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

Kevin Cassidy - Stifel Matt Ramsay - Canaccord Genuity Charlie Anderson - Dougherty & Co. Quinn Bolton - Needham & Co. Ross Seymore - Deutsche Bank Jagadish Iyer - Summit Redstone Joe Moore - Morgan Stanley Suji Desilva - Roth Capital Richard Shannon - Craig-Hallum.

Good day, ladies and gentlemen. And welcome to the Ambarella Third 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. Good afternoon, everyone. And welcome to Ambarella’s third fiscal quarter 2018 financial results conference call. Thank you for joining us today. Our speakers will be Dr. Fermi Wang, President and CEO; and George Laplante, CFO.

The primary purpose of today’s call is to provide you with information regarding our fiscal 2018 third quarter results.

The discussion today and responses to your answers will contain forward-looking statements regarding our projected financial results, financial prospects, our markets, demand for our solutions and the company’s effort to develop and commercialize new technologies, 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 and the Form 10-Q filed on September 8, 2017 for the second fiscal quarter of 2018.

Access to our third quarter results press release, historical results, SEC filings and a replay of today’s call can 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. Our Q3 2018 revenue was $89.1 million, representing a decrease of 11.4% from the same period in the prior year. Although, our revenue was lower than last -- for last year, our non-GoPro revenue was 7.2% higher and we enjoyed strong design win momentum in our target, IP security and automotive camera markets.

And we are very pleased with our execution and progress in the development of our computer vision solutions. During the third quarter we demonstrated and assembled our new CV1 chip to key IP security and automotive customers.

Based on our CV4 architecture, CV1 combines Ambarella’s traditional strengths in high resolution imaging for camera capturing video to be watched by humans and with the stereovision and the new level processing required for advanced motion vision.

In particular, the CV4 architecture is designed to support the performance requirements for perception and deep learning applications including update recognition. As an update, CV1 has met our aggressive targets for features, performance and power consumption.

And we look forward to demonstrating many of the advanced features of our CV1 chip, including in advanced ADAS Systems at the Consumer Electronics Show in January. Beyond CV1, we remain on target to deliver a new generation of SoC solutions in the first half of next year that are based on the CV4 architecture.

Leveraging 10-nanometer process technology, the SoCs will target high value IP security, drone, VR and OEM automotive camera applications.

In the automotive markets, we see opportunities in multiple applications spending car recorders, electronic mirror, surround view, advanced driver assistance systems or ADAS, and ultimately fully autonomous vehicles.

Initially, our design wins and the revenue are coming from car recorders that are transitioning from aftermarket dash cameras to OEM original equipment primarily in Asia. We are now also actively engaged with the world’s leading automotive mirror makers to deliver electronic mirror solutions for future generations of cars and the commercial vehicles.

This includes both single-camera rear view electronic mirrors, as well as a single chip triple camera designs that can be placed or augment rear and the side view mirrors.

Most major car makers are now planning for deployment of electronic mirrors on future models and that we anticipate revenue from these applications next year beginning in China, the world’s largest automotive market.

Looking forward, we see computer vision as a critical component of our automotive solution of ADAS feature will be required for many automotive applications.

For example, future generations of car recorders, electronic mirror and surround view systems may include the features such as advanced Lane Departure Warning System, Forward Collision Warning, pedestrian and blind spot detection.

We believe Ambarella’s advantages in image quality combined with powerful computer vision process will enable car makers to deliver the best HD video experience for human vision with the highest level of driver safety.

We also believe that many of future ADAS systems will require video recording to provide a record of events further leveraging Ambarella’s advanced video encoding capability.

During the quarter Honda introduced drive recorders powered by Ambarella’s A7LA video processor, the new recorders offer full HD video recording and similarly integrate with Honda’s navigation and infotainment systems.

The camera includes a parking recording mode to provide the video evidence in the case of parking lot accidents and HDI processing for high-quality recording in challenging lighting conditions. In China car makers BAIC and Chicony both introduced new car models featuring car recorders based on Ambarella’s S2L SoC.

BAIC’s Senova D50 includes an HD recorder with WiFi connectivity to allow video to be watched on a smartphone while Chicony GL model car recorder includes full HD video storage and simultaneous 720p frame on the vehicle’s infotainment systems.

In professional IP security camera market, we see increasing requirements for advanced computer vision and video analytics across a wide range of performance and price points.

During the quarter, we demonstrated and assembled our new CV1 chip leading IP camera makers as a platform for the development of the next-generation cameras with these capabilities. Additionally, European and U.S. based customer are now deploying cameras based on the new HEVC or H265 video standard following its early adoption in the Chinese market.

During the quarter European security supplier Bosch released its new AUTODROME IP 4,000i, 5,000i and 6,000i camera families, based on Ambarella’s S33L SoCs, the camera supports both H264 and H265 video and includes up to 30 times optical zoom and a full HD video at 60 frames per second.

The camera includes building analytics to distinguish between object types such as people, cars, bikes, motorcycles or trucks and may also be used in application beyond security such as in business retail environments for monitoring customer activity.

And in a fast-growing connected home market we saw the introduction of a variety of new home monitoring cameras spending video detail, security spotlight and battery-powered designs. During September, Nest introduced its Halo HD video doorbell.

It features a full 160-degree field view to allow people to clearly see visitors, as well as any package left on the ground. Based on Ambarella’s S2L camera SoC, the Halo camera includes a high dynamic range of processing for viewing in high contrast conditions, as well as night vision.

The camera can detect if a person is approaching even if they do not ring the bell and provide an alert via smartphone. Also during the quarter, Ring announced its Spotlight Cam Wired, an HD camera integrated with spotlights.

Based on our S2L chip, the Ring spotlight provides a full 1080p HD video, a wide angle camera lens and built-in microphone and speakers. And advanced motion detection engine with custom motion zones provides reliable and instant motion alerts if someone approaches your home.

And in the battery-powered category, Swann released its Smart Indoor/Outdoor Full HD Wire-Free Security Camera priced at just $129. Based on our S2LM chip the battery-powered camera includes infrared night vision, wide 120-degree field view and offer fast battery recharge.

In the consumer market -- in the consumer camera market, we have seen a number of innovative new product introductions for the holiday season. Many of the new model include support for 360-degree video, advanced image stabilization and software applications that address simplifying, content creation and video editing.

In October, California based startup Rhino introduced its small form factor 360-degree camera selling for $499, featuring dual wide angle lenses and using Ambarella’s H2 SoC. The Rhino captures 360-degree video in full 4K resolution and create panoramic 6K resolution still pictures.

The Rhino app includes advanced stabilization technology and architecting to follow person or objects to keep them in frame. Also during the quarter San Francisco-based startup Rebel began shipping its Arc camera which has integrated into the rear of the camera to keep the level with the whole horizon.

Featuring Ambarella’s A9SE SoC the camera shoots 4K video and 12-megapixel stills. The Rebel editing app automatically finds the best parts of your videos and it can also play back data captured by the camera including height, speed and how many rotations you have made.

In August, Insta360 introduced its Insta361 model that can be used as both a standalone camera and as an iPhone accessory. Priced at $299 and based on Ambarella’s A12 SoC the camera can shoot 4K video and take 24 megapixel stills.

It’s free capture feature enable user to shoot first and point later by first capturing 360-degree video and then panning and zooming on the phone to create 1080p director cut.

Also during the quarter GoPro introduced its future Fusion 360-degree camera based on Vu Ambarella A9ZS SoC featuring capable of shooting 5.2K video at 30 frames per second, taking 80 megapixel spherico photos and capturing 360-degree sound. Selling for $699, it also integrates WiFi, Bluetooth, GPS and voice control.

And earlier this month, we were excited to hear that Ambarella based VR camera has arrived at international space station. The Vuze VR camera from Israel-based human eyes supports both 360-degree and 3D video, and will be used to film a cinematic virtual reality experience as part of National Geographic’s upcoming series, One Strange Rock.

And in the home market category, market leader DJI released its new Zenmuse X7 camera based on our H1 chip. The Zenmuse X7 is a compact super 35 camera with an integrated camera made for high-end filmmaking that delivers Ultra HD video and outstanding image quality.

The X7 boasts very high sensitivity to light, shoots 4K video at up to 60 frames per second and support both H264 and H265 video standards. In our last earnings call we described the innovative snap drone from U.S. based Vantage Robotics, featuring a collapsible magnetic 1.37 pounds design with protected rotors and Ambarella based 4K camera.

During the quarter we were pleased to learn that the news network CNN has received a first of its kind waver from FAA to fly the snap drone over crowd of people for aerial video capture and news gathering. CNN’s successful waiver application was the product of over two years of research and testing on the part of CNN and Vantage Robotics.

In summary, we are continuing to invest in leading edge technology to expand our market opportunity both in current market and in broader range of new automotive applications.

We are very pleased with our progress in delivering the next-generation computer vision solutions and look forward to meeting with many of you at the 2018 CES show to demonstrate their capabilities. I now hand over to George for more details on the financials and our guidance for Q4..

Thank you, Fermi, and good afternoon, everyone. Today I will focus my review on the financial highlights for the third quarter of fiscal 2018 ended October 31, 2017, as well as the financial outlook for Q4 of this fiscal year.

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

Our Q3 2018 revenue of $89.1 million represents a decrease of 11.4% from the $100.5 million of revenue in the same period in the prior year. GoPro revenues in the quarter declined to $18.4 million, compared to $34.6 million in the same period in the prior year.

Q3 non-GoPro revenue grew 7.2% from the previous year finishing the quarter at $70.6 million. In Q3 we saw strong year-over-year growth in IP security followed by inline growth in auto and non-GoPro wearable markets, partially offset by a moderate year-over-year decline in the drone revenues.

In IP security, year-over-year growth was led by strong consumer product builds for the North American holiday selling season. Solid revenue increases from the OEM automotive video recorders plus inline aftermarket shipments resulted in good year-over-year growth in the auto market.

Drone revenues in the quarter were down from last year most likely due to DJI’s low-end spark drone impacting higher end drone sales in addition to continued weakness from Tier 2 consumer drone customers as we discussed last quarter.

Non-GAAP gross margin for Q3 was 64%, compared to 63% in the preceding quarter and 66.3% in the third quarter of the prior year. Gross margin improved from the previous quarter due primarily to better mix of products in IP security, particularly in the consumer home monitoring market, as well as an increase in sports camera revenues.

Non-GAAP operating expenses for third quarter were $27.2 million, compared to $25.4 million for Q2 of this fiscal year and $24.2 million for Q3 of the prior year. OpEx increased from the previous quarter primarily as a result of increased chip development costs, partially offset by a decline in the provision for annual executive bonuses.

Non-GAAP net income for Q3 was $25.7 million or $0.75 per diluted ordinary share, compared with non-GAAP net income of $38.4 million or $1.11 per ordinary -- diluted ordinary share for the same period in the previous year. The non-GAAP effective tax rate in Q3 2018 was 14.6%.

In the third quarter the non-GAAP earnings per diluted ordinary share were based on 34.4 million diluted shares, as compared to 34.6 million diluted shares for Q3 of fiscal year 2017. Total headcount at the end of Q3 was 689, compared to 680 at the end of the previous quarter, with about 81% of employees dedicated to engineering.

Approximately 71% of the total headcount is located in Asia. We ended Q3 with cash and marketable securities of $414 million, adding $26.6 million of cash from operations in the quarter. During the quarter the company repurchased 269,540 shares at an average price of $47.41 for total consideration of approximately $12.8 million.

The total number of shares purchased since the inception of the repurchase programs in June 2016 is 1,433,137 at an average share price of $50 for total consideration of $71.7 million. As of October 31, 2017, there was approximately $35 million available for repurchase under the repurchase program through June 30, 2018.

Total accounts receivable at the end of Q3 was $47.2 million or 48 days sales outstanding, this compares to accounts receivable of $38.4 million or 49 days sales outstanding at the end of the prior quarter.

Net inventory at the end of Q3 was $21.1 million or 55 days sales -- days of inventory, compared to $17.7 million or 63 days of inventory at the end of Q2. Accounts receivable and inventory remain in line with company targets. We had three 10%-plus revenue customers in Q3.

WT Microelectronics came in at 50.6% of revenues, compared to 53.7% in the third quarter of the prior year. GoPro represented 20.7%, compared to 30% last year and Chicony came in at 11.9% this year. I would now like to discuss the outlook for Q4 of fiscal year 2018.

We expect revenues for the fourth quarter ending January 31, 2018 to be between $68 million and $72 million, representing a decrease of between 22.3% and 17.7%, respectively, from Q4 of last year. In the quarter we expect GoPro revenues to decline to approximately $13 million from $30.2 million in the same period in the prior year.

We expect solid year-over-year revenue increases in IP security and auto OEM markets, offset by a moderate decline in the drone market. We continue to expect a shortage of high-speed memory to impact revenues over the next few quarters, particularly in the early part of next fiscal year.

Although, we have included an estimate of the expected impact of potential memory shortages to our Q4 revenue guidance, it is not yet clear to what extent revenues will be impacted in future quarters. We estimated Q4 non-GAAP gross margins to be between 62% and 63.5%, compared to 64% in Q3 of 2018 and 67.2% in Q4 of the prior year.

As forecasted, we are seeing the increased mix of China professional security revenues having the largest negative impact to margins in the quarter. As compared to the previous year some of the reduction in margin can also be attributed to the decline in sports camera revenues.

We expect non-GAAP OpEx in Q4 to be between $28.5 million and $30 million with the increase from Q3, primarily coming from increased take -- chip takeout fees and engineering headcount increases. We expect the non-GAAP effective tax rate to be approximately 16% in the quarter.

We estimate our diluted share count for Q4 to be approximately 34.8 million shares. At this point not much has changed as it relates to our expectations for fiscal ‘19.

Non-GoPro revenues are estimated to grow in the range of 10%, which assumes growth in security, auto and wearable markets, including non-GoPro sports cameras, offset by lower revenues in the consumer drone market. Although, we expect some revenues from GoPro, we lack clear visibility, and therefore, unable to provide guidance at this time.

Next year we expect gross margins to move into the high end of our target margin range of $59 million to $62 million during the first half, while we estimate OpEx to be between $120 million and $130 million. 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. [Operator Instructions] Our first question comes from the line of Kevin Cassidy with Stifel..

Thanks for taking my question and congratulations on the good results.

In the 360-degree camera adoption what kind of unit volumes are you seeing for that, it’s a new category and maybe can you compare it at all to sports cameras?.

Well, Kevin, I think, this is the early stage of 360-degree. You can see that most of the design we announced today, they just start shipping.

We are conservative on the volume, but I think that we -- it’s hard to compare to sports camera, because this is a new market, so I would say we are conservative, but we still continue to develop technology for this market, because we believe by giving time this market can be a meaningful business for us in the near future..

Okay. Thanks.

And on the deployment of the e-cameras or the e-mirrors, sorry, e-mirrors for automotive, can you give us any -- you said it will be next year, can you quantify that a little tighter?.

Yeah. First of all, we announced the impacts, but also this time we mentioned that we have a lot of design win activities with several OEMs and Tier 1s at this point. And we continue to believe that at the second half of next year, later next year, we’ll have start seeing revenue from the electronic mirrors..

Okay. Great. Thank you..

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

Thank you very much. Good afternoon, everyone. For me I was pleased to hear that you guys did sample CV1 in the quarter. Maybe you could give us a little bit more detail about, A, which market segment that you were able to sample the product into and maybe a representative set of customers there.

And second, how the initial reception of the product, particularly on the software side was received by the customers that you were able to sample to? Thank you..

Right. So we -- the two focus markets for us is automotive and IP security. And we just demoed it -- and the sample, like I said, demoed a sample to the key customer in those markets and you can imagine that some of the key customers from these markets that will receive our demo and receive our SDKs.

I think it’s still early because we just sampled a few weeks ago. It’s still very early stage. But I have -- I can say that we see a strong interest in CV1 and our CV technology, particularly due to our unique features, performance, power consumption and probably more importantly the roadmap of our CV family we talk about.

And in fact, this time we also talk about we expect to start sample to our key customer early next year for the next generation’s CV SoC based 10-nanometer chips. So I think with that most of the features, performance and the roadmap, I think, a lot of customers are very interested to continue to evaluating.

We expect to see some fierce feedback in several months..

Got it. That’s helpful. Just as a follow-up on the automotive market, because it seems like one of the very exciting spaces for CV in the long run, maybe you could comment a little bit for me on revenue opportunity in the automotive space between where we are today and when the CV family really ramps in the automotive space.

I know you have opportunities in e-mirrors and surround view, and a few other areas, but I think it would be helpful for us to understand the magnitude of revenue growth over the next calendar year in automotive even before the CV contributes materially to the sales pipe? Thank you..

It’s hard for me to give you a revenue growth forecast, but I -- let -- I can answer that question a different way. We look at the total available market for us. Our current market, including professional security and the connected home market, we are talking about roughly $1.6 billion based on the public research number that published by other firms.

But if you add auto, including electronic mirrors, surround view, recorders, ADAS and autonomous car, in several years our total available market size can grow up to $5 billion.

So basically that’s where we look at our potential growth and that’s how we decide that we are going to continue to invest heavily on the security camera, as well as the auto, because they become two biggest market opportunities for us.

And in terms of the near-term revenue is really about video recorder and e-mirrors, because those two things will have a lot of activity like today we talked about Honda and also on e-mirrors, we talked about we had several design wins that we’re working on right now.

And so near-term, I think that recorders are going to continue to be strong in Japan and in China, and e-mirrors is an international opportunity for us. And longer term, I want to mention that ADAS becomes a roadmap for e-mirrors, for recorders, for surround views. It’s not separate product anymore.

We continue to see that as a front, the front camera based ADAS will continue but all of the current video systems for human vision, like e-mirrors, recorders and surround view, will add ADAS function into it as a roadmap.

So I think we are very well-positioned to serve the human vision side of video product for automotive customer and use that as a foundation to build our computer vision technology into those same customers in the future.

And it’s definitely our ambition to continue to be a supplier both ADAS and autonomous car in the future and that’s why we develop CV and CV families..

Thank you very much for taking my question..

Our next question comes from the line of Charlie Anderson with Dougherty & Co. Please go ahead..

Yeah. Thanks for taking my questions. Fermi, you referenced in your script sort of increasing requirements, if I heard it right for IP security cameras for computer vision. So I wonder if maybe you could describe that a little bit more in terms of the content available to you.

I imagine there are different features that someone versus others, other prices established in the market in terms of what people will pay for CV, any commentary there would be helpful and then I’ve got a follow-up?.

Right. So I really think that what we heard is that, first of all, CV is coming to security camera both for the professional and the connected home.

But I think everybody’s looking for a single-chip solution that can do very good video processing like we have today and very good computer vision and there’s no such products today in the market, and lot of people our customer using two-chip solution or using server to do computer vision at this point.

So I really think that our focus is going to be trying to provide most price efficient but at the same time powerful in terms of the portfolio and feature on the video processing computer vision on a single chip and to leverage our current position with the current IP security customer and then that will add our ability to compete in this market.

But more importantly, with any chip that -- with that kind of performance features that we expect that ASP will be higher, gross margin will be -- is meant to be based on the competition but we definitely expect that is upside on the ASP side for us..

Great. And then, as a follow-up, George, I was wondering, like you sort of spelled about 10% non-GoPro mix growth next year. I think you previously talked about 10% to 15%.

Is that delta the difference from the memory shortages that extend into first half of next year and if you can maybe quantify that and also did they have an impact in Q3 and in your Q4 guidance, to what extent?.

Yeah. First of all, I think, it’s the range of 10%, so it could be above that also. I didn’t mean to make it a significant difference. But there are, I think, a couple variables next year. First of all, the transition to the new rev rec next year could have an impact in the early part of the year to our reported revenue.

In addition, in the early part there is the exposure to the high-speed memory. And I also think at this point we’re being very cautious on the consumer drone market until we see how the rest of the holiday season progresses..

Got it. Okay. Thanks so much..

Thank you. Our next question comes from the line of Quinn Bolton with Needham & Co..

Hey, guys.

George, just wondering if you could give us any more thoughts on GoPro, I think, a couple of quarters you had -- ago you had thought that that revenue was going to tail off, with the release of the HERO6, it looks like the GoPro’s revenue has been stronger here in the third quarter and the guide for the fourth quarter still has a healthy amount of GoPro.

As you look into fiscal ‘19, do you see sort of continued revenue from GoPro cameras or does the second half revenue kind of represent somewhat of a last time buy for that GoPro business? How should we be thinking about GoPro next year?.

No. I don’t believe the last Q4 will be the last time buy. I believe there will be additional revenues next year. It’s difficult at this point to determine the actual quantity and timing. We believe there will be very little in the early part of the year due to inventory levels coming out of the holiday season.

But we do believe after that that we’ll see some revenues particularly probably as Q2 and early Q3, and then wind down..

And is that for the fusion or are there other products that you have in GoPro?.

Well, we understand the HERO5 will wind down next year at some point, so it’ll be the fusion and the HERO5 at this point..

Great. And then just coming back to the CV family, I think, in the past you had talked about applications also in autonomous drones. It sounds like you’re currently limiting sampling to the automotive and security markets.

Do you expect to sample into the drone market at some point in the future or are there reasons why you maybe sort of deemphasizing CV family for drones going forward?.

No. In fact we do plan to sample to the drone market. In fact you should come to CES to see our demos. But at the same time the whole drone market has one big customer which is DJI. So that’s where we need to focus on.

And we have been talking about DJI is been well-known in the whole silicon development, so how to sample, how to deal with is going to be important strategy move for us and that’s why we never talk about this, but I think, DJI continued to be a very important customer for us.

We’re definitely going to show them our technology and continue to build relationship on that..

I think one thing….

Okay..

I think one thing on that is, is just priority of rolling out the software for each market. We see a big -- a much bigger demand in the security market than we do with the drone, so there’s just a bit of timing also on getting the resources allocated..

Got it. And then just for me I think in response to Charlie’s question on the security market, you sort of referenced the need for single-chip CV plus video processors.

Can we assume that the 10-nanometer version of the CV family member that you’re tapping out first half next year, will that merge both the traditional computer vision plus the video encoding or is it too early to talk about features for that second generation solution?.

No. I think that’s a good assumption..

Okay. Great. Thank you..

Our next question comes from the line of Ross Seymore with Deutsche Bank..

Hi, guys. Thanks for letting me ask a question. I wanted to first hit on the CV side of things and talk about the existing markets both the IP security, probably, primarily and then to a lesser extent the drone side. As you guys think about the feature set that you’re going to bring to it, you’ve talked many times about the ASP being higher.

But the value proposition, do you think that’s going to be something that really allows you to gain share, is it going to expand the market, because the features that the drone or the IP security cameras can drive, so really is it a share gain story for you guys or is it a powerful enough technology that you could actually expedite the growth rate of the industry you’re addressing itself?.

My belief is, let’s take the different markets one at a time. For security camera, I think, CV play a major role to really reshape this market and I do believe that CV will increase the size of total revenue market for security camera both for professional and the connected home.

So from that point of view I think the market will grow, not to mention that, we also believe there will be a refresh cycle coming up when the CV becomes at a reasonable price and good features and performance.

So that refresh cycle plus a growth market is definitely going to help us, plus I think the ASP definitely go up because of function features.

For drones, consumer drone, I think, it’s a -- we don’t see a continue to have a strong growth in the market, because the regulations and also the price point, but I do believe when the function and performance and the feature become available and the regulation becomes eased for the professional commercial drones, that will boost total revenue market for us.

So I really think that for consumer drone we need to focus on maybe a couple of important customer and DJI obviously number one, and also for commercial drones in the future. So we are doing technology. Fortunately the technology that we built for CV definitely directly apply to drones also.

We talk about stereo processing, we talk about object detection, planning, route planning, those technology are directly usable for the current drone market. So I really think that it’s really about how we allocate resource and building software for the near-term biggest opportunity.

That’s why we continue to talk about security and automotive, but drone we never say -- we’re definitely still keeping our radar and we want to get back there at the right point..

Great. That’s helpful. And then -- and my follow-up I just wanted to hit on gross margin with a two-part question, both of them for you, George. Talk a little bit about, clarify a little bit and add some color to the first half commentary about hitting the high end of your 59% to 62% range.

What are the plus or minuses that get you there and kind of any color in the back half of the year? And then the second part of the question is I know the ASPs are higher with the CV chip that you talked about, but do you expect gross margins to be accretive or dilutive in the CV family in general? Thank you..

Well, I think, in the first half we’ll start to see the impact of the China business increasing and the sports camera decline, so that’s why I am forecasting that to drift into the high end.

As far as the second half is concerned, right now it’s actually looking what I would call flat, no real degradation, because I think the mixed forecast at this point is not unsimilar to the first half. So I am reasonably comfortable with that. On the CV side, I am not expecting much impact to margins at all this year.

I think the volumes would be not really material to the overall margins. I think going forward I believe they will be accretive, particularly in certain markets like security and potentially drones.

I think we still have to sort out the various opportunities we have in auto, because there will be different competitive environments, for instance, in electronic mirrors versus surround view and later on ADAS. So I think those margins are still open for analysis in the future..

That’s great. Thank you..

Thank you. Our next question comes from the line of Jagadish Iyer with Summit Redstone..

Yeah. Thanks for taking my question. Two questions for me. First on the CV chip, particularly you talked about the application related to automotive.

What is the realistic timeline given the long qualification cycle and given that you are sampling currently with your existing products, when do you think that realistically you can get revenues from the CV chip for the automotive market and then I have a follow-up?.

Right. So for the automotive market like you said design cycles are long. But I think there are two portions of it. In China, the design cycle is shorter than other places. So we have seen that.

So -- but you’re right, if you let take and say electronic mirror that we have designs already and we talk about revenue, non-CV electronic mirrors revenue starting later next year, we believe that next-generation of electronic mirrors design will have a CV in there and that could be two years after that in China, maybe even longer for that.

So you’re absolutely right automotive CV is a long way of -- from revenue point of view is a long way for us. But however, all the design we need to be wins today for the three-year later revenue. So that’s why you have to start working on the design today.

But at the same time, we definitely realize that by working with Asian vendors especially in China we do see a near-term opportunity there..

Okay. Then as a follow-up I have, if you look at the home -- consumer home monitoring market, I was wondering if you have any thoughts on how big is it going -- is going to be and kind of a growth rate, and how should we think about competition here? Thank you..

First of all, I think, that market is continuing to grow. We have been talking about because the market has been growing for two years now. We continue to see strong growth. It’s hard for me to quote a growth rate because we haven’t seen any market research on that.

But based on our current customer feedback, we think that all the customers are seeing strong growths on their revenue and their products. So I optimistically believe that this market will continue to grow for another couple years.

In terms of how big it is, again, there’s no really market research for that, but if you look at the popular camera vendors, selling multiple camera into the home today. And if you’re considering how much home -- how many homes in U.S. and the penetration rate, I think, we’re still in probably the early phases of the connected home market.

And we expect this market can continue to growth maybe two years to three years following, especially when CV become a reality for connected home cameras that will again boost the usage, because it become a lot more convenient and user-friendly for the users of those cameras..

So is there a dollar number that you can kind of throw out there for the home monitoring market just to give us some kind of a context like whether it’s $20 a home or some kind of a number that we can take and then go from there?.

Well, our chip ASP is high single-digit, mid to high single-digit in that range for each camera. And if you say 2 to 3 -- you have to do your own calculation, but that’s where the ASP is for us for those cameras..

Okay. That’s good. Thank you..

Thank you. And our next question comes from the line of Joe Moore with Morgan Stanley..

Great. Thank you. I wonder if you -- it sounds like GoPro was stronger than your expectations or at least looks that way in the January quarter, and I guess, that’s kind of surprising in the sense of them talking about HERO5 not selling as well.

So, I guess, A, is that the case and do you understand why and then, B, does that mean that there’s some other part of your business in the January quarter that’s kind of maybe less than you expected that that’s offsetting?.

Actually, the GoPro business is pretty much in line with what we expected just because of the order processing timing. That was why my comment earlier that we expect the early part of next year to be slow for GoPro due to probably excess inventory, similar to what we’ve seen the last two years..

Okay. Great. That makes sense. And then, I guess, with regards to this longer automotive timeline on the CV chips, I am kind of curious when you sort of look at a business where you’re iterating the chips multiple times a year, you’re putting out multiple generations and you have these long design cycles.

How does that work, is CV1 sort of vying for model year, several years out type of wins?.

Yeah..

Or is CV1 to sort of establish a development platform so that they can evaluate the future iterations of the chip?.

Right. So, I think, let me give you example, for example, when we started doing electronic mirror, we used our computer chip called A9 to demo the function and features and powers and to get people interest and start moving on the designs. And we secure design win by showing them auto grade chip called A9Q.

So that’s the process we went through and we believe we need to run through similar things in the auto side, so that CV1 will be evaluating power for them, but we need to follow up with another chip which is auto grade for them to go into production.

But without CV1, look, there’s no chip that can evaluate your performance and your clients, you won’t be able to even get a discussion with that. So that’s the cycle we’re going through. But, however, the two to three-chip a year is not all for auto.

You can imagine that for the IP security camera or for the home security, the performance requirement for CV is much less than auto, so you need a different chip for that. So you can imagine that we start doing chips for different markets, one target for auto, one target for security and maybe there’s other things in between.

So look developing family become targeting particular applications, I think, that’s requirement for -- the continue to play in multiple different markets..

Great. Thank you very much..

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

Hi, Fermi. Hi, George.

In the fiscal ‘19 guidance for 10% year over year, can you talk about whether you think the IP security market, the auto market would grow faster on a relative basis and the puts and takes there?.

Well, right now I think the auto market is probably going to be our fastest growing market next year just on a percentage basis but it is off a smaller base. The next growth area is probably going to be the home security market. So I think that will again be very strong next year.

In professional security, I think, it will grow next year, but probably more in line with market, because you’re going to have ASP erosion there, unit increase and ASP erosion..

Okay. That’s helpful.

And then the auto, just to clarify the auto in fiscal ‘19, are you assuming any CV revenue in there or not and when will we be in a position to announce customer wins for CV?.

There -- right now, there’s no CV revenue in the auto market forecast and I would say in CV, probably the second half as we’ve talked about we’ll be able to talk about customer relationships, potentially or hopefully before that we might be able to talk in the auto space about relationships with CV..

Okay. That’s very helpful. Maybe one quick question on the security market, what’s the mix now of your revenues of professional versus consumer, has consumer come up the curve, whether half-half or it’s still small relative to the professional book? Thanks..

Yeah. It’s still less than half but it is expanding. It’s well over a third of the security, total security now..

Great. Very helpful. Thanks, George..

Thank you. And our next question comes from the line of Richard Shannon with Craig-Hallum..

Hi, guys. Thanks for taking my questions as well. Apologize for the ambient noise here in the airport, so I am just going to have to ask the question and go on mute. My questions follow-up on the IP security market kind of assumptions built in for fiscal ‘19, just following up on the previous question.

I wonder if you could tell -- give us the thought process on how you think about China versus the rest of the world, whether there’s any sort of realistic or noticeable bump coming from HEVC outside of China and then any thoughts on relative share? Thanks..

I still think that the Chinese market is growing faster than the international sales and also that high vision dollar continue to be very strong. So I don’t think -- I don’t expect that to change.

In terms of HEVC, that was a Chinese product based syndrome, but hardware like we said, Bosch started shipping HEVC products this quarter and we also knew that a few other international system company will follow with their HEVC offering.

So HEVC will become quite international standard for security camera, however, to our knowledge that, the royalty situation with HEVC is not -- has not been resolved yet. So that’s still a big question for our customer how to handle it.

But, nonetheless, we start seeing because of the tech vision dollar has been aggressively pushing HEVC and everybody else is following now..

Yeah. Just one other comment on the overall market, we do -- we did see I think strong revenues in professional security outside of China this year also. So that did contribute to some of the growth and we are expecting next year to see the same..

Great. Thank you, guys. That’s all for me..

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the floor back over to Dr. Fermi Wang for any closing comments..

Thank you. And I would like to thank all of our colleagues for their outstanding job to deliver computer vision technology on time and also thank you all of you for joining us this afternoon. I’ll see you next time. Bye..

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