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

Kevin Cassidy - Stifel Ted Moreau - Barrington Research Suji De Silva - Topeka Matt Ramsay - Canaccord Genuity Ross Seymore - Deutsche Bank Daniel Amir - Ladenburg Jagadish Iyer - Redstone Technology Charlie Anderson - Dougherty and Company Brad Erickson - Pacific Crest Securities Quinn Bolton - Needham & Company.

Good day, ladies and gentlemen and thank you for your patience. You've joined the Ambarella Fiscal Q3 2016 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, this conference maybe recorded. I would now turn the call over to your host Ms. Deborah Stapleton. Ma'am you may begin..

Thank you. Good afternoon, and welcome to Ambarella's third 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 fiscal third quarter.

The discussion today and the 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 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 March 30, 2015 for the 2015 fiscal year, and the Form 10-Q filed on September 08, 2015 for the second fiscal quarter of 2016.

Access to our third-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 Web site. I'll now turn the call over to Dr. Fermi Wang..

Thank you, Deb and good afternoon everyone. We are pleased with our Q3 fiscal year 2016 financial results. Our Q3 revenue was $93.2 million, representing an increase of 41.9% over the $65.7 million of revenue in the same period in the prior year.

During the quarter we saw strong sales for our existing markets including professional IP security cameras and the automotive aftermarket dash cameras as well as from new markets including flying cameras and the home monitoring cameras.

This growth has partially offset while we expected headwinds in our wearable sports camera market due to high inventory levels at the customers. We continue to enjoying strong design win momentum and the quarter saw the introduction of a significant number of new cameras mainly from customers new to Ambarella.

The introduction of the three new SoC families during the quarter is also helping to drive new design winds across all markets settlement. During the quarter our flying camera market were enjoying significant revenue increases driven primarily by sales of our 4K or UltraHD camera SoCs.

We expect that flying camera will be a popular gift item for the holiday season. During October Ambarella extended the industry widest range of flying camera SoCs of solutions with the introduction of its new A12S and A9SE in camera SoC families, delivering full HD and UltraHD video with advanced image stabilization.

The full HD A12S SoC family enables a new generation of flying camera including small compact of design, racing drones and sub $199 entry level models. The 4K UltraHD A9SE SoC family is ideal for mid and high-end design. Both SoC deliver outstanding high resolution video, DSLR quality photography and a low delay in live video streaming.

A comprehensive flying camera software development kit gives developers the ability to differentiate their products with advanced camera, fly control and the night working features.

In September, drone market leader DJI introduced its Zenmuse X5 or NEX-5R series of aerial cameras, the world's first set of Ambarella's compact micro fortress camera built specifically for aerial photography and the cinematography.

The Zenmuse X5 includes a 3-axis gimbal stabilization, an interchangeable lens mounts and a full wireless remote control over camera settings, including focus and aperture. The Zenmuse X5 supports 4K video recording and 60 megapixel photos while the Zenmuse X5R also adds supports for lossless cinema 4K raw video, both cameras use Ambarella's A9 SoC.

During the 2015 Hong Kong Electronics Fair in October, China based AEE demonstrated some new torque AP12 phone based on Ambarella's A7L SoC. The AP12 features a 1080p 60 video camera with a 3-axis gimbal and the support of advanced flying control including automatic landing and the take off and return to home.

In the professional wearable market TASER a global leader in home and body warm police cameras and Amodent’s management technology announced its HD Axon Body 2 camera. The camera is part of the Axon platform that connects cloud, mobile and the wearable technologies.

The camera is based on Ambarella's A7L SoC and it includes excellent low license activity and ability to record up to 12 hours of video on a single battery charge. In late-late November, TASER announced they won a major bid to outfit 22,000 London Metropolitan Police Officers with its Axon Body 2 cameras.

In September wearable camera market leader GoPro introduced its Hero+ camera for $199 was approved and multiple model its Wi-Fi and Bluetooth connectivity. The Hero+ captures 1080p60 video and 8 megapixels still images and includes both high laps and the burst photography. The Hero+ is based on Ambarella's A7L SoC.

As for the China Security Show in October, Ambarella demonstrated its new S3L IP camera SoC family delivering the benefits of H.265, all high efficiency video including for Home Monitoring and Mainstream Professional IP Cameras.

The S3L provides up to twice the video compression of Ambarella's H.264 encoding technology enabling cost saving from reduced storage requirement and the ability to stream higher quality video over bandwidth-restricted networks.

S3L also includes high-dynamic range imaging, 180 degree fisheye lens correction and a high-performance CPU for intelligent video analytics. During the third quarter a number of leading consumer brands introduced new Home Monitor cameras and the innovative IoT devices based on Ambarella solution for the first time.

For example, in November D-Link announced its Komfy Switch with camera, a new smart light switch for homeowners looking to create a smarter and a safer home, built to replace a standard light switch. It combines a 1080p camera with ability to monitor a range of environmental changes including temperature, humidity and air quality.

Also in November, Nightgear announced its Arlo Q Wi-Fi Home Monitoring camera. The Arlo Q features 1080p HD video wide 130 degree field of view, 4 megapixel sensor and advanced night vision. This includes ability to create customized activity zones with specific alerts and also feature top analyzing capability to building microphone and the speaker.

The coder also sold in production of the Samsung SmartCam 6414 Wi-Fi Home Monitoring camera. The camera features a full HD 1080p video, advanced motion detection, night vision and local recording to memory card. In automotive aftermarket Ambarella provides camera SoC solution for video camera recorders or dash cams.

We are continuing to see strong market growth for dash cameras especially in China and now anticipate that our total utilization in this year will approximately double from the previous fiscal year.

Recently Chinese internet leader Qihoo 360 featured its Ambarella based connected dash camera during the recent November 11 or a single state ecommerce event in China and they reported the sales of over 200,000 units during that day.

We're also seeing new opportunities for dash cameras outside of China with U.S.-based CAM International and the Korea based THINKWARE promoting new models into the U.S. and other regions.

In November Garmin International announced its dash cam 30 and dash cam 35 with HD standalone driving the quarters based on Ambarella's S2L and SLC, the dash cam 35 includes advance alerts to enhance driver awareness including full collision realized and the speed camera output.

In efficient for new product introductions in our existing markets our customers are creating a number of innovative new camera categories based on our 4K UltraHD SoCs.

For example in October DJI introduced its personal camera leveraging its strength in drone camera stabilization to create a new category of a hand held camera also more to integrate a free access to stabilization system to enable a fully stabilized camera with 4K UltraHD video and 12 megapixel for photography.

If automatic panorama mode captures 370 grid images also the camera rotates while staying completely level. It also takes long exposure shots without a need for tripod supporting night time photography. In November U.S.

based Silvershotz announced the Silvershotz 3 personal camera and it's automatically track subjects up to 2,000 feet away so user can fill their self from a spectators’ perspective and without the help of another person. Its 4K camera includes 65-times optical zoom and supports automatic editing and the live video streaming capabilities.

We are also continuing to make great progress in developing the new technologies that will differentiate future generations of Ambarella's SoCs. During the quarter we successfully tapped out our first 14 nanometer SoC which will provide significant of power and the performance advantages.

Additionally, the acquisition of VisLab an Italian pioneer in perception systems and a countless vehicle research is helping us define and develop future generations of computer legion tech solutions.

In summary we are pleased with our Q3 financial results and by the wide range of new cameras introduced by both new and existing customers in the quarter. The introduction of our new A12S, A9SE and S3 or SoCs will continue to drive the next generation of innovative products in the months ahead.

I will now turn the call over to George for details of our financial results..

Thank you, Fermi and good afternoon everyone. Today I will start with a review of the financial highlights for the third quarter of fiscal 2016 ending on October 31, 2015, and then move onto the financial outlook for Q4 of fiscal year 2016 that ends on January 31, 2015.

During the call I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting for Q3 we have eliminated stock-based compensation expense as adjusted for income taxes.

Our Q3 2016 revenue of $93.2 million represents an increase of 41.9% over the $65.7 million of revenue in the same period of the prior year. Camera market revenue was estimated to be 98% of Q3 revenue compared to 96% for the same period in prior year.

In the third quarter we had strong year-over-year and sequential growth in IP security volume camera and auto aftermarket revenues. As noted on our Q2 earnings call in September third quarter revenues from the wearable market did decline both sequentially and year-over-year.

Lower results in the wearable market reflect the earlier than usual launch and inventory build-up of wearable sports cameras in our Q2 rather than usual Q3 seasonal manufacturing cycle.

In the IP security market total revenue was up both sequentially and year-over-year but some softness in China continued in the quarter partially offsetting strong results in other geographic regions. In the U.S.

consumer IP security market we saw a solid revenue growth from both retail and service provider channels most likely driven by production for the holiday season. Other than in the U.S.

market it is difficult to distinguish the split between consumer and professional IP security market revenues as the OEMs and ODMs do not make this information available to us.

Flying camera revenues sustained a strong revenue growth experience in the previous quarter as customers increased production for the holiday selling season in North America and Europe.

Q3 automotive aftermarket revenues continued their recent positive trend with solid year-over-year and sequential growth despite the recent uncertain economic conditions in China the automotive aftermarket in China continue to grow along with Taiwan and Korea.

We believe this is a result of increased demand from customers for future rich product which aligns very well with our product offerings. Non-GAAP gross margin for Q3 of fiscal year 2016 was 65.9% compared to 65.3% in the immediately preceding quarter and 63.4% in the third quarter of the prior year.

Gross margin in the quarter remained strong due to the increase in flying camera and auto aftermarket revenues as a percent of overall revenues as well as softer revenues from the lower margin China IP security market.

Non-GAAP operating expenses for the third quarter were $23.1 million compared to $22.7 million for Q2 2016 and $18.7 million for Q3 of the prior year. This year’s Q3 OpEx increased due to higher chip development and employee compensation cost plus the first full quarter of operating expenses of the VisLab operations during 2015 acquisition.

Non-GAAP net income for Q3 2016 was $36.6 million or $1.08 per diluted ordinary share compared to a non-GAAP net income of $22.1 million or $0.68 per diluted ordinary share for the same period in the previous year. The non-GAAP effective tax rate in Q3 2016 was 4.7%.

The lower tax rate in the quarter reflects a year-to-date adjustment for an expected lower annual rate of 7.5% which resulted from a more favorable mix of profits within our geographic regions.

In the third quarter, the non-GAAP earnings per diluted ordinary share based on 33.9 million diluted shares as compared to 32.4 million diluted shares for Q3 of fiscal year 2015. Total headcount at the end of Q3 2016 was 627 compared to 614 at the end of the previous quarter with about 83% of employees dedicated to engineering.

Approximately 72% of our total headcount is located in Asia primarily in Taiwan and China. We ended Q3 with cash and marketable securities of $276.7 million adding $36 million of cash from operations in the quarter. Total accounts receivable at the end of Q3 2016 were $46.3 million or about 45 day sales outstanding.

This compares to accounts receivable of $42.1 million or 45 day sales outstanding in the prior quarter. Net inventory at the end of Q3 was $22.8 million or about 72 days compared to $27.8 million or 83 days at the end of Q2. Accounts receivable and inventory remain in line with Company targets.

WT Microelectronics our Asia logistics supplier represented 68% of our revenue in the quarter compared to 51% for the same period in the previous year.

Chicony Electronics Company, a manufacturer of camera products for multiple OEM customers as well as for their own distribution, represented 21% of revenue for Q3 of Fiscal 2016 compared to 41% for the same period in the prior year. WT and Chicony were the Company's only 10% customers.

I would now like to discuss the outlook for Q4 of fiscal year 2016. We expect revenues for the fourth quarter of fiscal year 2016 ending January 31, 2015 to be between $65 million and $67.5 million, representing an increase 0% to 4% respectively over Q4 of last year.

We expect solid year-over-year growth in our Q4 IT security, flying camera and auto aftermarket revenues. The Company also expects that Q4 growth in these markets will be offset by a substantial decline in year-over-year revenues from the wearable sports camera market.

In the wearable sports camera market high customer inventory levels at the end of calendar Q3 are expected to have a substantial impact on our shipments in Q4 extending into Q1 of fiscal year 2017.

Although we continue to monitor the China IP security market, we expect Q4 revenues to increase as major manufacturers increase promotional activity, both within China and for export, leading into the end of their financial years.

We estimate Q4 non-GAAP gross margins to be between 63% and 64.5% compared to 65.9% in Q3 of this fiscal year and 64.3% in Q4 of the prior year. Margin from camera products are expected to decline from Q3 primarily due to an increase in lower margins IT security revenues from China.

We expect non-GAAP net income for the fourth quarter to be between $15 million and $17 million. We are using an estimated non-GAAP annualized effective tax rate of 7.5% for net income amounts. We estimate our diluted share count for Q4 to be approximately 34 million shares.

For the fiscal year 2017, we expect to see revenue growth between 15% and 20% which is somewhat lower than our target model of 20% to 25%. We expect strong annual growth to continue in all key markets with the exception of wearable sports camera where we expect customer inventory reductions to continue into the early part of the year.

The year-over-year decline in wearable sport market in Q1 is expected to result in the moderate decline in Q1 2017 revenue as compared to the same period in the prior year. As we move beyond the difficult first half year-over-year comparisons, we would expect growth in all markets.

Gross margins should move into our target model 59% to 62% as the year progresses as China IP security market improves and consumer IP security business continues to grow as a percent of overall revenue. Operating margins are expected to be in the high 20s and low 30s as a percent of revenue for the year.

I would like to thank everyone for joining us call today and now I will turn it back to operator to manage the Q&A session.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Kevin Cassidy of Stifel. Your line is open..

I guess as we look at the sports camera market, I know you can't preannounce your customers' product builds but is there some opportunity for new design in fiscal year 2017 coming from the sports camera market?.

Kevin, I do believe all our customers are going to introduce new product in 2017, but we should not discuss the details in this call..

Okay maybe if we just bring it to the three new SoCs that to announce this quarter, when do you think you will see revenue from those products?.

For A9SE, A12S as well as S3L we expect all of them will generate revenue starting next year..

So typically a 12 month window from the time you introduced the product to seeing revenue..

We're talking about kind of the year 2016 that we should see revenue from the all the three product lines..

Right, right, and I even introduced new SoCs in the first quarter of this year as I remember at CES you've announced new products.

Those products are ramping into production today?.

Yes..

So it's typically we'll say 9 to 12 months per new products come to the market..

Well, Kevin, but we announced A9SE and A12, we had that chip for awhile, so we just took the timing but in fact we have A9SE and A12 in the lab for awhile, so I think we fully expect A9SE will be in production first half next year and A12 probably second half of next year and S3L we also expect probably in Q2 to Q3 next year..

Thank you. Our next question comes from Ted Moreau of Barrington Research. Your line is open..

I was just kind of wondering on the SoC -- the three new SoCs that you've introduced, are those ASPs in line with the general ASP trends that you've experienced, what do you expecting out of APS trends generally over the coming year?.

Yes, I think the ASP trends will be similar and we're offering products at high end, mid-range and low end, so you will see a wide range of APSs, but they should be in line with previous years both from APS standpoint and a margin standpoint..

Okay and I mean maybe more specifically and how about like in drones, do you see any shift in ASPs in drones or can you come under that as well?.

For the current -- all of the drones are using our chips these days, as always all user the A9 for their high end drones, so the ASP there is pretty stable and it was a good gross margin, but with A12 we have currently introduced A12 SoC for the low end drones, while the ASP in gross market will be lower, but I think we expect that the gross margin profile will be similar to our company gross margin..

So we will have a mix from low end to high end next year in the drone market from an ASP standpoint..

Okay and then in drones, do you expect with the Chinese year coming up middle of the next calendar quarter or the next fiscal quarter, do you expect -- I mean how do you think seasonality plays out and will impact that, that market? And that's it for me, thanks..

Well based on our understanding, most of our customers are selling their drones outside China, so I don't think Chinese New Year is a factor at this point, this year or another..

Thank you. Our next question comes from Suji De Silva of Topeka.

Your question please?.

Could you repeat George the fiscal ’17 revenue guidance, I think you said up 15% to 20% that's for the full year and if so which segment do you expect to contribute strongest to that?.

I think 15% to 20% is what we're talking about, really we're looking at strong performances year-over-year from security, automotive and from drones. So those will be the three main drivers.

We have a little bit of a year-over-year comparison issue in the first half and once we hit through that we should feel comfortable on the year-over-year growth for all the markets..

Okay great. And then in the sports wearable market. Can you quantify perhaps does it help the customers inventory levels today versus where they would typically be to understand how long it’s work down will take, I think you said it will take into the -- they will go into the first quarter, but any metrics there would be helpful..

Actually difficult for us to quantify actual inventory levels, if you go back to GoPro’s announcement they had at the end of September they had I think over a 100 days of inventory. So that's the only data point that is out in the marketplace at this point..

Okay, great. And then the professional security market particularly in China. I think last quarter you guys had told me that there was inventory -- efforts reduced inventory there and the end demand was not as much of the issue.

What are you seeing at this point in time with customers’ inventory willing in professional security and then the end demand, you talked about promotional activities so I'm curious about the dynamic there sell in versus sell through..

I think in the last few weeks we started seeing some signs of the recovery in China, but that may be related to some yearend push for our customers. So we are confident that it can be consumer, we continue to monitor China very carefully, but we do see some signs of recovery..

And Fermi their inventory levels are they keeping -- they've been leaned down and they’re keeping them lean, is that the way to think about it?.

Yes that's one way to look at it..

Thank you. Our next question comes from the line of Matt Ramsay of Canaccord Genuity. Your question, please..

Thank you. Good afternoon gentlemen.

Fermi I'm wondering if you could comment a little bit obviously there has been hyper growth in the sports camera market and now a big correction in that space from the sell through and inventory perspective and there is a lot of things going on, but maybe you could talk to us a little bit about the type of innovations that Ambarella is putting into its chips and into it software and what types of innovation that you are pushing into that space to potentially rekindle some growth there given the important of that end market..

Well I do think there is still innovation available in that particular market. Off course that's being in efficient to the traditional frame rate and the resolution.

We believe that 4Kp30 is the main stream right now and we also believe 4Kp60 is going to be a very important format for the sports camera because of the frame rate is very-very important requirement for the high motion sports type of the video.

But in addition to that multiple things that we are doing, I think that it's become very clear to us that you go through this kind of resolution, any kinds of the stabilizations is very helpful for the quality of the end video. So we are spending a lot of time to deliver a stabilization system.

We are now using [indiscernible] and just using our system our chip we can provide stabilization system to improve the video quality on those camera that's one thing. The other thing I think that is show of industry, there is a new trend, I’m talking about high dynamics range.

If you look at all the 4k TV probably because we are talking about 10 bit, means every color of every pixel using 10 bits instead of traditional 8 bits that basically means we improve your dynamics by 25%, but that also means it requires a huge amount of performance and also changes total infrastructure of the capturing system and with that we also believe that will improve the experience of video of the sports camera.

And on top of that how to -- during the trans-coding and editing better functional chip, so that all customer can provide a better user experience is always a things that we’re looking at. So I think there are multiple directions we are looking at, continuing to provide innovation for our key customers..

That's helpful.

And then maybe if you could talk a little bit, you mentioned the first design win Phazer [ph] I know you guys last year you had introduced the a reference design platform for variable cameras is that potentially an important market and the timing of that being I guess material to the revenue and what the opportunities that looks like outside of just law enforcement..

Correct.

So do believe this has become more and more important because now when we talk about wearable in the past, we always said that we need end-to-end solution meaning that just by wearable camera by itself is not enough you need to have a back end system so that you can easily add it, it’s easy to watch, easy to search and I think the Phazer is doing that and doing a great job of that.

When these kinds of end-to-end system become more mature and more easily available and becomes cheaper we do believe this type of camera will enable different type of a market, for example security guard, for example the firefighters, they are all applications that will start picking it up, it will take time.

So for the technology development point of view it’s very important for us to continue to focus on those areas, but I will not count it down as a revenue improvement for in the near term, but in the long-term we do see this as an important trends for us to continue to spend our R&D dollar..

Thanks and I’ll sneak one for George. I mean the $8 plus and net cash per share now and a reasonable portion of the market cap and cash given all the stock volatility. Any new comments or new consideration we should think about for uses of cash as you guys generate quite a lot? Thanks..

Not at this time. We have continuing discussions at the board level about use of cash including share buybacks, dividends, et cetera. We are focusing on expanding the Company and we’re still looking for M&A opportunities.

So for the time being I think M&A is really the only significant use of cash that we’ve had publicly talked about and it’s probably going to continue that way at least in the near term..

Our next question comes from Ross Seymore of Deutsche Bank, your question please..

Just want to make sure I understood.

George in your comments on the April quarter did I hear right that you said that the year-over-year revenues would be down moderately?.

Yes, that’s correct..

And the cause of that is continued inventory burn in the sports side or are there other either seasonal dynamics or cyclical dynamics?.

Just the sports inventory correction, we expect that to continue into our Q1..

So was that relatively flat sequentially or down say 5% or so year-over-year versus what you guided it.

Is the biggest improvement thereafter to get to your 15% to 20% range just the end of the inventory burn in the sports side in addition to the drones and the auto aftermarket, et cetera, the more secular drivers?.

Yes, we feel we have strong growth in the other three markets and we would expect after the inventory correction to get to a more normalized sports camera revenue level..

And I guess my last question for you George is on the gross margin side of things, can you just remind us in your full year guidance the trajectory of that, I think this year you also had guided to 59 to 62 and your credits did significantly better than that.

So I just want to make sure I understand the path from the high number you are at now to the more normalized target that you just gave..

As you know our spread between the high end and the low end of the margin is quite wide and therefore mix nearly drives the overall blended margin.

This year as I said it earlier the fact that the drone business which is a higher margin business for us actually expanded much higher than anticipated, that has offset some of the lower margin business we had. So we really overachieved.

Next year though we see the professional security business and the home monitoring business particularly in China growing much faster, therefore, putting downward pressure on the margins. Now with that said if drones and the auto aftermarket do overachieve we do have the opportunity to beat the margin profile.

But at this point the China market looks to be very strong moving out of Q2 into Q3 and therefore we’re projecting moving into that upper range of the target model during that period..

Our next question comes from Daniel Amir of Ladenburg, your question please..

So question here on the automotive side. I was wondering if you could expand what you’re seeing on the automotive space and when should we see some of the next generation products coming out of that? And then I have one follow up there..

On the automotive we have two bigger market one is aftermarket and for the aftermarket business we continue to see strength and also we are continuing to offer new solutions coming out. For example, that A12S product we also have a similar part for A12A which is for automotive aftermarket.

So we do have a next generation aftermarket solution ready to be introduced. If you are talking about the OEM business and that’s where our acquisition of VisLab is helping us to deliver a computer vision technology that will go into our first computer vision chip and we are doing the internal development.

And we continue to believe that the first chip will be out by second half next year..

And then follow up on the action camera market, given the issues that you faced during the past quarter here, I mean, has your visibility changed in that market versus two or three quarters ago or you clearly have the same visibility that you have, it’s just now you’re of course facing an inventory correction?.

Yes, our visibility is pretty similar quarter-to-quarter, our relationships are pretty much the same here..

And then the last question on the action camera -- on the drone market, any comments on or changes on competitive front there in terms of other chip providers entering the space?.

Yes, in fact in the last conference call that we talked about Qualcomm, that Qualcomm announced their drone reference designs three months ago.

And since then we spend time to understand their product offering and also try to collect the feedback from the market and with that we still believe that they’re current at processor based solution is quite behind on video quality, compression efficiency, power consumption and video feature and performance.

So, and with our announcement of A12S and A9SE, we have a complete roadmap from the operating for our customers from starting $199 drone to all the way to a $1000 drone. So I think we have a complete solution where we are confident and comfortable with this market with our product offering at this point..

Thank you. Our next question comes from Jagadish Iyer of Redstone Technology. Your question please..

I just want to drill down little bit more on the gross margins George. So, if the variables are going to decline at least for the next say maybe two quarters.

You kind of guided gross margins a little bit tad lower, but I was thinking that maybe it should be probably at similar levels that what you've achieved in the current -- in the most recent quarter. So, can you talk about some puts and takes in terms of the gross margin.

And do you -- and if you think that the -- if the wearable market mean -- if this sports market is not going to be improving at least towards the latter part of 2016, should we expect that we could may -- you could be at the top end of the 59% to 65% range? Thanks..

Yes, I think, I think the two biggest puts and takes there on the downside is the China security business that's significantly lower than our corporate margins so growth there does pull the margin -- the blended margin down. And that is offset by our higher margin business which is really now driven primarily by the drone business.

So, it's the mix of those two markets that I have to deal with as far as forecasting the blended margin over let's say a longer period of time. And those are difficult markets to forecast exactly. I still believe we can be in the high-end of my target range, through at least Q2 and Q3 and we're comfortable with that for now..

And so, just a question Fermi then, I just had one thing on the competitive dynamics, can you talk about what is going on in the automotive side, as well as there, I mean the dash cam side and also on the professional IP security in China out there.

Do you see some new players coming into the marketplace or do you see some -- any pricing pressure in that segment? Thank you..

Well, I think it’s actually about IP security first, I think that, in that market we still view the [indiscernible] as our major competitor there and the price pressure has been there for three years and the dynamic hasn't change.

Last year [indiscernible] have been focusing on introducing HEVC solution and we announced our 4K H3 HEVC SoC in late 2014. And also we announced our new H3 our SoC in China Security Field just announced in October.

And with this high-end and OM [ph] chip, with this chip we believe that we have a complete HEVC roadmap and also sustainable advantage in terms of video quality, compression efficiency, power and the CPU performance over a high silicon.

So, from that point of view alone there is -- price is always a big issue in China, but we continue to offer solution and the roadmap to compete with them.

There are many other smaller vendor going in, Qualcomm also introduced a platform for IP security camera, but I think there solution is not mature yet, then the other smaller guys, I don't think that's put a huge impact on the market yet.

On the photo side, it's really a wide range of low end customer mobile pad, AIT -- Korean is -- few other companies are trying to compete purely on the price. So, pressure is always there. We also heard [indiscernible] had tried to go to dash cam. So, that market is really very competitive for Chinese and Taiwanese SoC vendors..

Thank you. And next question comes from the line of Charlie Anderson of Dougherty and Company. Your line is open..

I wondered, if you could help us with the magnitude of the sports camera downtick maybe on like a percentage, what percent are they in October versus January or any context you can give there'll be helpful George?.

I think let's just do it in general terms per say, we're substantially -- they’ll be substantially down in Q4 and Q1 both from a revenue and a percent of revenue standpoint..

And then for Q1 do you expect quadcopter to be up or down sequentially or flat?.

Right now we think it may be up a bit from Q4, but Q4 will probably be down a bit from Q3. So, that's the current thinking..

And then a question from me, sort of the quadcopter market in general, I'm wondering how you expect may be the market to evolve in counter 2016 in terms of -- the units that are selling now, will the mix considerably changing your mind on the price points.

And I also wonder now as you're starting to win -- get design wins in for next year, where is the demand coming from in terms of the computer vision and I know you guys very important to, do you feel like the demand is there for that or some of that drone makers look like doing part of that stuff themselves, any color would be helpful..

So first I'll talk about the core captured market, that market continued to grow fast and grow in almost all the price range, that for example current Sensory [ph] is at $699 always $1200, I think they're doing very well.

But we're also starting a huge number of companies trying to do a lower end any software from $100 to $400 drones, some of them with camera some of them without camera.

We only focus on the drone with cameras and we're trying to providing the best solution and with A12S and also some A9S solution we will be able to provide not only the beautiful video quality but also we're going to show a very good video image stabilization system and that will be a unique feature that very few people have and that will be one of the major feature that will differentiate.

So fully expect that we continue to have design wins from the low end to higher end of drone market and also that we're going to see many-many different type of drones coming out next year and it's going to put a lot of pressure on the price for everybody.

In terms of the computer region everybody in the drone market knows that without the computer vision that if you count the manual control of the drones is prone to the problem, so computer vision is a Holy Grail of the solution.

However, there is no solution out there that can deliver a workable computer vision solution to all of the -- to solve all the computer vision problems for drones. And we believe that when we introduce our CV solution, our solution will be not only applied to automotive market but also applied to drone market.

And again we believe our chip will be out second half next year for our customers..

Thank you. Our next question comes from Brad Erickson of Pacific Crest Securities. Your line is open..

Just a couple of follow up, first on the IP security, I think you've mentioned certain geographies came in better than expected but seems like China remains a bit soften and apologies you may have commented already on this, but just wanted to clarify.

Are you saying that effectively the pause that you're seeing as of last quarter sort of is persistent in China?.

Well, what we’re saying is that we do start seeing recovery from China. For hardware we also saw that we believe some of the recovery is because our Chinese customers are doing some yearend push and if the yearend push is successful that will help, but if not then it could be another even problem too that we need to take care of.

So the conclusion is we’re strictly optimistic but we still continue to watch China very closely..

Got it that's helpful and then in terms of the sports camera, I think that's still roughly call at 35% maybe even 40% of revenue, given the outlook what's kind of a base level assumption for the percentage of revenue that could be next year in mind in light of your updated target model commentary?.

We haven't really said anything publically about the percentage, all we’ve said is we think it will be substantially down in the early part of the year as both for the dollar and a percent..

Got it and then finally on drone customers, can you just remind us how many drone customers you currently work with and as we think out towards next year, where that number could go roughly?.

Well, we only announced three customers DTI, Unique and ADE [ph] and we are also engaged with several other drone makers worldwide.

So with that and also engaged we’re comfortable a lot more than that because this is a hot area, there are a lot of [indiscernible] and for those small starter company we are trying to using our old team to support them and we then engage directly.

So it's hard for us to say how many customers we have, but overall I think we're seeing enough, we believe there are many-many customers who are coming to this drone space with our solution or without our either way they're going to compete.

But I think the most important thing that we're trying to say is we believe we not only best solution but we have the most complete roadmap from that low end to the high end of customers..

Thank you. Our next question comes from Quinn Bolton of Needham & Company.

Your question please?.

Just wanted to come back to the October results obviously you guys came in slightly ahead of the high end of your guidance, as you look at the revenue splits by segment did the revenue splits sort of come out as you expected back when you gave guidance or fine camera [ph], security specially the consumer side of security, a little bit stronger and perhaps you've already started to see wearable cameras weaken from what you might have guided to 90 days ago?.

No actually the quarter came in pretty much in line with our guidance across the board, we did say that wearable would be down year-over-year and sequentially we said China will be soft and that pretty much came to pass across the markets. So we're pretty much on target I would say for our guidance and as far as mix in Q3..

And then you guys have clearly been -- wearable cameras has been dominated by your largest customer you’ve announced the Xiaomi camera a few quarters ago.

Can you give us any sense whether with Xiaomi and perhaps other customers are you starting to see better diversification or as your largest customer they are still the vast majority of that business?.

Well, we work with many different sports camera customers and the Xiaomi is the only one that generate enough volume for us to talk about because they are still far away from GoPro numbers but I think Xiaomi’s number certainly is bigger than any other people we’ve seen.

But given that our understanding is Xiaomi mainly sell their camera in China and so the overlap within GoPro sales and Xiaomi sales is probably little from a geographic point of view. So, any other customer I don’t think they generate meaningful revenue against this though..

And then just lastly you guy seen pretty strong sequential growth in the flying cameras over the last couple of quarters. Wondering if you have any estimates you might be able to share, what you think the total unit cam is of flying cameras say in calendar '15 and where do you think that could go in 2016.

I know it’s a pretty small base, but I think you get good ASPs and clearly get the best margins out of that segment?.

Well, it’d be hard for us to make a judgment for 2016. The only thing I can say is I think that growth is going to continue. I think for 2015 I won’t be surprised that we sell more than million units mark -- total market..

Thank you. At this time, I’d like to turn the call back over to Dr. Fermi Wang for any closing remarks..

Thanks everybody and thank you for joining us today and also special thanks to all our employees for their continued dedication and hard work, and goodbye for now..

Thank you, Mr. Wang and thank you ladies and gentlemen for your participation. That does conclude Ambarella’s fiscal Q3 2016 earnings conference call. You may disconnect your lines at this time. Have a wonderful day..