key areas like analytics, algorithm and development.

We continue to search for good opportunities and yes we would be open to using stock in one of those transactions, but we also have significant cash on the balance sheet which is also available for this type of transaction so we would either depending on the size it could be cash plus stock or just cash..

And this is Fermi I just had one more comment you’ll see us we have a stock income growth and some of the income growth is definitely target to speed up our internal video analytics development in terms of software and algorithms..

Okay, and then kind of separately thanks for breaking out the drone opportunity for fiscal Q2 and sounds like for the rest of the year. Well I’m just kind of wondering if you sit back and think about maybe over the next 12 months to 24 months timeframe.

What do you think like on the camera side, what do you think like how could your mix – how do you think your mix ends up shaking out across the various markets?.

Well, I think our current markets are still growing, our core markets are growing well. We are adding at least in the next 12 months we hope to add volume from both drones and home security.

So therefore, I would see those as a percentage of the sales continue to increase and probably a small decline as a percentage of sales in the wearable area as well as potentially in the professional security. So you'll see the mix change more towards some of the new markets and this is pretty much in line with what we had forecasted..

That’s helpful.

And then is it more these newer market are just growing that much faster or do you see a slowing of the growth rates of the – the more traditional wearables and IP security – professional IP security markets?.

I think the current markets are growing pretty much in line with what we had said earlier in the 20% to 30% range depending on which market. One market the auto aftermarket has been growing above that. so of our traditional markets has probably one of the fastest-growing markets, but it is off a small base..

Okay great. Thanks for taking my questions..

Our next question or comment comes from the line of Jay Srivatsa with Chardan Capital Markets. Your line is now open..

Thanks for taking my questions and congrats on a good quarter and guidance. Fermi on the automotive side in the past it tends to be lumpy and somewhat unpredictable. How do you see the pattern going forward and do you have enough visibility and how that will play out for the rest of the year..

Yes, thank you Jay. I think we are now seeing a clear market growth in China and also we are taking market shares in Korea, which is probably also very large dash camera market.

And just that the Chinese market is going fast and we mention Qihoo 360, which is large, very large internet security company in China just starting in to build a dash camera, when we expect a few more company was startling that and with that, we believe that dash camera will continue to provide us growth in longer and the I think the choppiness that you saw in the past is many because the Russian market was weak for the last 18 months and that continue to be the case, but however the growth on the China and Korea, over time..

All right. And then back to competitive dynamics related to HiSilicon specifically they had been playing in the low-end market but they’ve introduced some solutions targeting the mid-end and through certain extent of the high-end.

How do you see the dynamic between the two of you as you look at the rest of the year especially in the China market?.

Well, I think that the dynamic hasn’t changed. In fact they still continue to be a very aggressive on the pricing on lower end side. In fact we saw S2Lm we can also being very aggressive on low end side too. But we leverage our strength on high and middle end and continue to compete with them.

I don’t think this challenge will change, because I think that we can continue to invest. Not only just the resolution and frame rate and also the quality on the features on the video analytics.

So all of that combined I think give me confidence that we’re going to continue to occupy the main stream and the high end and continue to fight HiSilicon on the low end side..

Thank you very much..

Our next question or comment comes from the line of Charlie Anderson with Dougherty & Company. Your line is now open..

Yes, thanks for taking my questions and my congrats as well. Fermi I wonder if you give us sort of a high-level view of the drone quadcopter market and also the home security market.

How big is that market size at this point on an annual basis? I am not speaking to your units, but sort of the total market as you see it between those two right now?.

Well, we don’t have any market data with this two market and – but they definitely grows fast that’s drones first. We don’t have any data, but I won’t be surprised that this market will go beyond maybe for this year easily.

And they’ll continue to grow on there – the drones cameras, there is a lot of drone without camera [indiscernible] level, but we only focus on drones with cameras.

On the consumer camera side, consumer IP security camera side, we really don’t have a data, because there are a lot of players out there and we do have some success with service providers in U.S.

and in Europe and also we have a success in channel, but we really don’t have any market data to indirectly – we will allow to see that, I won’t be surprised that there are many, many players in there and I have to believe that we are the one leader..

Great. And then I have a few housekeeping questions for George.

George could you speak to what you are seeing sequentially on sports camera July versus April if that’s going to be up, down or flat? And then I also wonder if could just address the inventory I think you are up 2.5 year-over-year, I mean clearly you are building for these new markets, but on a faster rate than revenue growth.

So if you could just kind of address what’s happening there? And then last one on that is - on the customer funded R&D I wonder if you could speak to what end market that’s in?.

Let's go in reverse order. First on the customer R&D it’s actually across all our core markets. We’ve had multiple projects running at this time. On the inventory the growth of the inventor is pretty much in line with our launch plans of new products.

So we’re comfortable with the S2Lm ramp, as well as the ramp and support of A7L automotive and wearable devices. So we will see the inventory probably increase a little bit over this quarter and then start to decline as we go into Q3. On the wearable side, let’s call Xiaoyi specifically on sports cameras.

We would see Q1 to Q2 actually an increase you saw the GoPro launch couple of days ago, which has a significant impact as well as the ramp of the Xiaomi camera..

Perfect. Thank you so much..

Our next question or comment comes from the line of Joe Moore with Morgan Stanley. Your line is now open..

Great, thank you.

I’m curious when you guys talk about wanting to build out your analytical capabilities, where do you stand now not comparing to your traditional camera competitors, but comparing to company like Mobileye do you have the kind of expertise that they have and is that the ultimate goals to develop that?.

Right, Joe I think the video analytics definitely for the automotive OEM is the one that we are talking for to use the video analytics technology, but at the same time video analytic technology that we are developing also apply to across the border or our current markets including wearable, including IP security, including phones.

And so that in terms of ingenuity development we are ongoing with the development we haven’t comment about the schedule that we want to deliver the first product and this is actually one of the first priorities in terms of ingenuity running the company and we will believe we can monetize this technology on other market first then moving to automotive and become more mature to compete with the big company like Mobileye..

Okay. Great, thank you.

And then separately can you give us an update on 40-nanometer or you going to be able to have those products out next year and into consumer markets?.

Our 40-nanometer schedule hasn’t changed since we talk about life time..

Okay, great. Thank you very much. Great, quarter..

Thank you..

Our next question or comment comes from the line of Kevin Cassidy with Stifel. Your line is now open..

Thank you for taking my question.

On the wearable cameras I’m thinking of the market for police forces have you been involved with any contract tender or any new developments there maybe if you could say what markets are most interesting to you?.

We are involving a lot of developing activities and we are shipping continue growing volume into Asia particularly China. If you go to Chinese – if you go to China the Chinese for recent as wearing HD camera which is based on our Ambarella solution today and that we also involve on a lot of resolving discussion with U.S.

and European customers and we usually don't talk about the customers before they announced it..

Okay, great. And the battery life is a key factor in there I believe your latest products support eight hour battery life with a 40-nanometer extent that even further than eight hours..

So 40-nanometer is so expensive I think you will go to other high-end market first before go to wearable, but yes if people can afford the price that 40-nanometer will make the battery life even longer.

However, there is a trade-off between the price and the features set and that something balance, so we believe even we saw current technology, we can help the current wearable camera go to eight hours already..

Okay great. Congratulations again on the great results..

Thank you..

Our next question or comment comes from the line of Brad Erickson with Pacific Crest Securities. Your line is now open..

Great, thanks for taking my questions and just a few follow-up familiar. First I just want to make sure I am understanding correctly. We talk about the July quarter relative to the guidance you historically I think July quarters kind of flattish sometimes up, sometimes down you mention the consumer IP markets you mentioned drones.

When you think about the other contributors to the sequential increase how would you rank order between sort of action cameras IP surveillance and then automotive?.

I don't think I really rank them in the past but there is a contribution in Q2 from a lot of new customer launch isn't actually across all the markets that you've heard me talk about the S2Lm in his home and professional security you seen the GoPro and shall me ramps taking place there significant number of A7L based product ramps across Asia in the auto aftermarket as well as the two new drones.

I don't normally rank those, but you can see it's a pretty broad-based revenue – their support for revenue across all the market..

Great that’s very helpful.

And then just on the a dash products you know I think people generally understand design cycles and automotive being somewhat longer in some cases 3 years to 5 years you as you start to work with some tier 1 auto suppliers where do you think you are in terms of sort of the validation and testing timeline inevitably are involved with winning OEM embedded business and I guess along those lines I mean are we three to five years out potentially from a meaningful revenue in that segment or could it potentially be longer if there were further validation and testing necessary?.

So, Brad for the automotive OEM business we talk about – we have three opportunity to penetrate.

A, that’s well evident that’s been a longest to give there, but we also talk about, we have electronic mirror and also we have a surround view technology and for the electronic mirror and surround view I think we have a solution and we are talking to customers.

I think most of them like the technology and we are in the designing activity talking to [vessel] I will be hoping that those two markets will get us to the OEM faster and A dash, for A dash you are right it’s going to be four, five years out there..

Got it, that’s great. Thank you..

And our next question or comment comes from the line of Suji Desilva with Topeka. Your line is now open.

Hi, Fermi, hi George. Nice to have in the quarter, can you talk about, Fermi you talk about the drone market? Can you just talk about why you are optimistic about the demand opportunity there? Just add some color obviously you are seeing a lot of customers..

Well, I think why drones maybe excited because the first time I saw it actual video was – give a perspective that is very rare because I've been working on videos for 30, 35 years.

And when you see a video being shot by a consumer that's not possibly in the past and we will realize that there are many, many different location can pop off from this one. And I think DJI just prove that's the case.

And I think all DJI are selling the cameras for the retail channel to consumers, but I won’t be surprised there are many other applications, you just buying DJI drones using for the other vertical business.

From that point of view I think there are tremendous opportunity for us to get moving forward, because also optimistic – because that for drone to work properly they need a very clear video.

And that means they need to push not only the resolution and the fair rate, but also they are going to meet better media processing, better lowlight performance, better HDR, better [indiscernible] future that give us a very consistent result that I will put on the table.

So not only it’s just because of the market that we believe going to continue to grow fast, but also we are going to continue to consume the best we are going to develop and that’s why we are very excited on this opportunity..

Okay, my other question is on the high-definition customers there is that business mostly government or is it corporate as well, what is the runway for that left is there large unpenetrated opportunity there?.

Right, so we don’t clearly know where technician sell their camera, but I think the 70% of their camera going to China internally and 30% go export and I think majority is like you say it’s going to be in a government building, in casino, bank and enterprise implementation.

So if you look at the total security camera market still more than 50% is analog camera and I expect that by the end of the year it’s going to be 50/50 split between analog and IP security, so from there I still - that’s why I still believe there is some growth for us in the next couple of years..

Okay, and last quick question you mentioned the battery powered camera that can go six months and wake up on event, is that a niche market, is that a high volume market what do you think that opportunity it sounds newer versus the other one?.

No, it’s a question we feel very old I do have – my personal opinion is I think there is a lot of occasions can be used, one most popular use case that people talking about is using as [indiscernible] so that when you ring the door, pick the camera, pop up, capture video and send the video through the Wi-Fi connectivity to your cellphone, so even – whole you know exactly we’ll show up your [indiscernible] and so that’s one beautiful occasion I think if that happens it could be a huge opportunity for us..

Thanks guys..

Thank you. End of Q&A.

And I am showing no further questions or comments at this time. So with that said I would like to turn the conference over to Dr. Fermi Wang for any further remarks..

Thanks for all of you for joining us today and we really appreciate your support and I would like to say a special thanks to all our employees for their continued hard work and their dedication to Ambarella. Thank you and good bye..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect..