Deborah A. Stapleton - President, Stapleton Communications, Inc. Feng-Ming Wang - Chief Executive Officer George W. Laplante - Chief Financial Officer.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc. Matthew D. Ramsay - Canaccord Genuity, Inc. Jagadish Iyer - Redstone Technology Research Daniel L. Amir - Ladenburg Thalmann & Co., Inc. (Broker) Quinn Bolton - Needham & Co. LLC Charlie Lowell Anderson - Dougherty & Co.

LLC Marc Estigarribia - Chardan Capital Markets LLC Brad Erickson - Pacific Crest Securities Richard Cutts Shannon - Craig-Hallum Capital Group LLC.

Good day ladies and gentlemen, and welcome to the Ambarella Fourth Quarter and Fiscal Year 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. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Deborah Stapleton of Investor Relations. Ms. Stapleton, you may begin..

Good afternoon, everyone, and welcome to Ambarella's fourth quarter fiscal 2016 financial results conference call. Thank you for joining us. Our speakers today 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 fourth quarter and year-end 2016 results. 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're under no obligation to update these statements.

These risks, uncertainties and assumptions as well as other information on potential risk factors that could affect our financial results are more fully described in the documents 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 and the Form 10-Q filed on December 9, 2015 for the third fiscal quarter of 2016.

Access to our fourth 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 will now turn the call over to Dr. Fermi Wang..

Thank you, Deb, and good afternoon, everyone. Our Q4 2016 revenue was $68 million, representing an increase of 5% over the $64.7 million of revenue in the same period in the prior year. For the full fiscal year 2016, our revenue was $316.4 million, representing a 44.9% increase over the $218.3 million in the prior fiscal year.

During the quarter, we continue to see strong sales from professional IP security cameras and automotive aftermarket dash cameras, as well as from new markets, including flying cameras and home monitoring cameras. This revenue growth was largely offset, however, by a continued decline in the wearable sports camera market.

Ambarella is continuing to successfully diversify its end camera market. And during the 2016 Consumer Electronics Show in January, Ambarella showcased its full range of camera solutions spanning automotive, home monitoring, wearable, virtual reality and flying camera markets.

Beginning with the automotive OEM market, Ambarella demonstrated its new MotorVu Electronic Mirror reference design at the show. Electronic mirrors utilize cameras and LCD displays to augment optical rearview and side-view mirrors to provide a wider, unobstructed field of view.

Ambarella's A9SE base design feature advanced video processing for excellent visibility, even in low-light and high contrast driving conditions, while also reducing LED headlight flickering. The demonstration was done in collaboration with Gentex, the world's leading automotive mirror supplier, who provided advanced LCD mirror display.

Also during the show, Ambarella introduced its MotorVu 3D 360° Surround View reference design. The reference design brings high-quality HD video to multi-camera parking assistance applications, and features a dedicated video engine to combine multiple HD video streams for 3D scene rendering.

The ability to both record and stream video for multiple cameras enables new use cases, such as 360 degree video security for cars. Another major theme of CES this year was drones or, as we call them, flying cameras.

During the show, Ambarella displayed many of the major brands now using Ambarella camera SoCs, ranging from lower cost consumer models to professional level models with 4K video.

We're increasingly seeing interest from flying camera makers to run the fly control software on our chips in lower cost design, while higher end model continue to split the fly control and camera software across separate microcontroller and camera SoCs.

At the show, Ambarella introduced its new H2 and H12 camera SoC for the next generation of sports, virtual reality and flying cameras. H2 targets high-end camera models with 4K Ultra HD HEVC video at 60 frames per second and 4K AVC video at 120 frames per second.

This high frame rate delivers smooth video during fast action shots and slow motion playback. H2 also includes 10-bit High Dynamic Range video processing to handle high contrast scenes and supports DSLR quality photography. H2 is Ambarella's first 14-nanometer SoC.

The new H12 SoC targets mainstream cameras at lower cost points and offers 4K Ultra HD HEVC video at 30 frames per second.

Both SoCs have extremely low power consumption, allowing for the design of small form factor cameras and feature advanced 3D electronic image stabilization, potentially eliminating the need for mechanical gimbals in flying cameras.

And in January, drone market leader DJI announced its Phantom 3 4K, a 4K WiFi edition of the popular easy-to-fly Phantom 3 series with pricing of only $799. The newest model in DJI's Phantom 3 flagship series features an integrated 3-axis gimbal stabilized camera based on Ambarella's A9 camera SoC, with 4K video and 12 megapixel stills.

Also during the quarter, Chinese drone maker EHang launched the Ghost 2.0, a consumer drone that comes with virtual reality goggles, allowing its user to experience flight through the drone's A9-based 4K camera. The VR goggles come with head-tracking which allows the user to simply moving their head to tilt the camera.

In home monitoring market, Ambarella continued to expand its customer base, both from retail brands as well as from service providers offering cloud-based security solutions. During the quarter, security service provider ADT introduced a new HD home monitoring model, the Pulse A325 (8:08) indoor camera.

The camera is based on Ambarella's A7L (8:12) SoC and features HD video, WiFi connectivity, wide-angle viewing, IR illumination and motion detection. Also during the quarter, Hikvision, the world's largest security equipment manufacturer, introduced its new EZVIZ C1s camera for home monitoring.

The new Full HD camera supports small room, wide-view angle, and integrates both temperature and moisture sensors. It is based on Ambarella's H2LM camera SoC. And during the CES show, Ambarella introduced its video total payout (8:51) solution, featuring Full HD video with 180-degree viewing in the dynamic zoom.

This solution allows the user to dynamically zoom between a visitors space and any package lateral (9:05) door. Additionally, we partnered with Acer Corporation to provide a person (9:11) recognition solution that integrates with our cloud to enable the video doorbell to automatically recognize a person at the door.

In automotive aftermarket, Ambarella provides camera SoC solutions for video camera recorders or dash cams. We are continuing to see strong demand in China, with customer increasingly looking for more sophisticated device with wireless connectivity and driver assistance or features.

During the quarter, Tencent Holdings Limited, a major Chinese company who service including QQ messenger and WeChat mobile messaging introduced its Shen Yun (9:55) connected dash cam.

Based on Ambarella's A12A camera SoC the new Full HD model features Lane Departure and Forward Collision Warning algorithms, as well as an additional driver facing camera to detect and warn when a driver is fatigued or distracted.

The camera allows quick and convenient upload over building 3G connection triggered by a dedicated Bluetooth remote button that can be placed anywhere in the car. Users can also remotely monitor the parked vehicle through live streaming of video over 3G.

In addition to new product introductions in our existing markets, our customers are creating a number of innovative new camera categories based on our HD and Ultra HD SoCs. During CES, U.S. based giant (10:50) demonstrated its professional grade virtual reality camera in Ambarella suite.

The camera integrates 24 camera modules with custom optics to provide a full 360 degree viewing with 3D stereoscopic video capture. Junk suite of hardware and software tools supports the professional production of high quality immersive content. Also during the show, U.S.

based Livestream introduced its new Movi camera to make easier than ever to broadcast live events in HD. Movi is a pocket-sized live event video camera that lets you edit on your iPhone while you film. Its iOS app controls up to nine virtual HD cameras with live editing that includes ability to pan, zoom and cut between multiple live shots.

The Movi camera is based on Ambarella's A9SE camera SoC. In terms of our technology development, we are continuing to invest in technologies necessary to win an expanding number of camera market, such as advanced computer vision, which is applicable to multiple markets, including automotive, security and flying cameras.

Additionally, we're designing the most advanced process nodes as demonstrated by the successful execution, our first 14-nanometer SoC H2, and future designs at both 14-nanometers and 10-nanmeters.

When combined with Ambarella's traditional advantages in image and video quality together with lowest power, we believe our solution will remain highly differentiated from competitors' products.

In conclusion, we are pleased with our results for the full 2016 fiscal year, but not satisfied by our near-term financial outlook which is being impacted by wearable sports camera sales.

As we look ahead, we are confident that our progress in diversifying our end market combined with successful execution of new camera SoCs will continue to provide opportunities for innovation and growth. Now I will turn the call over to George for details of our financial results..

Thank you, Fermi, and good afternoon, everyone. Today, I will start with the review of the financial highlights for the fourth quarter of fiscal 2016 ending on January 31, 2016, then move on to the financial outlook for Q1 of fiscal year 2017 that ends on April 30, 2016.

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 Q4, we have eliminated stock-based competition expense as well as the increase in the tax provision resulting from a one-time write down of a deferred tax asset that may not be usable in the future.

Our Q4 2016 revenue of $68 million represents an increase of 5% over the $64.7 million of revenue in the same period in the prior year. In the fourth quarter, we had solid year-over-year growth in IP security, flying camera and automotive aftermarket revenues.

Sequentially, revenues in the consumer portion of these markets did decline due to normal seasonality. As we anticipated on our Q3 earnings call in December, fourth quarter revenues from the wearable market were down substantially from the previous year.

The decline was primarily result of the drop in demand from GoPro due to their high inventory levels, combined with excess chip inventory at their OEM partners, purchased for GoPro consumption. In the IP security market, total revenues from all geographic region were in line with our expectations.

In China, IP security didn't demonstrate solid year-over-year revenue growth, but was flat sequentially. We continue to monitor the China IP security market due to the economic uncertainties, especially as we enter the normally seasonally slow Q1.

Flying camera revenues sustain the strong year-over-year revenue growth experienced in the previous two quarters, but declined sequentially reflecting the normal seasonal trend for consumer products. And Q4 automotive aftermarket revenues continued their positive trend with good year-over-year growth.

Non-GAAP gross margin for Q4 of fiscal 2016 was 64.1% compared to 65.9% in the immediately preceding quarter, and 64.3% in the fourth quarter of the prior year.

Gross margin in the quarter declined as the lower margin China and home IP security markets became a bigger percentage of revenues in the quarter partially offset by the year-over-year growth in flying camera revenues.

Non-GAAP operating expenses for the fourth quarter were $22.9 million compared to $23.1 million for Q3 2016 and $18.9 million for Q4 the prior year. This year's Q4 OpEx decreased from the previous quarter due primarily to lower chip development costs incurred.

As we expensed the development cost including tape out fees over the development period, fluctuations occur based on the timing of engineering efforts on the number of chips we're working on.

Non-GAAP net income for Q4 2016 was $21.6 million or $0.64 per diluted ordinary share, compared with non-GAAP net income of $22.6 million or $0.68 per diluted ordinary share for the same period in the previous year. The non-GAAP effective tax rate in Q4 2016 was a negative 3.6%, reflecting a lower annual non-GAAP tax rate of 5%.

For non-GAAP reporting, we eliminated stock-based compensation expense and the impact of the one-time write-down of the deferred tax asset discussed above. In the fourth quarter, the non-GAAP earnings per diluted ordinary share are based on 33.8 million diluted shares as compared to 33.1 million diluted shares for Q4 of fiscal year 2015.

Looking at the full fiscal year 2016, our revenues of $316.4 million represented a 44.9% increase over the $218.3 million in the prior fiscal year. Non-GAAP net income increased to $111.6 million from $64.4 million in the prior year, representing an increase of 73.3%.

Total head count at the end of Q4 2016 was 640 compared to 620 at the end of the previous quarter, with about 83% of employees dedicated to engineering. Approximately 73% of our total head count is located in Asia, primarily in Taiwan and China.

We ended Q4 with cash and marketable securities of $307.9 million, adding $30.3 million of cash from operations in the quarter. For the full year, we added $123.6 million of cash from operations. Total accounts receivable at the end of Q4 2016 were $39.4 million or about 52 days sales outstanding.

This compares to accounts receivable of $46.3 million or 45 days sales outstanding in the prior quarter. Net inventory at the end of Q4 was $18.2 million or about 76 days, compared to $22.8 million or 69 days at the end of Q3. Accounts receivable and inventory remain in line with company targets.

WT Microelectronics, our Asia logistic supplier, represented 63% 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 18% of revenue for Q4 of fiscal 2016 compared to 37% 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 Q1 of fiscal year 2017. We expect revenues for the first quarter of fiscal year 2017 ending on April 30, 2016 to be between $55 million and $57 million, representing a decrease of between 24% and 20%, respectively, from Q1 of last year.

In our December earnings call, we said that we expected a moderate decline in Q1 year-over-year revenues due to inventory adjustments at GoPro.

Since that time, the actual demand from GoPro is expected to decline to the low single-digits as a percent of revenue in Q1, with the likelihood that this weakness will continue at similar levels until the launch of any new products with our chip. At this time, we remain cautious until we have a better picture of end user demand in this market.

But, as a result of expansion of our other wearable camera business, our Q1 wearable revenue should remain in the mid-teens as a percent of total Q1 revenues. We expect flying camera and automotive aftermarket revenues to continue in line with our growth expectations.

In IP security, we are anticipating a small year-over-year decrease in Q1 revenues due to softness in professional security demand from North America end customers, combined with flat revenues in China. We estimate Q1 non-GAAP gross margins to be between 60.5% and 62%, compared to 64.1% in Q4 and 64.8% in Q1 of the prior year.

Margins from camera products are expected to decline from Q4, primarily due to an increase in lower margin revenues from the China IP security and North American home security markets, as a percent of overall revenue. We expect non-GAAP net income for the first quarter to be between $8 million and $10 million.

We are using an estimated non-GAAP annualized effective tax rate of 7.5% for the net income amounts. We estimate our diluted share count for Q1 to be approximately 34 million shares. I would like to thank everyone for joining our call today, and now I will turn it back to the operator to manage the Q&A session..

Thank you. Our first question comes from the line of Kevin Cassidy with Stifel. Your line is open..

Thank you. Thanks for taking my question. George, last quarter, you gave rough guidance for fiscal year 2017.

Do you want to update that guidance?.

I'm not going to update it on this call. I think, as everybody recognizes, the headwinds we have in the sports camera market, it is going to be a challenge this year. But I think, at this point, I'd like to see the timing, and really when this sort of revenue stream will start coming back.

So, I think once I understand that better, I will update the annual numbers..

Okay. Understand. And it seems what you're doing in automotive, and especially with Gentex, was exciting, you showed at CES.

Can you give us a little clearer view on what the revenue stream might look like? When you'd start recording revenue in the automotive market, maybe on an OEM basis?.

I think we haven't really changed our position. It would be towards the end of next calendar year. We would expect to be able to announce customer wins..

Okay. Thank you. I'll get back in the queue..

Thank you. Our next question comes from the line of Matt Ramsay with Canaccord Genuity. Your line is open..

Thank you very much. Good afternoon, gentlemen. Obviously a lot of moving parts here. There's been quite a bit, I guess, written about and discussed about the competitive landscape in the IP security camera market, particularly in China, with two of the big vendors there.

Fermi, maybe you could walk us through, or discuss a bit, the competitive landscape as you see it, particularly in that market, with Huawei and potentially other competitors.

And how that competitive landscape may change as your 14-nanometer products are introduced? How relevant are the new technologies in your 14-nanometer products to that IP security camera market overall? Thanks..

Thank you. First off all, I'd like to say, we don't see the competitive landscape changing at all in the last three months. And HiSilicon continue to be our major competitor in IP security cameras. And they have been really focused on HEVC solutions. And we continue to work on our advanced technology.

In fact, we announced our 4K HD SoC in last year, and also our new S3L SoC in October last year. And you noticed that we just announced our 14-nanometer chip, which can do 4Kp60. And I believe that chip can be used in security camera, and will be used in security camera.

So, overall, I believe that we have a complete roadmap and sustainable (25:49) advantages in terms of video quality, compression efficiency, and power and CPU performance. And I also want to add that, inside China, we see HiSilicon as a major competitor. Outside China, we don't see that much.

And on top of that, we're still very comfortable with our 59% to 62% gross margin target, which already included all of the competitive landscape I just mentioned..

All right. Thank you. That's helpful. George, maybe as a follow-up for you. Obviously, the sale at GoPro and all the things that have happened there over the last few months has affected your outlook and your visibility. I guess a couple of things for the business outside of the wearable space.

One, overall in that business in your guidance, how are the growth trends on a year-over-year basis for sort of the ex-GoPro business overall? And secondly, one of the other things that you had mentioned that affected the outlook was inventory of chips at your distribution and logistics partners.

How healthy is the channel as you see it right now across the different end markets of the business? Thanks..

Yeah. First of all, I think you noticed in there, we did point out that our other wearable customers are growing. We still expect wearable to be in the mid-teens of our revenue in Q1. You have flee cameras, you have other sports cameras. So, those markets are growing. They're off a small base.

But we feel comfortable that this year that they'll meet our expectations. So, we're thinking in light of the declining GoPro, some of that will be offset by other customers. Now the other question was on end markets and inventory. Other than the GoPro channel, inventory levels are at normal levels.

We do see a little excess inventory in North America security on the professional side, but on the consumer side those are fine throughout, drones are fine. So, we're pretty comfortable with the rest of the inventory levels out there at customers..

Right. Thanks. I'll get back in the queue..

Thank you. Our next question comes from the line of Jagadish Iyer with Redstone Technology. Your line is open..

Yeah. Thanks for taking my question. Two questions, George. First, if I look at the various buckets that you have in your segments between sports camera as well as IP security and so on.

How should we think about it in terms of fiscal 2017, in terms of the kind of broad strokes in terms of the growth? In fiscal 2016, you grew 44% despite a headwind in your sports camera market. How should we be thinking about that as we just broadly look at fiscal 2017? And then I have a follow up..

Well, first of all, last year, we had substantial growth in our sports camera market in fiscal 2016. As we said on the last call, we're expecting a significant year-over-year decline in the sports camera market for fiscal 2017, primarily due to this first half headwinds.

Other than that, I think, we're comfortable with growth rates that we talked about in the other markets, year-over-year growth rates in security and drones as well as the automobile aftermarket. Obviously, the mix will change just because of the decline in sports.

And we would expect security to become a more significant percent of our overall revenue in fiscal 2017..

Okay. Okay. That's good. And, Fermi, you talked about an opportunity with regard to this doorbell if I heard it right..

That's right..

Yeah. Can you talk about more about that opportunity, which geography, what kind of dollar content should we be thinking about it? And, so that we can at least estimate in this kind of a new opportunity..

Right. First of all, the doorbell is a new application. And the function is very simple. When some people go to your home, ring the doorbell, in services have a ring.

In fact, you will trigger a camera, the camera will capture video using WiFi technology, streaming the video to your cell phone directly regardless whether you're at home or somewhere else. So, you can see who is at the door, and you can talk to the guy through audio and also decide what to do. So that's the technology we bring to our customer.

And we see a lot of these activities, in fact internationally. We have a lot of design wins in U.S., lot of design wins in Asia. We also start seeing Europe start doing this similar design. So, I think this is really the early phase of this market, it's hard for me to say about this market yet.

But, considering the value add to the consumers and also the response for our customer, I'm very optimistic about opportunity. And also, we have the technology. As you can imagine that there are two challenges in this technology. One is really power consumption, because the doorbell has to be operated at very, very low power, and that's our strength.

The other one is streaming video through very, very narrow bandwidth, that's another our strength. So, from both the point of view, we have technology advantage for this kind of applications..

And is there any dollar content that you can put to that particular opportunity at least per device or something like that, Fermi?.

Well, I would say that it's going to be starting with our low-end to mid-end of IP security camera type of work (31:49) ASP. I will say mid-to-high single-digits ASP is what we're looking at right now..

Okay. And our next question comes from the line of Daniel Amir with Ladenburg. Your line is open..

Yeah. Thanks a lot. Couple questions here. First of all, on your new SoC that you're coming out here, the development, I guess, at least in the 14-nanometer and potentially 10-nanometer.

I guess, what is the timing of some of these products or the roadmap? And second, what is the cost benefits that you expect to see with regards to these SoCs? And then I have one follow-up. Thanks..

Okay. So, our first 14-nanometer chip, H2, is available for sample right now. And we expect to see our customer ramping our product, let's say, very early next year. And I think I'm comfortable with that.

And so, but at the same time, we are ramping up multiple designs at 14-nanometers also we start working on the 10-nanometer design, which I think our first 10-nanometer tape out will be next year.

In terms of cost reduction, I have to say that based on 14-nano and 10-nano cost structure, I don't believe we get any cost reduction from a per millimeter type point of view. But the biggest benefit of 14-nanometer and 10-nanometer is providing a lot of power consumption saving.

So, for lower power application that's where we're going to focus this technology on. For the people who really don't care about power consumption, I think they are better off using our 20A nanometer process, which we have quite a few chips available already..

Okay. And just some housekeeping.

I mean, how should we look at OpEx and stock-based comp here next couple quarters, I mean, in terms of visibility?.

OpEx will come up a little bit as we go forward, as we talked about before. We're collecting a few more head count primarily in our computer vision area as well as additional 14-nanometer tape out fees. So, we would expect, we still expect investment in fiscal year 2017, primarily on the R&D side.

Stock-based comp will come up a little bit, probably flatten out in the first half over what we saw in Q4..

Okay. Thanks..

Thank you. Our next questions comes from the line of Ross Seymore with Deutsche Bank. Your line is open..

Well, thanks for taking my questions. This is (34:46) calling in for Ross.

With regards to the gross margin, do you still expect the back half of this year to decline from the Q1 level? And what are the puts and takes that you factored into that forecast? Also, understanding there is a wide range of margins by end product or end market, curious that do you see much margin compression within each segment, especially in drones and autos where you have higher margins or is product mix the primary swing factor?.

I think we're still very comfortable with staying within our target gross margin range of 59% to 62%. It has come down a little bit quicker than we originally anticipated, but the mix going forward, should not be that far off with Q1. The primary driver is mix.

The increase in security revenues, particularly China and home security, as a percent of the overall revenues is what the primary driver to lower those and the upside driver on that is drone. So, we always have the opportunity that drones outgrows what we're forecasting the potential for upside is there.

But right now, we feel the current 59% to 62% is pretty solid for the year..

Okay. Thanks. And then my follow-up question is, we've been hearing reports about more competition especially in China. I guess, this is kind of across different segments.

What changes have you seen in the competitive dynamics there?.

Well, this is Fermi. I think, as we have said, we have, I'll call, our major competitor in China is HiSilicon. And starting two quarters ago, Qualcomm (36:32) tried to compete with us on the drone side.

And since the IPO, I've been talking about, there are many, many Chinese and Taiwanese semiconductor house tried to compete with on the low end, on the price side. And that structure hasn't changed in the last three months. And while we continue to move forward with the higher and better SoCs, our competitors moved up too.

So, in fact, we still come under the high end very, very competitive in mainstream and competing on the price on low end, that, it doesn't change. In fact, from the last three months, we don't see much of HiSilicon. The competitive stream exchange (37:12) with HiSilicon and Qualcomm.

And on the low-end side, there are many people try to come in, but from the low-end product side, I think that those guys probably competing more with the HiSilicon and core competitors..

Okay. Great. Thank you..

Thank you. Our next question comes from the line of Quinn Bolton with Needham. Your line is open..

Hi, Fermi and George. Well, first off, on the gross margins, George. It sounds like if the mix is going to stay fairly flat over the next couple of quarters, the gross margin outlook doesn't change much from what you're guiding in the April quarter.

I guess, my question is, to the extent that you do see a recovery in the sports camera business second half of the calendar year, is that a positive for gross margin or does that potentially represent pressure for gross margin?.

I would expect the mix just to remain at the high end in that market, which then would be in line with our gross margin..

So, it'd be neutral if it comes back?.

Yeah. And it depends also what region and volumes and price breaks that we have to give to sell those (38:30). The lower – let's say, the recovery, the higher the pricing would be..

Got it. Okay. And second question, back around at the time of CES, you'd mentioned you were seeing some promotional activity in the China security market that you thought might create sort of a pause in demand in the April quarter. If I heard you right, it sounds like you're guiding professional security to be approximately flat in April.

Just wondering if you could give us an update on what that promotional activity was, and whether you think it has any sort of hangover in the April quarter?.

Yes. In fact, you're right. I think the promotion is done, I think that also you see the result, our Q4 number has a growth on the professional IP security camera. And on the China side, after Chinese New Year, the updates, we're still conservative on that. Our customer is still being conservative on that.

But it entails that, like you said, a lot of inventory to sit down. So I think, while we continue guide the China is flat and shows that I think, we're neutral on this market and continue to watch what's going to happen in the next several months..

Okay. And then last question for you, Fermi. I know you mentioned that HiSilicon is really pushing HEVC. It sounds like there're still patent issues around HEVC and the adoption of HEVC.

So, from your perspective, are you seeing the security market willing to adopt HEVC solutions, or are there IPR issues that kind of keep that H.264 market in the near term?.

Yes, you're right. And I think the HEVC patent issue is still lingering there, and we haven't seen much progress recently. However, I think a lot of our Chinese customers are assuming that the royalty issue is a much lesser issue in China for them, so they are more willing to take our HEVC adoption than people outside of China.

So, I think that's why HEVC, you'll see more momentum in China than anywhere else..

Yeah.

That's why HiSilicon can push it as aggressively as they are?.

And also, we are pushing very aggressively in China also, after we announced the S3L and S3LM and also our latest H2, and we are very competitive and very complete roadmap for HEVC also..

Great. Thank you..

Thank you..

Thank you. Our next question comes from the line of Charlie Anderson with Dougherty & Company. Your line is open..

Yeah, good afternoon. Thanks for taking my questions. I want to ask about IP security. I think in the past, you've mentioned what percent of security maybe home security was, and I wonder if there was any update there.

It sounds like that may grow a little bit if IP security professionally is more flattish to maybe a little down? And then also on that line, you mentioned North America down, is that just a function of market share, in terms of the China competition, any color there would be helpful?.

Yeah. I think, on North America first, I think that is shifting – in a shifting demand. I think actually, Europe is doing a very good job in North America, as well as the Chinese competition. So, those two geographic regions have picked up market share..

On the consumer IP-cam side, I think, we've been talking about – we have two different market, one is retail channel, one is service provider channel, and we continue to see strong demand from both. And we continue – we believe there will be a high growth rate for us in the consumer IP-cam in the coming year..

Great..

We expect that – yeah, I was just going to say, we expect that to become a bigger percent of our overall IP security revenues in fiscal 2017..

Great. Thank you for that. And then the follow-up for me was, Fermi, you talked about computer vision and you're certainly investing there.

I wonder, as we look at your end markets that are most setup for that, drones, and if you think about auto, I wonder what the battle looks like in terms of, did the Tier 1s want to do that themselves versus take something from you, is this more of a Tier 2 to Tier 3 market for you, or is there an opportunity at Tier 1 for computer vision? Any color on that would be helpful..

Yeah. I think all the Tier 1 want to do themselves, but it doesn't mean they want to do a chip themselves. In fact, they all have their computer vision algorithm.

So our strategy is to provide a chip which is really target computer vision application by optimizing (43:19) optimize for the computer vision algorithm, then write our own algorithm on top of that as a reference design, and giving the reference design to Tier 1, Tier 2 customers, that they can put their algorithm on top of that, so they can have a differentiate technology, that's our strategy.

So, you're right, Tier 1 all wants their own algorithm, but they don't mean – that doesn't mean they want to build their own chip..

Got it. Thank you so much for that..

Thank you. And our next question comes from the line of Marc Estigarribia with Chardan Capital Markets. Your line is open..

Thank you for taking my call.

George, Fermi, maybe you can just give us a little bit of an outlook for the drone market, the TAM, and what did you expect this year in terms of that addressable market? But also, I guess more importantly to Ambarella, what is your marketing strategy, your position strategy, to capture those design wins on a mass market scale?.

One is, we need to continue to dominant the high-end. High-end is the majority of the market, right now (45:29) high-end is more like DJI, Phantom 3 or Phantom 4 type of product.

And in there, they need a best video quality, best compression efficiency, lower power consumption, very good video performance, that plays to our strength, and also those products will require our best chip, for example, as we expect our H2 chip will play in that market on the high-end side, so to provide 4Kp60, even 4Kp120 solution, that's still what we like to have.

And at the same time, for lower end market, we see a huge amount of momentum there, trying to build any price – price range of $199 to $499, that's called the lower end drones, and we introduced our A12 and H12 products at a very competitive solution, in fact, our customer – I fully expect our customer will use our chip, a single-chip solution in there and providing a solution that give them (46:31) lower 4K solution, but more importantly, we will be able to enable them to do electronic images realization instead using a mechanical gimbal that will save a lot of cost on it.

So from our strategy point of view, we are focusing on continued differentiate on the video quality compression efficiency, power consumption, image stabilization for both high-end and low-end, but we have differentiated to support two different markets..

Great. Thank you for that.

And if you can just comment a little bit about the competition growing specifically on the low-end, how big is the risk do you think in terms of possibly losing design wins to Qualcomm on the GoPro sockets?.

Okay. So in fact we know that the Qualcomm are talking to our customer, but we don't see them making much progress with camera solutions. In fact, we still believe that their current ad processor base solution is quite behind video quality, compression efficiency, power consumption, video features and performance.

And for your information on GoPro drone, I cannot make comment on that, but it's a high-end drone like a DJI Phantom 3. If you look at DJI Phantom 3, there are two major components in there, one is the camera SoC, the other one is a microcontroller for fly control.

And in that particular design, we play only on the camera SoC side, and we notice that Qualcomm is trying to replace the $5 microcontroller with ad (48:14) processor for the flight control functions. That might be the angle they are working on right now. So that's on the high-end drone.

But on the low-end drone side really no strong need, everything either not only low cost but also image stabilization, power consumption, video compression, everything, I think we are very well positioned. We have multiple solutions out there. I believe Qualcomm will try to come to compete, but I think we're ready..

Great. And just one last follow up please, thank you for that.

In terms of the next catalyst for the mass market device or the mass market socket product to deliver, do you think we're kind of neck-and-neck in terms of auto OEM versus drones? What sort of any color that you can give in terms of which we should expect first or sort of what's going on there?.

I think drone is definitely the near-term growth opportunity for us. But however, if you look at the potential market size, I have to say auto OEM is a lot bigger than drones at peak.

So, while we continue trying to compete with the drone with our latest technology, and we continue to invest on different technology so that we hope we can play in automotive OEM later, we're talking about two years, three years, four years, five years later.

So I think that drone will continue to give us a short-term growth, and hopefully we have long-term growth on the auto OEMs..

Great. Thank you for the color. I appreciate it..

Thank you. And our next question comes from the line of Brad Erickson with Pacific Crest Securities. Your line is open..

Hi, guys, thanks for taking my questions. First on the drones, you've talked historically or, I guess, in fiscal 2016, that it was going to be about or maybe even a bit above 10% of revenue.

What are your expectations for drones as a percentage of revenue within your fiscal 2017 plan?.

We would expect it to increase. Most likely it could get as high as the high teens as a percent of revenue during the year, with the decline in the wearable sports camera, obviously the other markets will be a larger percentage..

Got it. That's helpful. And then, I think – sorry, I dropped off the call, but I think you said that you were not making any adjustment to the full year outlook in terms of the revenue outlook, but did comment on some less clear visibility in the near term.

Is that just strictly around sort of the demand environment for GoPro, or is there something else going on there in terms of like timing around new products?.

Well, it's both. I mean, we have the historically old products, which we probably won't be delivering anymore, chips too. So depending on the launch cycle, like GoPro, we really determine when we would start ramping the GoPro business.

In addition to that, we did mention that we're still watching China professional security closely to see how that progresses over the year..

Got it. And then finally, can you just update us on the -you talked about – no update to the revenue outlook. Can you talk about the operating margin outlook and just kind of whether the previous comments you made last quarter in terms of the implied OpEx for the year, if those are still generally consistent? Thank you..

Yeah. I have not – I didn't update the 15% to 20% growth rate on this call. We'd like to see how over the next few months, how the – let's say, the wearable sports camera market, the timing of the recovery there and the extent of the recovery.

Once we understand that little better, I would probably say, update probably on the next call, where we think the year will be. Obviously, it's a bigger challenge now because we do feel that the GoPro situation will extend into Q2. So we will be watching that in the China security business quite closely..

Okay. And our next question comes from the line of Richard Shannon with Craig-Hallum. Your line is open..

Well, hi guys. Thank you for taking my questions. I guess, just a couple of questions from me. Fermi, I'd like to follow up on one of your replay to the question a few minutes ago regarding, seeing more competition from kind of lower end solutions, coming from vendors out of China, Taiwan et cetera.

As you think about the entire market, and you obviously have a number of segments you're dealing with where trends could be different that.

But to what extent do you see a continued or even more aggressive push towards higher end solutions where you typically do well, versus kind of more mainstream ones where the competition is little bit more fierce? And are there markets specifically where you're seeing any meaningful changes or still (53:10) maybe two quarters ago or something like that?.

Right. First of all, to clarify that what I say about Taiwan, China low end competition. They have been there for a long time, it's not just happening recently, and they have been consistently trying to compete on the low end side. And if you partition in the business into the high end, the mainstream at low end, they only play on low end side.

Our mainstream business is really competing on an IP security cameras competing with HiSilicon, and on the sports side or drone side, they are much less a competition there.

So I think from a competition point of view, we don't see that it's – there is anything changing in the last three months, and if you ask me who I'm worried the most, I still think the HiSilicon is the one that we watch the most, that we make sure that we can continue to compete with that.

Especially in this one call, we will continue to mention that we are very comfortable with the 59% to 62% gross margin, that already considered all of the competitiveness situation including HiSilicon, Qualcomm and all the low end guys you mentioned..

Okay. Fair enough. I think, just one more question from me regarding the H2 product that you introduced couple of months ago. I missed the answer about, when you expect to see first revenues for that product.

And is that timeframe changed at all since you introduced the product, and if so is that due to customer schedules or more internal to Ambarella?.

No, I think, the schedule didn't change. I think, very early next year, you should start seeing the – we always our customers – to answer that question, for any other product in the past, we always say, our customer take it nine months to 12 months after we give them sample to go to production. Consider H2 is our newest high-end chip.

We expect that our customer will take a little more time. So 12 months is probably right time for us. So from that point of view, since we already gave a sample to the customer, we will release SDK to the customer. I fully expect that we're working closely with the customer, hopefully we can tell them to go to (55:23) as quickly as possible..

Okay. Great. I appreciate that clarification. That's all the questions from me, guys. Thank you..

Thank you. And our last question comes from the line of Kevin Cassidy with Stifel. Your line is open..

Thanks. Thanks for letting me to have a follow up. The Phantom 4 was announced yesterday and had collision avoidance from DJI.

Is there any hooks or anything in your SoC that helps that, is that part of a computer vision product strategy?.

Well. First of all, since the DJI didn't say anything about how they implement that computer vision things, I would like to refer them to answer most of that. But, one thing I can say that the computer, their computer vision algorithm is not running on our chip yet (56:12)..

Okay. Great. And then, also just as a follow up there, I believe GoPro has made some acquisitions around video editing.

Would there be features in your new chips that would augment or help the video editing?.

Again, that is a new product for GoPro. So I would let GoPro to answer that question..

Yeah. Okay. Thank you..

Thank you..

Thank you. And, this concludes our Q&A session for today. I would now like to turn the call back over to Dr. Fermi Wang for closing remarks..

And everybody, thanks for joining us today. And, also, I want to send a very special thanks to all of our employees for their dedication and the support. And thank you, everybody. Goodbye..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day..