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

Matthew Ramsay - Canaccord Genuity Kevin Cassidy - Stifel Suji Desilva - Roth Capital Partners Quinn Bolton - Needham & Company Ross Seymore - Deutsche Bank Jagadish Iyer - Redstone Technology Research Charlie Anderson - Dougherty & Company Brad Erickson - Pacific Crest Securities Richard Shannon - Craig-Hallum Joe Moore - Morgan Stanley.

Good day ladies and gentlemen, and welcome to the Ambarella Third Fiscal Year 2017 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Ms. Deborah Stapleton, Investor Relations. Ms. Stapleton, you may begin..

Thank you, Katherine. Good afternoon everyone and welcome to Ambarella’s third fiscal quarter 2017 financial results conference call. Thank you for joining us today. Our speakers will be Dr. Fermi Wang, President and CEO and George Laplante, CFO.

The primary purpose of today’s call is to provide you with the information regarding our fiscal 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 those 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 25, 2016 for the 2016 fiscal year and quarterly report on Form 10-Q for our second quarter of fiscal year 2017 that we filed on September 8, 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 website. I will now turn the call to Dr. Fermi Wang..

the Inspire 2 and the Phantom 4 Pro. That set a new standard for aerial imaging. Both drones support 4K ultra HD video at the 60 frames per second, the industry’s first models to do so. The Phantom 4 Pro camera features a 1 inch 20 megapixel sensor, 12 stops of dynamic range, mechanical shutter and the 30 minutes flight time.

The high end Inspire 2 supports the mounting of Zenmuse cameras and include obstacle avoidance and intelligent flight mode. Both the Phantom 4 Pro and Inspire 2 include Ambarella’s H1 4K camera SOC which can record video in both H.264 and H.265 video codecs.

In the wearable sports category, market leader GoPro introduced its new Hero5 Black and the Hero5 sessions models at $399 and $299 respectively. The new models include 4K ultra HD video at 30 frames per second, electronic image stabilization, integrated GPS, voice control and waterproof housing.

The Hero5 Black includes a 12 megapixel photography and supports RAW and HDR modes. While the H5 sessions supports 10 megapixel photography. Both new models are based on Ambarella’s A9 SOC. During the quarter Nikon introduced its KeyMission 170 waterproof action camera.

This is the first Nikon camera to be based on an Ambarella solution and leverages our A9AC SOC to enable 4K ultra HD video recording and 8.3 megapixel photography.

Also during the quarter Chinese action camera maker EKEN started shipping its H8 and H9 families of action sports camera offering 4K ultra HD video, wifi connectivity and electronic image stabilization at a sub-150 dollar price point. The cameras are based on Ambarella’s A12 SOC.

In non-sports wearable camera market, Ambarella provide solutions for variety of body-worn design including the majority of the world’s police cameras. In November, Snap Inc introduced spectacles. These are sunglasses that include a camera that can take a 10 second snaps and wirelessly added into memories of snapshot.

Spectacles use an Ambarella low power HD SOC. In the home monitoring camera market we are continuing to see significant growth.

During the quarter a number of the leading retail operators introduced new cameras with an increasing focus on high quality HD video, battery power for ease of replacement and embedded intelligence to minimize number of false alerts.

Leading European electronic manufacturer Bosch allowed its entry into a smart home IoT market with the introduction of two Ambarella based consumer ID cameras. The Bosch 360 indoor camera offers to 360 degree coverage while the Bosch outdoor camera integrates HD camera into a live picture.

The cameras offer two way voice communications, intelligence image analysts to avoid false alarms and are supported by Bosch’s smart camera apps and a cloud storage service.

And in August, Nest began shipping its Nest Cam outdoor camera building upon the success of its existing Nest indoor cam model, supporting 24/7 streaming, the new water resistant model has 2 megapixel resolution, eight times new night vision and two-way audio.

The cameras can also be packed if a human is present enabling to send us special alerts to use a smartphone including a picture of events. In September Canary introduced its new flash battery powered IP camera based on Ambarella’s H2L SOC.

This indoor outdoor weather proof HD security camera can be used wirelessly or plugged in to provide ultimate flexibility in camera placement. It includes the various features such as night vision, wide angle viewing, two way audio encryption and eliminates the need for separate base station.

Also during the quarter, Simplest [ph] introduced its first camera sold for only $99 [indiscernible] based on our H2LM SOC. This indoor camera offers intelligent multi-based recording, 30-day media storage and a seamless integration with Simplest H DIY security system.

In the professional security camera market we're seeing continuous growth in IP security camera as well as new opportunities in camera supporting HD video over existing analog coaxial cable or technology commonly referred to as analog HD or HD CCTV.

During the quarter Chinese security giant Daiwa began shipping its next generation of analog HD solution including two 4 megapixel cameras in polar and iBall form factors, leveraging Ambarella’s H2LM SOC for advanced image processing, the cameras offer excellent image quality over existing coaxial cable and support wide dynamic range processing to capture image details in high contrast lighting conditions.

Daiwa also introduced its latest IP camera the HDW 4830, eight megapixel iBall camera based on Ambarella’s H3 SOC. The camera includes 4K video and can support both H.264 and H.265 video formats. Also during the quarter network solutions supplier Ubiquiti began shipping its unified T3 and T3 door IP cameras based on Ambarella’s H2LM SOCs.

The cameras support full HD video indoor and outdoor operation while hybrid cloud technology enable secure local storage and a convenient re more access and allow additional licensing or maintenance fee. In the automotive video camera business we are seeing accelerating production of advanced camera video recorders by car manufacturers.

Automotive OEMs are responding to continued interest in Asia and Eastern Europe and they're now offering OEM branded video recorders for [indiscernible] and dealership options. During the quarter Mercedes Benz started shipping its integrated ecosystem featuring an Ambarella based HD camera for incident recording.

European regulation requires that all new car be equipped with equal technology starting from April 2018. In the event of a serious accident eco automatically connects to an emergency center for voice communications with optional pre-event recording and a live video footage.

Initially the camera is being provided as a built-in standard feature for Mercedes Benz cars sold in Russia.

Also during the quarter Japanese automotive giant Toyota introduced a family of dealer feed drive recorders based on Ambarella’s H2 [ph] and A128 SOCs supporting full HD video recording at thirty frames per second, the cameras provides drivers with a reliable video and audio advantage in case of accident.

And in November Chinese automaker [Cheng Yen] introduced its CS95 SUV at the Guangzhou auto show. The new model features an integrated full HD driver recorder based on Ambarella’s H2LA SOCs.

And in automotive aftermarket Thinkware the leading Korean video recorder manufacturer introduced its flagship Quantum model with two channels quad HD video recording. It offers twice the number of pixels of standard full HD video recorders and features integrated event departure warning, fore closure warning in a night video recording.

Looking forward we see significant opportunities for computer vision technology across multiple markets, including drone, IP security camera and automotive camera.

Ambarella is continuing to invest heavily in computer vision development building upon the pioneering computer vision and autonomous vehicle award done by our combined Ambarella and the VisLab teams. We remain on track to ship out first computer vision chip in the beginning of next year.

And on November 8, Italian Prime Minister Matteo Renzi visited VisLab citing them as an example of a successful Italian startup with a strong vision and solid execution. Mr. Renzi reached the facility in Pama on board VisLab’s latest vehicle prototype driving in autonomous mode together with Alberto Broggi, Ambarella’s Italian general manager. Mr.

Renzi was impressed by the smoothness of the ride and commented positively on a vision that VisLab has developed in the past twenty years. With that I will now hand it over to George for more details on the financials and our Q4 guidance..

Thanks Fermi and good afternoon everyone. Today I will start with a review of the financial highlights for the third quarter of fiscal 2017 ending on October 31 2016 and then review the financial outlook for Q4 of fiscal year 2017, that ends on January 31 2017.

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 for Q3 we have eliminated stock based compensation expense, adjusted for the impact of taxes.

Our Q3 2017 revenue of $100.5 million represents an increase of 7.8% from the $93.2 million of revenue in the same period in the prior year. In the third quarter consumer security and wearable cameras demonstrated strong year over year growth.

In the wearable market we saw a strong year over year and sequential growth led by the production ramp of the new Go Pro Hero5 line of cameras as well as the non-sports wearable such as police cameras.

As a reminder the comparison to prior year revenues for Go Pro is somewhat difficult as a significant portion of their product launches occurred in Q2 rather than Q3 last year.

On a year over year basis estimated revenues in the IP security market returned to growth with the professional security recovery a strong sequential growth in home security demonstrating strong year over year and sequential growth.

The drone market was down both year over year and sequentially primarily due to the timing of product launches as manufacturers continued to incur delays in the launch of new products or incurred production issues causing a barrier to meet market demand.

The Q3 automotive aftermarket revenues were down year over year primarily as a result of continued softness in China. The impact of the CMOS sensor shortage in Q three was in line with our expectations with 2 to 3 million of revenue either lost or delayed.

We now expect the shortage to continue but at a slowing pace in Q4 for certain sensors with the impact primarily affecting new product launches by customers. Non-GAAP gross margin for Q3 was 66.3% compared 67.1% in the immediately preceding quarter and 65.9% in the third quarter of the prior year.

Gross margin in the quarter was higher than anticipated primarily due to the benefit receipt of approximately $1.1 million from the recovery and sale of inventory previously written down due to the yield loss in the manufacturing process. We expect one more quarter of positive margin impact from the inventory recovery but in a lesser amount.

Excluding this impact product margins were in line with our expectations. Non-GAAP operating expenses for the third quarter were $24.2 million compared to $23 million for Q2 2017 and $23.1 million for Q3 of the prior year.

As expected Q3 OpEx increased from the previous quarter due primarily to higher chip development cost as we invest more in 14 nanometer process node.

Non-GAAP net income for Q3 was $38.4 million or $1.11 per diluted ordinary share compared with non-GAAP net income of $36.6 million or $1.08 per diluted ordinary share for the same period in previous year. The non-GAAP effective tax rate in Q3 2017 was 9.6%.

In the third quarter the non-GAAP earnings per diluted ordinary share are based on 34.6 million diluted shares as compared to 33.9 million diluted shares for Q3. Total headcount at the end of Q3 was 658 compared to 654 at the end of the previous quarter with about 82% of our employees dedicated 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 $372.1 million adding $43 million of cash from operations in the quarter. Total accounts receivable at the end of Q3 were $41.4 million or about 37 days sales outstanding.

This compares to accounts receivable of $33.6 million or 47 days sales outstanding in the prior quarter. Net inventory at the end of Q3 was $23.3 million or about 59 days of inventory compared to $20.9 million or 82 days of inventory at the end of Q2. Accounts receivable and inventory remained in line with company targets.

WT Microelectronics, our Asia logistics acquire represented approximately 54% of our revenue in the quarter compared to 68% for the same period in the previous year. During the quarter for the first time we commenced significant shipments of chips directly to Go Pro rather than their ODMs in support of the launch of the Hero5 products.

As a result Go Pro represented approximately 30% of our revenue in Q3 of fiscal 2017 compared to 1% for the same period in the prior year.

To avoid any misunderstanding please note that the 1% of revenue generated from Go Pro direct shipments in the prior year did not include chips shipped to Go Pro’s various ODMs either directly or through WT Microelectronics for production of their camera products. I would now like to discuss the outlook for Q4 of fiscal year 2017.

We expect revenues for our fourth quarter ending January 31 2017 to be between $84 million and $87 million representing an increase of between 24% and 28% respectively from Q4 of last year. We are anticipating solid year over year growth in drones and wearable sports cameras with flat revenues from IP security and automotive markets.

The automotive market now includes revenues from video recorders in both the OEM and aftermarket channels. We estimate Q4 non-GAAP gross margins to be between 64% and 65.5% compared to 66.3% in Q3 of this fiscal year and 64.1% in Q4 of the prior year.

As I mentioned earlier we are expecting a positive gross margin impact from the recovery of previously written off inventory in Q4 but to a lesser amount than previous quarters.

We expect non-GAAP OpEx in the fourth quarter to be between $25 million and $27 million with an increase from Q3 primarily coming from increased chip development costs associated primarily with the initial development programs in the new 10 nanometer process technology.

We expect the non-GAAP effective tax rate to be approximately 11.5% in the quarter and estimate our diluted share count for Q4 to be approximately 35.3 million shares.

Although we expect to return to growth for the full year of fiscal year ‘18 our current visibility of Ambarella inventory levels held at our primary consumer product customers indicates there is a potential for a negative impact to revenue in the early part of fiscal year ‘18.

Whether we realize such an impact, and the scope of any impact will largely depend upon the holiday sell-through in these markets. Once we have a better understanding of the holiday sell through and the related impact on our customer year end inventory levels of our chips we can be more specific in our annual guidance for next year.

I anticipate providing a more detailed outlook on our year end earnings call. Today the company announced that its Board of Directors has authorized an extension of the duration of its share repurchase program initially announced in June 2016.

Under the extended program Ambarella is authorized to continue to repurchase up to an aggregate of $75 million of ordinary shares until June 30, 2017. In June the company repurchased a total of 405,089 shares in the open market for a total cash consideration of approximately $20.2 million or $49.80 per share.

Since that time the company has not repurchased any additional shares. Although the repurchase program does not obligate the company to acquire any particular amount of ordinary shares we will continue to evaluate the opportunity to repurchase shares for the remainder of the extended period.

Any repurchases of shares will be funded from company’s working capital. I’d like to thank everyone for joining our call today. And now we will turn it back to the operator to manage the Q&A session..

[Operator Instructions] And our first question comes from Matt Ramsay with Canaccord Genuity..

Good afternoon guys, thank you very much. George, maybe you could -- I know you've provided some details in your prepared script.

But maybe you could walk us through a little bit more of the moving parts on a segment basis for the guidance, and the guide is impacted by a number of things, sound like a bit more weakness in the drone market than I had anticipated and obviously from seasonality with some of the consumer customers.

So any additional granularity on a per segment basis that you can give on the January outlook would be really helpful. Thank you..

I think I mentioned that that drones and wearable would be stronger in Q4. I think professional security although it's flat year over year that does I think show a continuation of the strength in China that we saw in Q3. So I think we're reasonably happy there.

And on the home security market that just continues to be really strong for us in the quarter. So I don't think there was really any surprises in the quarter. We saw drones come back a little bit in Q4, we will see it we think and home security and sports cameras remain strong.

Fermi, it was good to hear you discuss some of the traction in the automotive market for the data recording application, I think you mentioned Mercedes and some dealer outfitting at Toyota as being two of the newer customers in addition of the some that you've had in the past.

I guess two things, one may you could talk a little bit about the revenue per car opportunity for that application and how the data recording application might be to some, I don’t know, mirror application and other camera applications at the same OEM, is there a direct correlation that, how we see that pipeline development in those OEM over time? Thanks.

.

Right. I think as you know that every brand has multiple different models and we start shipping, we sell the models but not all of the model. So I think the revenue ramp is going to take a while but we are very excited that we finally get into those models. In terms of the ASPs, it really depends on the quality level.

As you know that to sell the car requires the temperature range, some of the cars need AEC Q100 and some of the cars might even require ASO compliance in the future. So all those quality points have different price points associate with it.

What I can say is that point right now for the current model we are looking as a high single digit and probably in the future if we go to the AECQ it can potentially be higher than that..

That's helpful and then George, I will just finish up with this, and I will get back in the queue. But you obviously gave some forward commentary about inventory levels of your chips at your customers into next year.

Anything that you can give us that might want to fire that potential impact and I guess how conservative are you trying to be with that outlook going forward given I guess the lack of visibility of the sustained sell through of some of the products? Thanks. .

And yeah I think I really can't give any more -- I can't quantify it any better, I don't think at this point but I think you have to realize first that we have a higher concentration of consumer revenue in the second half of this year and it is across multiple markets.

And I think each customer, they vary their inventory levels from suppliers based on a multitude of factors such as cost or lead times.

So I really -- so depending on how each of our customers are able to burn off their supply of Ambarella chips by year end that will determine the impact to our early fiscal ‘18 revenues and I think it's a bit early right now to be able to quantify that.

But I just want to be clear really our inventory levels at customers are not necessarily a definitive indication of our customers’ success in selling their own products, primarily because they all carry different inventory levels..

Thank you. Our next question comes from Kevin Cassidy with Stifel. .

Thank you and congratulations on the great results. But for your guidance I mean maybe George description is for year over year.

Can you say what's the change quarter over quarter and which part of your markets are dropping down to come up with the down 15% quarter over quarter, is it just seasonal?.

Yes, you would see most of the markets – our historical run rates we've seen Q4 drop from Q3 and this is a fairly normal quarter. So almost across the board probably with the exception of our OEM auto business, most of the other markets drop between Q3 and Q4. So I think this is actually very normal. .

And I guess the home security market is fairly new for you.

So is that – with the seasonality is there, is that typically a January weak quarter?.

And I think it's going to be in the future. It is not so much this year. We're seeing a sequential ramp through the whole year including Q4..

In that market there's still a big chunk of the regional portion in there. So eventually I think you're going to see more and more seasonality in the future. .

And maybe just one other question on gross margin guidance.

If you excluded the previously written off inventory what would gross margin have been?.

It ends up just over 65%. .

Thank you. Our next question comes from Suji Desilva with Roth Capital..

Looking at perhaps a little further to fiscal ’18, can you talk about which two or three segments here, you're thinking, have the most growth opportunities? I know there is a lot of visibility challenge near term but maybe a longer term thought there. .

I'll give it a try. I think that first of all if you look at the dollar side, I still think that the drone become a bigger chunk of business and I definitely think stronger dollar side point of view I think drone can give us a more dollar growth.

But if you look at the percentage of growth I really think that consumer IP security camera as well as auto OEM business both of them are going to show very strong growth in percentage wise. So those three areas definitely things that we're focusing on right now.

And look, of course, there are other wild cards in there that we didn’t talk about, for example, we talked about that we’re working on VR cameras, it’s really a very hard to make a judgment how big that market is, that's why we’re being very conservative on that. .

And then another longer term question, the computer vision chip that's coming around the corner here.

What should be the end markets that they could target do you think would be one of the first ones for that and start showing up?.

I would guess it's going to be drones because there is an obvious demand for high performance computer vision chip in the drones. So although that market is not big but the requirements for the high performance computer vision chip is very clear..

And then just last clarification perhaps for George.

So are the drone program pushouts related to Sony image sensor shortage or not related?.

Not related to Sony at this time. .

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

I just wanted to come back to the professional security. George if I heard you, I think you said it was going to be flat year on year. If that's the case can you talk to us -- I mean obviously I would have thought you would have seen sort of a growth trend in that market just just given the move towards IP cams.

Is it the Sony CMOS sensors that’s still a dragon in keeping it business only flat year on year or can you talk about the dynamics in professional security a little bit more?.

Sure. There's two there's two things. There is some in impact from the Sony sensor particularly at the low end of the professional security market in China. And the second one which is actually more significant, if you go back to a year ago there was a significant ramp in China coming into year end.

So there was -- I think it was to a certain degree a bubble because we saw that drop off significantly in Q1 and Q2 and now we've seen it recover back to normal levels. So I think being flat year over year is actually a positive as it relates to the China market because last year's was somewhat artificially inflated..

And then sort of similar question on the drones. I think you said it would be up year on year but your comments, I think you said on a sequential basis really only automotive would be flat. So just wanted to see if you could clarify sort of the outlook for the drones into the January quarter on a sequential basis..

Well, we're struggling a little bit on the drone market because there are so many product delays. And there are some issues with manufacturing in customer area, so we're starting a little bit about getting the exact numbers there.

We think it can be – it’s going to be down a little bit sequentially which you would expect but I think a lot of it's driven by manufacturing issues, product delays, not necessarily we don't want to make it sound like there's a demand issue in the marketplace because in some cases some of the products are selling very well and there's a backward around the products, they just can't get them into the marketplace.

.

And then last one maybe for Fermi, sounds like the drone market will be the first market to adopt your machine vision solution as it comes to market next year .Just wondering looks like DJ I obviously the 800 pound gorilla in that space uses more videos.

Would you target -- trying to take that socket or do you see growth opportunities at other OEMs, just how do you position against sort of the incumbent on the machine vision chips at your largest drone customer?.

In fact, I would say that we are trying to sell our solution to all the potential OEMs there and DJI included. We know that videos is there but competition is competition, we need to -- I think we have a better chip and we target things to try to win as many design win as possible in the drone space..

Thank you. Our next question comes from Ross Seymore with Deutsche Bank..

I guess some of the questions about the fourth quarter sequential, George, could you just right size us on describing those end markets for the third quarter for the actual, just so we know what to grow off of?.

You mean as far as the percent of the revenue in there for Q3?.

Yeah or just if sequentials which grew which shrank, any precision you have on that would be helpful. .

Yeah, if you're looking at the biggest growth sequentially it’s got to be in sports cameras, the launch going from near zero at Go Pro to a full launch. So that's the most significant step up in the quarter.

If you look at professional security that was the second largest step up because we saw, as you remember, slow in professional security too in China in the first half. So those two were the largest step up. And then if you look at home consumer security has been steadily growing through the year. So those are the major step ups in the quarter. .

And we look into the quarter itself and even if we take out the benefit of selling written off inventory you still would have been at the high end of your mix.

If China was coming back, if the consumer security business was doing what was doing, why was the mix at the high end of what you guys had originally guided?.

Really in the new chip in sports cameras, there are solid margins there. .

And then as we look forward I guess this one's for Fermi, you talked a lot about the OEM traction that you're having with the embedded dash cams.

Talk a little bit about -- do you believe that has a benefit of you guys getting a better relationship with those same OEMs as far as the computer vision chips? Are they going to be similar enough relationships that the investments that you're putting in now and to the OEM dash cams will benefit the CV side of things going forward or are they sufficiently different?.

In fact, I would say that it’s the reverse. We got a better relationship with the OEMs starting by acquiring VisLab and then we get introduced to the OEMs, that when they try to find recorders, they remember Ambarella as part of that. So and then though quality recorders, we show them a very strong roadmap on the recorders side.

So I think really our CV investment, our acquisition of VisLab helped us to establish ourselves as a viable supplier to the auto OEMs..

Thank you. Our next question comes from Jagadish Iyer with Redstone. .

Yeah thanks for taking my question. Two questions I have, first George. I just wanted to drill down on the IP security camera in the U.S. What kind of success have you had so far and how should we think about its margins? And then I have a follow up..

Yeah IP in the U.S. for us is really dominated by the home security market and those are at the low end of the margin profile for the company..

But how about gross in terms of looking at like annual growth in that segment.

If you look at, say, in the October quarter of this year versus the last year?.

Well it's one of our fastest growing markets. A very high percentage growth rate but that’s a very small base. So we haven't given a percentage growth rate. .

Okay but that's fair enough. And then I just want to understand and this is, maybe I misunderstood this but if you look at historically Go Pro has Q4 to be one of their strongest quarters in the company history.

So I just wanted to understand given your guidance, is that a big step up for you guys or have they already purchased everything predominantly in your most recent October quarter?.

For the largest quarter for any of the consumer product companies is Q3 but we also have some revenues, holiday season revenues that occur earlier in Q4. So you do see an overlap there into Q4. .

Thank you. And our next question comes from Charlie Anderson with Dougherty & Company..

Yes thanks for taking my question. I just want to go back to the quad copter, we've seen product delays there, is that by definition sort of absolved from this sort of inventory overhang into the first half of the year, so drones are not impacted? And it sounds like that's helped I guess, I just want to clarify that.

And then secondly on consumer IP security, have we crossed over that 10% thresholds and what's the outlook going forward as a percent of revenue?.

Yeah, let's start with the consumer. It is right at that 10% level now. So it's getting – it’s been growing pretty steadily and we see that becoming a bigger part of our overall IP security.

On the drones they're – it hasn't all sorted out yet, there is a potential in certain areas that there could be excess inventory depending on how the manufacturing process works itself out..

And Charlie, this is Fermi, to add one more comment there. The consumer IP security camera percentage, because we ship a lot of chips to tech division of Daiwa and those chips using both professional and consumer, and it’s very hard for us to determine the ratio in most accounts.

So it's very hard for us to get very accurate as to measure how big is our consumer market for now. .

Yeah, the number I quote it was actually our North American number. .

Yeah.

Don't forget Bosch too, right, now that they're selling – yes, so Fermi, I just go back on your comment about drones being the big grower next year, are you seeing something from a feature set standpoint, from a price standpoint that sort of underpins your bullishness on that end market for next year?.

I think you see that both -- absolutely correctly. I think that the customer demand was a better feature and the price erosion are the drivers for this growth. And the price erosion is very clear.

Last year the most of the DJI drone above 1000, now we're booking anywhere between 499 to 999 as the mainstream and we see a lot of the CLP drones at anywhere between the 299 to 499 price range. So I think that price point is definitely a big driver.

And at certain time we continue to see a lot of our customer trying to innovate, for example, on the camera side DJI just announced a 4Kp60, at 60 frame per second is absolutely critical for the high flying drones to capture excellent video, because when you move so fast frame rate matters.

At the same time you see a lot of people trying to do a computer vision so that you can have a thunderstorm in the future. Even from the feature point of view I think there's a continuous innovation in the product and so both upgrade features as well as the price erosion are the drivers for the growth..

Thank you. Our next question comes from Brad Erickson with Pacific Crest Securities..

Guys, thanks for taking my question. Just a couple follow ups here. First, just any clarification, George, from your prepared remarks, you mentioned that there could be the negative impact to first half fiscal ’18 depending on holiday sell through.

Just wanted to clarify if you meant that the impact could result in negative revenue year over year for those quarters or if you just meant negative relative to your current expectation?.

Yes, negative to my current expectations. You know I mean if you look at the impact, we're talking more or less in that individual market what the impact of our Q1 is and not necessarily on the total quarter revenue yet. .

And then I am assuming within this guidance, the January guidance you are assuming drones to still be down, correct? Is that the case?.

Well there's a potential for it. We think it has also the potential to be growing. If we can get through some of these manufacturing and the get the ramps going..

That's helpful. And then regarding the growth next year, you said overall company expects to return to growth and I think Fermi may have added that the drones would be also a grower there. I think drone is probably close to doubled this year for you guys.

Are you guys materially expanding the number of customers that's driving that growth next year or is it really just your customers kind of dropping in price point as Fermi just talked about earlier, is it more of customer expansion or more of your unit expansion from existing customers driving the drone growth next year?.

I think the drones -- we gradually increased the number of costumers, in fact, we announced multiple in the last conference call. We talked about unit and also talked about solar customers in China.

So the number of customer is there expanding but however the big winner in this market is DJI and we do expect that DJI continues to expand to other unit sales next year and I think that's probably the biggest driver..

Thank you and our next question comes from Richard Shannon with Craig-Hallum..

Maybe first question for George just on the other comment about inventories in the first half.

Is that across multiple sectors or just consumer and what breadth of customer base of your friends are here?.

Now consumer, I think when you look at the concentration of consumer in the second half you have home security. You have wearable, you have drones. So there's a lot of consumer based companies that we’re monitoring the sell through. .

Is this different than what you've seen in past years around this time frame or is there some new development here that’s driving this commentary?.

Well, we have seen in past years but it's been with fewer customers and less of an impact. So this year with more of the customers involved we're being more cautious I think in trying to monitor. It's a little difficult for us to monitor sell through, particularly in markets like home security, we get very little data on that, that's current. .

That helped, so I was actually to ask question about that but I think that just answers that. Maybe question again for you, George, on gross margins here. You guys continue to exceed not only your quarterly guidance but also kind of your longer term model here.

Sounds like the new products you're selling to your top customer, historical top customer are favorable.

How should we think about gross margins over the next few several quarters, is there a time frame by which you expect to get more to that long term model you've consistently talked about for the last few years? Or can they stay sustainably above that level?.

I think I'm going to actually put that question off until our year end call. I think mix has so much impact on my margin profile that I really like to see where particularly the first half margin profile will be. I think longer term we still expect margins to move towards that, the timing is difficult to forecast at this point..

One last quick question for me. You’ve talked about some success here, really success you’ve had with recording applications in automotive.

Is that a noticeable material portion of revenues for automotive yet or is it still really quite small?.

It's not material yet but the trend is very clear that it's not only just a couple of OEMs we’re talking about, we are seeing strong momentum in China and in Europe I think that China particularly. So I think this is definitely a trend that we want to continue to follow up and we have high hope that this continues to be our growth driver..

Thank you. Our next question comes from Joe Moore with Morgan Stanley..

Great, thank you. I just had one longer term question on the computer vision side. I guess a lot of the focus lately has been on applying AI to those types of problems and versus sort of a neural type [ph] approach.

Can you talk about that how that might affect your sort of long term approach to that market and is there opportunity for you to be sort of an inference engine in these consumer applications for a neural type approach?.

Well, in fact that's definitely part of our approach, we’re using a CN type of approach for our object detection among other things that, that technology apply to and that's going to be available on our CV1 chip. All the following chip will use similar type of AI technology.

So that's definitely part of our plan, and in fact that's going to become here to be our long term plan too. .

And then if you think about that computer vision technology you talked about drones being the first area. What about surveillance? It seems like there's a lot of applications in surveillance as well.

How long might that take you to get that into market?.

Well, in fact that -- you are absolutely right. Security camera also has high demand on the computer vision but it’s in different performance level. For example, drone, you need to have an AI type technology to cover 360 degree view and probably need to have higher resolution. On the security camera side the performance requirement is lower than that.

So it's very hard to use a single chip to cover both markets. So that's why we keep talking about we want to be using building a first chip and continue to drive -- from there. So you should expect a strong roadmap from us to address using different chips to address different market requirements. .

Thank you. And we have a follow up from Matt Ramsay with Canaccord Genuity..

George, a couple of things with respect to the guidance that I just wanted to try to tease out or maybe clarify further. I think most of us had modeled revenue from your consumer segment down pretty materially in January on a sequential basis and then probably down again in April.

And so the commentary that you provided regarding inventory levels and the risk of visibility in the first half of the year, is that to try to indicate to us that you -- remind us of seasonality or is this an indication that things could get materially worse if sell through doesn't sustain some of your key customers there? I'm just trying to get an accurate framing of that.

And I think that commentary might have surprised some folks on at least the starkness of your commentary there. So just any clarification there would help. .

I don't know if I have any added clarification in what the results are. But we have so many consumer customers now, monitoring those sell-throughs is a little difficult. There is a lot of inventory build for the holiday season.

So we are being conservative going into the new year until we have better visibility on what those inventory levels end up to be. I don't know if I can give you any more specifics around that.

And I'm not trying to gauge the level of our concern at this point, we're pointing it out because of, I think, the high inventory levels that are in the channel right now..

That's fair. And then just one little follow up. I know we talked in the past about the enterprise security camera market and you've given some trends of how it was in the third and into the fourth quarters. But I think you guys had talked about that being sort of a 15-ish percent growth market for the duration of next year.

Is that still the expectation that that market returns to some longer term sustainable growth? That's it from me. Thanks. .

Yes we currently feel that the professional side of the market will maintain growth -- return to growth next year and this is driven a lot by the recovery in China. .

Thank you. And I'm showing no further questions at this time. I would like to turn the call back to Dr. Fermi Wang for any closing remarks..

Thank you and thanks for joining us today and special thanks to all our employees for their continued dedication and good bye for now. Thank you. .

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..