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

Joe Moore - Morgan Stanley Richard Shannon - Craig-Hallum Capital Group LLC Kevin Cassidy - Stifel Suji De Silva - ROTH Capital Matt Ramsay - Canaccord Genuity Ross Seymore - Deutsche Bank Quinn Bolton - Needham & Company Brad Erickson - Pacific Crest Securities Charlie Anderson - Dougherty & Company.

Good day, ladies and gentlemen, and welcome to the Ambarella First Quarter Fiscal Year 2018 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, Andrew. Good afternoon, and welcome to Ambarella's first fiscal quarter 2018 financial results conference call. We 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 2018 first quarter results. The discussion today and the responses to your answers will contain forward-looking statements regarding our projected financial results, 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, 2017 for the 2017 fiscal year.

Access to our first 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. I am pleased to report that our Q1 fiscal year 2018 revenue was $64.1 million representing an increase of 12.2% from the $57.2 million of the revenue in the same period of the previous year. Our non-GAAP revenue improved at 16.1%.

During the quarter we enjoyed strong revenue growth from IT security cameras, including both professional and home monitoring markets as well as continued growth in Ambarella Police Cameras and OEM automotive video recorders. We also saw a significant number of new 360-degree in the VR camera introductions.

At the recent ISC West Security Show Ambarella introduced S5L and S5Lm to enable a new generation of 4K security cameras. The S5L is designed for professional IP cameras and includes 4K High Dynamic Range (HDR) processing, multi-streaming, on-chip lens distortion correction, and dual video inputs.

The S5LM targets the home monitoring market, including battery-powered IP cameras and video doorbell cameras, and uses a single 16-bit DDR memory for low-power operation. Both chip families feature a quad-core ARM Cortex-A53 CPU for advanced analytics, and are fabricated in low-power 14nm process technology.

Also during the show Ambarella demonstrated some of the first practical implementations of the -- network based in the Olympics running our current security chips. This included battery powered camera with a person detection to avoid forced alarms and extended battery life and face detection and face recognition for intelligent monitoring.

Till quarter we successfully bought up our computer reading chip CD1. The chip is on schedule to send to customers in the second half of the year. Ambarella is continuing to focus our efforts on the development of a complete family over advanced computer vision SOCs targeting current as well as new market.

We expect to deliver between 2 to 3 new CV chips per year calling multiple price and the performance points. We believe our unique approach to building the platform will give our customers the ability to build a new and innovative solution to expand market opportunities.

In a professional IP security camera market, the adoption of the new HEVC video format continues to drive new technologies for our new low cost 4K capable S3L and S3LM camera in China.

During the quarter Hikvision world's largest security product supplier began volume shipments of an extensive new range of HEVC cameras S3LM and expanding from 2 to 8 megapixel resolutions.

Also during the quarter, Daiwa began shipping multiple new S3L base models including 2 megapixel - domes, 4 megapixel dome network cameras and the 2 megapixel PTZ cameras with 12 times optical zoom. We expect continued design win momentum in China for our HEVC IP security camera solutions based on S3L and the new S5L families.

In the whole monitoring market, we enjoy the continued activity for retail customers including new battery power designs and HD baby monitors. During the quarter, Motorola introduced its spherical orbit battery powered indoor and outdoor waterproof camera based on H2LM SOC. The camera features a full HD video and a wide 150 degree field view.

While its - supports continuous recording even if the internet connection is lost. Also during the quarter baby monitors start up managed introduced PANNOVO baby monitor integrated with an LED -- and the featuring temperature and humidity sensors.

Based on Ambarella's S2LM SOC the - camera uses computer vision to learn how the baby moves and to inform the parent if the baby is awake or sleeping. In the drone market, market leader DJI introduced two new Ambarella based drones during the quarter.

In March DJI introduced the Phantom 3AC in China retailing for around $500 based on Ambarella A9AC SOC. The new tool offers a 4K video 2 megapixel still, 720 light view vision positioning system and over 25 minute flight time.

And in April DJI introduced its new Phantom 4 advanced model featuring a new camera based on Ambarella H1 SOC which is a 20 megapixel sensor offering 4K video recording at 60 frame-per second and high dynamic range processing. The drone offers over 30 minutes flight time and retails for $1,345.

Although we are disappointed that the recently announced Spark drone from DJI did not use Ambarella solution. We realize that the customer growth in new market to open desire to have a multiple suppliers although we expect DJI to compete with multi source in the future.

We also expect that the DJI and Ambarella will continue to engage in the development of future products especially where image and the video quality are of primary importance. This is best demonstrated by the two new recently introduced Phantom models as previously discussed.

In automotive market Ambarella has traditionally supplied SOC solution for aftermarket fashcams as well as dealer installed accessories models. We are now experiencing increase in demand for camera video recorders being offered as original equipment by Chinese and Japanese automotive OEMs.

The Chinese automotive market is now the world's largest with 28 million cars sold in 2016 and therefore represents a significant opportunity for our automotive solutions.

During the quarter, Dongfeng Motor Corporation China's second largest automaker introduced its 837 car recorded which is installed in its Ax5 and Ax7 car models based on Ambarella A12A SOC. The car recorder includes 1080 P video HD wireless streaming and a light 158 degree viewing.

And the -- quarter Chinese automaker Changan introduced its CX70 XUV featuring an embedded camera design using Ambarella's A7LA SOC. The camera includes a full HD recording and displays the video on the cars navigation and the infotainment screen.

In the automotive retail market, Garmin introduced three new models the Dash Cam 45, 55, and 65W, sleek video recorders. The Ambarella A12A based camera features driver alerts such as a full collision and a lane depart warning and can notify drivers when traffic ahead begin to move.

The Dash Cam 55, 65W allows video recording of up to Quad HD resolution. While the Dash Cam 65 W also leverages the A12 the working capability to offer a unique 180 degrees field of view. In the wearable market, we are seeing increased adoption of a low power 60 SoC solution in body worn police cameras.

At the recent ISC West show, Panasonic introduced its Arbitrator body worn camera.

The robust camera includes wireless connectivity and is integrated with the Panasonic Evidence Management Software, based on Ambarella's A12 SoC, it includes support for full HD 1080p video, electronic image stabilization and provides more than 12 hours of battery life. Also during the quarter, [indiscernible] introduced its body worn police camera.

The new camera is designed to meet the Chinese government requirements to use the new HEVC encoding standard to provide a higher recording efficiency than the existing H.264 standard. The small form factor camera is Ambarella's H3 SoC with highly efficient HEVC encoding to provide 16 hours of 1080p recording in just 16 gigabyte of storage space.

And fueling this quarter, we sold an introduction of a number of new 360 degree VR cameras spanning profession, standard alone consumer and the smartphone attach accessories models.

The cameras typically employee two lenses to capture a full 360 degree view in a single Ambarella H2 or A12 SoC to capture, encode and [indiscernible] the UHD or ultra HD video strengths. While the VR camera market remains nascent, it's too early to forecast the size of market.

The new cameras surfaced by the increase in demand for immersive video-content driven by Facebook and YouTube support for 360 degree video and VR enhanced pay sets. At NAB conference held in April, YI Technology introduced its YI HALO camera aimed at professional and developed in partnership with Google based on Ambarella's A9SE SoCs.

The YI HALO is a 17-camera design capable of shooting stereoscopic video at up to 80 resolution and is built to work with Google's Jump VR creation platform. In the high-end 360 degree camera category Ambarella's H2 VR SoC empower true models introduced by Garmin and YI Technology.

Garmin's new rugged and the waterproof Virb 360 model captures spherical video in up to 5.7K resolution with a 360 degree video and includes GPS and sensors for augmented reality overlays. Videos and the photos are automatically pitched in the camera enabling fast sharing as well as instant live streaming.

YI Technology's 360 VR camera delivers 360 degree images and video, offer support for live streaming to Facebook and YouTube and is priced at a $399. In entry level 360 degree camera category, Ambarella's A12 SoC empowers two new models introduced by Xiaomi and Ion.

Xiaomi Mijia 360 degree panoramic camera records 360 degree video with a 3.5K resolution and includes image stabilization, Wi-Fi connectivity and 19 minutes battery life. Ion's 360 U smartphone camera introduced at the [indiscernible] in May includes a phone charging battery case and compatible dual-lens camera.

It captures 8 megapixel 360 degree image and can shoot up to 2 hours of a 4K 360 degree video.

In summary, in addition to continuing to grow growth opportunities in our existing market, we see the combination of video with computer vision technology as a primary driver of new activities in both current and emerging markets including OEM automotive and robotics.

Our investment in the development of new family of computer SOCs to enable our customers next generation of advanced video cameras will be the foundation for the future expansion of our business. Now I will hand it over to George for more details on the financials and our guidance for Q2..

Thank you, Fermi and good afternoon everyone. Today I will focus my review on financial highlights for the first quarter of fiscal 2018 ended April 2017 and then review the financial outlook for Q2 fiscal year 2018 that ends on July 31, 2017.

During the call, I'll discuss non-GAAP results and as such you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results for Q1 of 2018. For non-GAAP reporting for Q1, we have eliminated stock-based compensation expense adjusted for the impact of taxes.

Our Q1 2018 revenue of $64.1 million represents an increase of 12.2% from the $57.2 million of revenue in the same period for the prior year. Revenues in Q1 excluding sales to GoPro and our OEMs grew 16.1% from the previous year finishing the quarter at $62.5 million.

If Q1 we saw solid year-over-year growth in the IP security auto and non GoPro wearable markets. Along with the initial shipments into the virtual reality market, partially offset by a decline in drone revenues.

In IP security both professional and consumer revenues demonstrated strong growth led by a solid performance from the China security market and the home monitoring market in the US. Initial ramps in the OEM automotive video recorders plus in-line aftermarket shipments resulted in good year-over-year growth in auto market.

Drone revenues in the quarter were down from last year primarily due to weakness from Tier 2 drone customers. Non-GAAP gross margin for Q1 was 64.3% compared to 67.2% in the foreseeable quarter and 64.6% in the first quarter of the prior year.

The decline in gross margin from the previous quarter reflects the increase in lower margin China security and US home monitoring revenues as well as decline in higher margin sports camera market revenues.

In addition in Q1, we did not have a material impact from the recovery of previously written down inventory as occurred in the previous 3 quarters. Non-GAAP operating expenses for the first quarter were $25.7 million compared to $25.4 million for Q4 of 2017 and $24.3 million to Q1 of the prior year.

Headcount and new chip development costs continued to be the major drivers of operating expenses representing 67% and 16% respectively of total OpEx in the quarter.

Non-GAAP net income for Q1 was $13.4 million or $0.39 per diluted ordinary share compared with non-GAAP net income of $11.4 million or $0.34 per diluted ordinary share for the same period in the previous year. The non-GAAP effective tax rate in Q1 2018 was 14.9%.

In the first quarter, the non-GAAP earnings per diluted ordinary share are based on 34.7 million diluted shares as compared to 34 million total shares in Q1 of 2017. Total headcount at the end of Q1 was 672 compared to 669 at the end of the previous quarter with about 82% of the employees dedicated to engineering.

Approximately 72% of our total headcount is located in Asia primarily in Taiwan and China. We ended Q1 with cash and marketable securities of $420.2 million adding $23 million of cash from operations in the quarter. Total accounts receivable at the end of Q1 were $22.9 million or about 37 days sales outstanding.

This compares to accounts receivable of $38.6 million or 41 days sales outstanding at the end of the prior quarter. Net inventory at the end of Q1 was $19.1 million or 78 days of inventory compared to $20.1 million or 68 days of inventory at the end of Q4. Accounts receivable and inventory remained in line with company targets.

WT Microelectronics, our Asia logistics supplier represented approximately 72% of our revenue in the quarter compared to 74% for the same period in the previous year. WT was the company's only 10% customer in Q1 for both fiscal years 2017 and 2018. I would now like to discuss the outlook for Q2 of fiscal year 2018.

We expect revenues for our second quarter ending July 31, 2017 to be between $69 million and $72 million representing an increase of between 6% and 10.6% respectively from Q2 of last year. Non go GoPro revenues in Q2 of fiscal year 18 are expected to grow between 11.8% and 17%.

Non GoPro revenues exclude estimated revenues to GoPro and OEMs of $6.8 million and $3.8 million in Q2 of fiscal years 2017 and 2018 respectively. We expect solid year-over-year revenue increases in the IP security auto and non GoPro wearable markets as well as continued growth in new virtual reality market. Offset by a decline in the drone market.

We expect the drone market to be down from previous year primarily as a result of continued weakness from Tier 2 drone customers as well as a difficult year-over-year comparable due to timing of product launches.

Although the recent introduction of the DJI Spark could potentially have a negative impact on sales of higher performance drones, we believe our revenues with DJI will grow this year.

For fiscal year 2018, we remain comfortable with our revenue forecasts of plus or minus 3% growth from last year despite potential weakness in the drone market particularly from Tier 2 customers. At this point, we believe our revenues from other markets will be sufficient to offset any potential drone revenue shortfalls.

We estimate Q2 non-GAAP gross margins to be between 62% and 63.5% compared to 64.3% in Q1 of 2018 and 67.1% in Q2 of the prior year. As expected we are anticipating the increase in China security revenues and year-over-year decline in drone revenues to be diluted to margin in the quarter.

We continue to see gross margins for the year moving into the high end of our target margins of 59% to 62%. We expect non-GAAP OpEx in Q2 in the second quarter to be between $26 million and $27.5 million. While the increase from Q1 primarily coming from increased R&D headcount and new chip development cost.

We expect a non-GAAP effective tax rate to be approximately 15% in the quarter. Based on changes in geographic distribution of profits for the company, we expect a non-GAAP tax rate for fiscal year 2018 to be approximately 15%. We estimate our diluted share count for Q2 to be approximately 34.9 million shares.

In Q1 of fiscal year 2018, the company repurchased a total of 162,738 shares at an average price of $53.91 for a total consideration of approximately $8.77 million under the $75 million share repurchase program that we initially announced in June 2016.

Approximately $46 million remain available for purchase of shares under the program through June 30, 2017. While the previous authorized program will continue through June 30, Ambarella's board of directors has authorized the repurchase of up to an additional $50 million of its ordinary shares over a 12 month period commencing July 1, 2017.

Repurchases under the new program may be made from time to time to open market purchases or to privately negotiated transactions. Subject to market conditions applicable legal requirements and other relevant factors.

The repurchase program does not obligate the company to acquire any particularly ordinary shares and it may be suspended at any time at the company's discretion. The repurchase program will be funded using embryos working capital. I would like to thank everyone for joining the call today.

And now, I will turn it back to the operator to manage the Q&A session..

And our first question comes from Joe Moore with Morgan Stanley..

So you reiterated the growth rate for the year, but I guess you didn't reiterate the comment about your ex GoPro I think it was a 20 percent growth rate echo for this year is that still that just thinking even though you're not below 20% in the first half?.

Yes. I think we're still comfortable with the previous numbers. They may be a little bit higher percentage for GoPro, but I think 20% to 30% is still appropriate range at this point for non-GoPro growth..

Got it. And then, with regards to the Spark situation, I mean can you just talk about that part looks like it only supports 1080 P clarity.

How do you think about those types of markets, it seems like it's always been competitive as there is something new there in that level of product that it's more competitive or you know how do you think about whether you would pursue something with sort of the specs at the lower end of your portfolio?.

Right. So first of all, I think like we said before we stand here we start seeing a lot of the lower cost of -- being introduced by customers and that trend continues. For example in addition to DJI Spark announcement, we also announced a [indiscernible] introducing a 1080 P 4K video drone at $200. So the trade is there.

So I think with DJI Spark is that they have found CV function in there and also that is very sensitive. We believe that in that although we haven't seen the final product Spark, but we do believe that in there is a two chip solution, one chip doing CV, the other chip is doing 1080 P 4K level video.

So our goal is we're going to continue to support our existing customer with our current product roadmap for anything below $500 for the low-end drones. But I think the key is when our CV family or chip is available, we will be able to provide single chip solution from a low-end drones.

I think that's going to be the all go to work out in the next couple of years..

Thank you very much..

Thank you and our next question comes from Richard Shannon with Craig-Hallum. Your life is now open..

Fermi and George, thanks for taking my questions. Maybe I'll continue on the topic of drones here. You mentioned some weakness with Tier 2 drone manufacturers out there.

Maybe you can comment on the environment little bit more and are you seeing maybe a shake up between kind of the larger Tier 1's and Tier 2's or if you can help us understand that when you might expect the drone market to come back later this year?.

Well, I think if you look at the overall drone market I think it's going to continue to grow. It's just that DJI is dominating this market. I think everybody is seeing that. Some of the second tier suppliers have introduced products, but they are having difficulty getting attractions in the market.

I think that's also obviously discussion the second tier guys introducing product but cannot really sell in the way that they excepted. And we are using continue to see customers by introducing new products especially on the low cost drones.

So I expected that the trend will continue that people will continue to dry with the different features and differentiation on both the low and high end and we continue to see more low-end, low cost drones coming up, but we will continue to watch the momentum.

Today we still believe that on the market is still growing, who knows how big the market is but we believe that both the high end and low-end drones continue to enjoy the market growth..

Okay. Great..

One other comment there Richard, I think potentially as computer vision it becomes more capable arms the functionality becomes more capable in a more cost effective I think that might open up other opportunities in particular maybe on the commercial side..

Right. Okay, I agree and I look forward to hearing more about that maybe offline. My second question on the China IP security market, I know you've talked about this being pretty good for the last couple of quarters I think mostly from introduction here HEVC enabled product.

How long do you expect to see improvement in China from that and is there a stronger cycle going on there is it primarily coming from the introduction of your HEVC product there?.

Yes, I think the primary driver this year is from us penetrating the HEVC low end market with S3L and S3LM. I think that's probably going to continue through the remainder of the year. There are a lot of product introductions that we look forward to over the year, so I think that will continue.

We also see a pretty stable market for the rest of the security market globally. Other customers seem to be having reasonably good year, so I think overall we'll probably see overall professional security grow a little more than we thought at the beginning of the year..

Okay, Perfect. That's all the questions from me guys. Thank you..

And our next question comes from Kevin Cassidy with Stifel..

Thanks for taking my question.

China OEM automotive designs that you've won, when would those ramp into production?.

Well, Kevin we are talking about multiple different product categories for the Chinese video recorder OEM products, we are already in production, sounds that we are reassessing early revenue. We continue to see the ramp-up in the Chinese OEM for the video recorders.

And in terms of for the other video product like Evero [ph] and the surround views, we believe is still second half of next year, a relevant time. But we continue to see very high activity on the product design win cycles..

On the home security camera market, did you see a growth in that, quarter-over-quarter?.

In the home market we did, yes..

There is new product announced from NEFT, were you involved with that design, or that seems to be the first new design they've had in a while.

Can you say what your involvement is still with NEFT?.

Well, I think you are referring to the new product they announced which is not ours. I think that's using our processor design in that product..

Okay. Thank you..

And our next question comes from Suji De Silva with ROTH Capital. .

Hi Fermi, hi George. So, on the Computer Vision chip there, can you talk about when you get to a one-chip solution versus two-chip? Do you save the customer relative dollars versus two chip solution? How are your computer vision chip being priced relative to your current portfolio. .

Well, for you to go on the two chip to single chip, you know the biggest saving is the components around the chips, because every chip need to come with you know flash DRAM, flash, a power controller. You really need a lot of other components associated with those two chips. So, just by going to single chip design, you save huge on the BOM side.

So our ASP savings versus the two chip, I expect is going to be also providing some savings, but I think our ASP will determine that how competitive the market is at a time. .

I was just going to add I think one thing. You will get a lot of increase in performance from what they get now. I mean a lot of what's being rolled out now is software running on a let say an apps processor. You know our architecture I think will give you much more performance and the ability to expand the functionality in the device. .

And when your computer vision chip rolls, should we expect the price bump up relative to the current portfolio, or is kind of at the same price point when it comes in?.

Well, I think I expect to grow up. .

I believe your ASPs will go up which is normal for us when we introduce new features and functions. .

Fair enough. And then a follow-up question on the drone market.

Can you give us a sense of what percent of revenue it's roughly coming in at now and how concentrated is around DJI to just understand the exposure there?.

Well, we haven't talked about the concentration, but they probably have said mid-80% market share. Last year was about 17% of our revenue and we expect now to be probably flat this year, total drone market. .

Got it. Appreciate it, thank you. .

And our next question is from Matt Ramsay with Canaccord Genuity. Your line is now open. .

I think I just wanted to follow-up on a bit of the guidance question. I think Joe asked at the beginning of the non-GoPro piece George. If there is a reacceleration in the back half, maybe you could walk us through the drivers of that reacceleration by market.

I think a lot of it's had maybe a scene or hope that the business would be significantly less seasonal now that the GoPro is maybe out of the model and going out of the model. But it looks like from what you are implying, the seasonality might not be that different for this year. So, if you could just walk us through that that would be helpful.

Thank you. .

Yeah. I think the seasonality still will be there. You will still see step up this year in drones. We have a wearable component now both, non-GoPro sports and non-sports wearable if that makes sense. Those will expand in Q3 particularly. The auto market does not necessarily expand that much.

But this year we have a rollout of the security market, which has two components. One of them is seasonal, when you have your home security. So, we expect to step-up in the home security market in the second half particularly on the retail component.

And then this year, because we're ramping, really a new market on the professional side on the ATVC market in China, we expect that to continue to grow through the second half. So, our year-over-year growth rate now really is across both the professional and the home. .

That's really helpful. Thank you. Fermi, I wanted to ask a couple of questions on the new CV1 chip. You talked about sampling this year and if I'm not mistaken, I think the first target revenue would be in the drone space.

If you could just walk us through how things have gone so far since you've gotten the chip back and what the milestones are for customer samples and then first revenue?.

Right, so from the CV1 point of view we see the CV1 chip from the foundry already made and we successfully built it up and in fact we are writing software and bringing up software at this point and we are - just like we said on target to assemble the hardware and the software to our key customer in the second half of the year.

And we believe that now with working chip, we are verifying that our approach to finalize the CV with the first, then we find the passing implementation of hardware and software combination for those algorithms. And with our approach, we're now seeing some first-hand result.

We are happy to say that we continue to see a validation of all those payments tend to come. And more importantly, with the CV1 being - in the lab and we start working on it, we knew that we can continue to develop our CV roadmap and we believe we'll introduce two to three new chips per year with the CV capability in the future.

And with two to three new chips, we will try to address all of our current market and the emerging new market. The current market including drones, includes outhouse, including security camera and also for the emerging market, I really think that for the auto OEMs as well as the robotic is going to be a key area we're going to focus on.

And also with that, two to three new chips per year, with the CV capability, we'll try to cover the low to high price point. So our goal is trying to provide a complete coverage on our CV roadmap in the future so that we can - those price points..

Thank you very much..

Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open..

Okay. So I want to go back to the drone market if I could for a little bit. With some of the competition emerging in there and then you were talking about a little bit of the weakness in the second tier, the tier 2 guys.

How do you expect pricing to be effected at the high end and even across your stack? If competition is coming in and they're choosing to go elsewhere at the low end, do you compete via price to try to keep those sockets or do we kind of have a hole we have to deal with until the CV chips can address it?.

Well, in fact the 1080 P video that DJI Spark use, it's a really ultra - we started selling 1080 P video solution 10 years ago. So from the price point, we talked to probably multiple Taiwanese and Chinese vendors have chips that capable of doing 1080 P video at this point.

So the price point is very challenging, but we do have a solution ambition to continue to compete with them under any kind of price point. On the higher side of cost because, the competition has continuously tried to go up; and we will continue to provide very competitive pricing point as well as technical solution.

So I don't think that we will -- we won't reduce the -- because of price. But I think 1080 P there are so low-end guys there. Sometimes you just don't know who are you competing with..

And I guess as my follow-up I wanted to talk about the OpEx thing. Two aspects to it, George is the fiscal year still going to be up 12% to 14%? And then I think Fermi, you talked a couple times about 2 to 3 new CV chips coming per year.

Can you just talk us through the investment phase of that? Are we two-thirds of the way through it and we're closer to the revenue coming in towards the end of this year next year or is that elevated investment going to stay that way as you perhaps even moved to 10-nanometer in that two to three per year cadence?.

Okay, there is couple of questions there. I think yes, we're still comfortable 12% to 14% at this point and that includes the rollout of our chips this year, two to three chips. Remember the two to three chips is total chips every year which is what we have been doing historically.

So really the OpEx impact from the chip development standpoint right now is the increased cost from process notes which is obviously a several million dollars per chip but it's not potentially as large as maybe you're thinking.

I think next year we will continue to -- on that roadmap and probably as we've talked about with the 10-nanometer, so that investment will continue through next year, particularly when we move towards auto [ph] chips; so we will have increased costs associated with having the chips actually ASO qualified..

So let me add one more point; so in fact we will be paid about three 40-nanometer chip. So the current OpEx level you're seeing only supports two to three chip a year from a 40-nanometer chip. From the 40-nanometer to 10-nanometer, the increase isn't much less than the 28 to 40.

So from the PayPal fee point of view, putting two to three chips is not a significance previously..

Thanks, that's very helpful. One quick clarification housekeeping wise from George, I wasn't quick enough to write down.

When you said the non-GoPro revenue guide sequentially for the quarter, can you just run us through that the GoPro amounts against?.

Yes. Non-revenue increase in Q2 would be about 12% to 17%..

Got you..

And that's on $69 million to $72 million total topline..

Great, thank you..

And our next question comes from Quinn Bolton with Needham & Company. Your line is now open..

Hi, perhaps a clarification for me. Just as you look at the CV1; I guess I was under the impression that that didn't have the video and coding that would come from another AMBA solution but in a number of the applications for CV1 it does sound like you may have video and coding capabilities.

Can you just clarify whether the video and coding is part of the CV1 solution?.

Well, for the video encoding function which we haven't talked about CV-wise spec; so I'll leave that further. But in the future we definitely believe all chip have complete video processing, video encoding and CV functions. But when we come to the talking about CV1 we make clear how we're going to been inside CV1..

Okay.

So the comments been about single-chip drones may not necessarily be CV1, it just maybe a future CV1 -- CV family member?.

It's possible, yes..

Got it, okay.

And then second question, I think in your prepared script you talked about demonstrating at ISC West neural networks running on the security; cameras, just kind of wondering how you see that application rolling out for image recognition -- you with a person or package tracking; you know, what -- how do you see that rolling out over the next few years? And what percent of the market do you think that applies to?.

Yes. Maybe I shall address that the competition first to that.

You know, the last camera that has been introduced, a lot of people asking my competition and also back to relate to your question; I think the key point is that our competitors have not changed is still [indiscernible], core counseling, smart phone application process are in the high silicon [ph] and also a bunch of a low cost and low end video processing in China and Taiwan we talked about.

But traditionally, more importantly, our traditional advantage of video processing, video compression and core consumption have not changed either.

But to your point, as we set up in the past a lot of early adaptors of the computer rated device now using software implementation like DSP or CPU to outperfect time to market so our roadmap to address this problem is starting with our new H5L which is [indiscernible] CPU which can do safety type of recognition as we demonstrate ISC as you mentioned and we believe those function are going to continue to be very important but I think it's going to be the must have feature moving forward.

There will be more and more computer features required for the security camera for different locations. That's why we believe that our new CV chip family that will after much higher performance in the world literature far more efficient to be than any combination of CPU and VSP in the future..

And then just a last question on the security market, you talked about seeing the HEVC strength within the China market, I'm wondering if you're seeing any progress in terms of HEVC adoption outside of the Chinese market?.

Well, it's interesting question because yesterday at Apple's conference they announced they are going to in a way new OS going to support HEVC.

So what I mean is although I don't know for sure but what I mean is I think Apple figured out how to negotiate the title royalties with the two major patent pools and as well as other patent holders, especially in terms of video screening patents.

So I think with that I believe that the HEVC format finally gets traction in the market and hopefully with that we're going to start seeing more and more HEVC requirements in the market, especially all the smartphone will be able to decode HEVC and display HEVC screens; then I think that will open up the whole platform.

That has been delayed for two to three years but I think finally we're start seeing some indications that the problem will be resolved..

Great, thank you..

And our next question comes from Brad Erickson with Pacific Crest Securities. Your line is now open..

Good afternoon, thanks for taking my questions.

First, just regarding SOC [ph], are you able to just quantify that incremental spending you might see next year on our R&D line relative to see the CV spending we're seeing this year?.

Not yet, we're working on it now, it is a major project; I think it will add cost to next year. Probably we'll be able to talk more intelligently about it on the next call but we can expect OpEx to continue to increase to absorb that next year..

Increase as a percentage of revenue or….

Yes. It very well could increase as a percentage of revenue but we haven't got the final -- really the final structure and how to go forward on that yet..

Got it, that's helpful.

And then secondarily, based on what you know from the work thus far on this lab, what are kind of the most suitable applications within automotive you see developing from an opportunity? So just kind of the basic ADAS functionality at first or do you see more eminent potential for level two, level three type applications? And then second, just -- where do you kind of intend on differentiating versus some of the more established players in that space? Thanks..

Right, thank you. So first of all, of course that our focus was with that technology in CV1 and we'll be [indiscernible] ADAS function for sure but I think going to the level four, level five; you see our ambition and what we want to achieve in the future and that CV1 is a great fundamental to achieve that goal.

But like you said, early revenue will be coming from the ADAS market, in fact we do believe that ADAS market does includes not only on the total OEM side but also on some of that after-market side; so we try to address both with our CV families.

And the way we differentiate with our big player is, we -- with this type of acquisition we got to complete [indiscernible].

Basically what I mean is we have a source that we can use that source -- we control one source that can drive a car; I think very few company can say that and now we have not only the source for it but also how we're -- which optimized for the algorithm and the source for implementation of this lab so far and we are probably one of the very few combination of distinguish -- differentiate how we're in complete self-respect that can do [indiscernible] today and we are trying to demo it but I think that's definitely how we're trying to differentiate.

And of course because of that differentiate technology and how we decide that we deliver higher performance and much lower consumption, that's another thing which is consistent with our advantage as our video processing technology..

Got it, that's super helpful. Thanks..

And our next question comes from Charlie Anderson with Dougherty & Company. Your line is now open..

Thanks for taking my question. I have just got one quick housekeeping for George.

So George, I noticed on the balance sheet the -- it was maybe $9.5 million sequential jump in intangible, what was that?.

Yes, under the new accounting regulations, some of these long-term operating leases now have to be capitalized.

So our lease on our software we used to develop the chips which is very expensive cadence software, it became a capital asset so we recorded the asset and the liability and we will now start depreciating the asset versus recording as a lease payment. The P&L in fact is zero..

Got it, got it. Okay, perfect.

And then for me just going back to auto, we're going to continue the conversation there; you know, some of the established players in the market and ADAS -- they sort of build their business through some Tier1 partnerships; so what degree are you guys involved there and is there -- you know, as you come out with CV and as you come out with some of the new solutions with Tier1 partnerships that help you growing that market?.

Absolutely. In fact, last three years we have spent a lot of time to try to build relationships with Tier1. In fact, the relationship starts with non-ADAS products by working on the video recorders, working on emails [ph], and working on the surround views.

Now we are engaging with a lot of Tier1's, not only just discussion of the project but also development of new projects and we -- through that we will become viable supplier to those Tier1's; I think that's huge stuff.

And during the meantime, all those three markets, doesn't matter recorders, emails or surround views; they all require ADAS roadmap for those kind of products. And with that we're -- because we are the supplier with the current solution, and we have a chance to talk to the ADAS team to understand their requirement as well as what they want from us.

So I think our Tier1 engagement has been therefore for three years and getting stronger through our current products and hopefully we will -- we can convince them to use our CV1 or CV-family chip for their ADAS in the future..

Perfect. Thanks so much..

Thank you..

And that does conclude our Q&A session. I would like to turn the call back to Mr. Wang for closing remarks..

Thank you all for joining the conference call today. And particularly I will like to thank all of our employees for their continued dedication and support. I'll talk to you next time. Thank you..

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