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

Kevin Cassidy - Stifel Joe Moore - Morgan Stanley Ross Seymore - Deutsche Bank Matt Ramsay - Cowen Suji Desilva - ROTH Capital Quinn Bolton - Needham & Company Adam Gonzalez - Bank of America/Merrill Lynch Charlie Anderson - Dougherty Richard Shannon - Craig-Hallum.

Good day, ladies and gentlemen and welcome to the Ambarella Second Quarter Fiscal Year 2019 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, Liz. Good afternoon and welcome to Ambarella’s second fiscal quarter 2019 financial results conference call. Thank you for joining us today. Our speakers will be Dr. Fermi Wang, President and CEO; Casey Eichler, CFO; and George Laplante, Executive Vice President.

The primary purpose of today’s call is to provide you with information regarding our fiscal 2019 second quarter results. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, 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, 2018 for the 2018 fiscal year and the Form 10-Q filed on June 8, 2018 for the first fiscal quarter 2019.

Access to our second 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 and good afternoon, everyone. Our Q2 fiscal year 2019 revenue was $62.5 million representing a decrease from $71.6 million in the same period over the prior year. Revenue from our target markets, including IP security camera and the OEM automotive car recorders grew year-over-year.

Revenue from consumer applications, including sports, VR and the drone cameras continued to decline.

And as you can see from our weak Q3 guidance, we expect revenue from these consumer applications to continue to be under pressure reflecting lower demand for non-GoPro sports camera, the VR market is remaining nascent and the drone market leader, DJI, mostly using its own silicon solutions.

The limited size of this market combined with this market dynamics further reinforces our decision to focus on the growing IP security, automotive and the new robotic market opportunities. During the quarter, we continued to make steady progress on the development and the delivery of computer video solution based on our CVFlow architecture.

We benchmarked our CVFlow SoC against competing solutions for our primary silicon competitors running leading public domain neural networks. This benchmark showed that we have a significant performance and the power advantages versus competing camera SoCs, application processors and the GPU-based solutions.

The efficiency of our CVFlow architecture also gives us a big die size advantage. When combined with the major advances in our image processing in the highly efficient video encoding, we believe our new CVFlow SoCs are very well positioned to win in our target markets.

We have now released our CVFlow software developed kits, supporting our new CV2 and the CV22 SoCs, including tools for the optimization of a Convolutional Neural Network over to our customers. Customer feedback has been very positive in terms of the CV performance power consumption and the programming flexibility.

In many cases, customers are seeing performance results that are more than 10x faster using our CV chips through our public domain network than with competing solutions.

As a result of these customer evaluations, we now have a multiple leading professional IP camera manufacturers in design with our computer vision SoCs and expect this customer to enter mass production in the first half of next year.

We believe that the security cameras with computer vision capability will continue to grow as a percentage of total professional IP camera markets, including those for new installations as well as for replacement of existing cameras. This will provide the opportunity for us to increase our value contribution per camera and to grow our total revenue.

Professional IP camera customers are also continuing to introduce a wide range of cameras based on our existing SoC solutions. For example, in May, European IP security camera leader Axis Communications introduced its Q6125 PTZ camera using Ambarella’s H3 SoC that enables surveillance in total darkness up to 200 meters.

In the IoT home monitoring camera market, we saw a number of new product introductions from service providers spanning both traditional security companies and the cellular operators offering security services. U.S.

security giant, ADT introduced its Doorman Service based on an integrated doorbell camera and the door lock that can provide both remote viewing and door opening. The camera used Ambarella’s H2 [L][ ph] camera SoC for high-quality HD video and leverages advanced de-warping capability to provide a full 180 degree field of view.

Also during the quarter, alarm.com introduced its V622 indoor camera with full HD video wide angle 180 degree field of view. Based on Ambarella’s H2 E camera SoC, the camera also includes [indiscernible] vision, digital Pan Tilt Zoom and two-way audio calling and Bluetooth music streaming.

Ambarella’s IoT home monitoring revenue has been driven largely by the U.S. market in recent years we are now seeing new opportunities for growth in Europe.

During the quarter, European mobile service provider, Vodafone launched its smart home IoT service powered by Samsung SmartThings featuring a HD camera based on Ambarella’s H2 LM SoC, the service has initially been launched in Spain with other European countries to follow.

In the OEM automotive market, we continue to see customer momentum for our computer vision solutions. Feedback from customer is that they are looking for a platform that provides more flexibility to add value and the differentiation than the current market leading solution.

Furthermore, alternative legacy automotive chip suppliers are failing to meet the CNN processing performance requirements as well as being unable to operate within the limited power and the thermal constraints of the camera design.

Ambarella is meeting these requirements delivering higher CN performance, superior low light performance and low power operation while also operating video recording capability to support machine and human vision in a single design.

In the front camera ADAS category, we are being evaluated by leading Tier 1 camera supplier as well as a third-party software supplier to deliver an ADAS solution, including those meeting Euro NCAP requirements.

To accelerate time-to-market, while initially focused on customers and the partners that are developing their own algorithm requiring high-performance and CNN processing and low power, with Ambarella’s providing an open programmable [indiscernible] platform and HDK.

In the emerging Level 2 through Level 5 autonomous vehicle categories, Ambarella is offering a flexible open perception platform, including both short and long range stereo cameras, enabling customers to develop their own autonomous software stacks.

Additionally, we see opportunities to partner with customers in the further development of our own perception modules for future integration into their autonomous architecture. During the quarter, we continued to deliver CV1 based SuperCam stereo cameras to customers for evaluation.

The SuperCam camera delivered the 360 degree short and long distance viewing capability required for advanced perception and precise self location. They provide a perception range of over 150 meters for stereo obstacle detection and over 100 meters for monocular object classification.

We also demonstrate our new CV2 SoC by combining CNN processing that is up to 20 times as powerful as CV1 and includes more advanced image processing as well as enhanced stereo processing.

Our testing confirms that CV2 consume less than 5 watt power while simultaneously performing new [network] [ph] processing, image signal processing and HEV’s encoding at a 4K resolution.

On the processing performance per watt basis, this is more than a order of magnitude better than leading CPUs can achieve even with the only perform [new network][ph] processing.

The Level 2 to Level 5 autonomous application with CV2’s combination with CNN performance and low power enables development of camera perception hubs that offloads CNN processing for the main computer.

And in China, the world’s largest automotive market, Ambarella currently enjoys a leading position in the OEM car recorder market is building upon the relationships established with camera makers and third-party software companies to target future designs that require computer vision technology.

This includes forward facing cameras that combine recording with ADAS functions as well as electronic mirrors that integrate recording capability or [advice by][ph] detection. In the OEM automotive market, we continue to see new car models introduced in Asia with car recorders integrated as pre-installed options.

During the quarter, Toyota introduced two new HD drive recorders in its C68 family. The models are both powered by Ambarella’s A12 A SoC and include HDR processing, low-light night time recording and a wide angle viewing enabled by A12’s on-chip [developing] [ph] hardware.

While the model supports two external small form factor camera modules for front and rear viewing with connectivity to the HEV unit supported by Ambarella’s V6 serializer/deserializer link chips. In China, carmaker, SAIC introduced its Model X electric SUV with a full HD car recorder, including Wi-Fi capability based on Ambarella’s A12 camera SoC.

Additionally, Chinese carmaker, BYD, introduced its Tang SUV with an integrated full HD car recorder also based on Ambarella’s A12 SoC. The design leveraged the A12 on-chip Ethernet capability for connectivity with the vehicle’s infotainment system.

In the aftermarket [indiscernible] category, Korea’s Fine Digital introduced its GX2000 model based on Ambarella’s A12, the dash cam include font and the rear quad HD resolution cameras, ADAS functions, including lane detection warning and the forward collision warning and 3D noise cancellation for excellent nighttime image quality.

Ambarella is also engaging with aftermarket in the fleet camera makers with a full camera design based on our CV22 SoC that combines traditional dash cam recording capabilities with advanced ADAS algorithms.

In the consumer drone market, Parrot, Europe’s leading drone group and the world’s number two consumer drone maker introduced its ANAFI model setting a new benchmark for video features and quality at a sub $700 price. ANAFI is ultra-compact portable design with the 4K HDR camera and a 25-minute flight time.

Based on Ambarella’s H22 SoC, the camera includes advanced HDR processing and offers unique video and photo shooting capability. Thanks to its 180 degree tilt gimbal and 2.8x lossless zoom.

Also during the quarter, Chinese drone maker, Yuneec, introduced its Mantis Q consumer drone, a small form factor designed for both outdoor and indoor use and capable of navigation inside buildings. The drone features an integrated 4K camera based on Ambarella’s A9Z SoC and includes electronic image stabilization and the voice control.

In summary, while our revenue continued to be impacted by the decline of sales into specific consumer markets, we remain confident that our decision to focus on computer vision or IT security camera, automotive and the robotic market is correct and bearing fruit.

We are delighted by the customer response to our new computer vision SoC in IP security camera market and look forward to customers being in mass production in the first half of next year.

In the automotive market, our revenue from car recorder continue to grow and we are making steady progress and as we engage customer with our computer vision technology for ADAS and autonomous vehicle applications.

Finally, having successfully delivered the 10-nanometer CV2 and CV22, CVFlow SoCs in the first half of this year, we are also pleased to announce that we have taped out an additional family member to further extend the range of price performance options available to our customers.

Before I turn the call to George for his portion of the call, I would like to introduce our new CFO, Casey Eichler who has been on board a total of about 3 weeks. We are also pleased to have him to replace George, who as you know is retiring at the end of September.

And also I want to sincerely thank George for his many years of service to the company. His dedication, guidance and the friendship have been invaluable to me and the entire team of Ambarella and we all wish him the very best in his well-deserved retirement.

Now, I will turn the call over to Casey who would like to say a few words before going to discuss our Q2 result and the Q3 guidance..

Thank you, Fermi. I am excited to join Ambarella and I look forward to working with Fermi and the entire Ambarella team. George built an excellent team and has demonstrated tremendous leadership while at Ambarella. I appreciate the opportunity to work with him over the next month, while he transitions to a new chapter in life.

With that, I will turn it over to George to go through our Q2 results and Q3 guidance..

Thank you, Casey and good afternoon everyone. Today, I will review the financial highlights for the second quarter of fiscal 2019 ended July 31, 2018 as well as the financial outlook for Q3 fiscal year 2019 and update the outlook for the full fiscal year.

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 Q2, we have eliminated stock-based compensation expense adjusted for the impact of taxes.

In line with our previous guidance, our Q2 2019 revenue totaled $62.5 million, which represents a decrease of 12.8% from the $71.6 million of revenue in the same period of the prior year. Non-GoPro revenue declined in the quarter by approximately 8.3% from the $67.9 million in the previous year.

In Q2, we saw year-over-year growth in IP security and auto OEM offset by a substantial decline in revenues from drones and wearables which also includes non-GoPro sports and VR cameras. In IP security, year-over-year growth was led by consumer security revenues, while professional security revenues were flat.

Solid revenue increases from OEM automotive video recorders in Japan and China resulted in year-over-year growth for the auto market. Consumer drone revenues in the quarter were down substantially from last year with the majority of our revenue coming from the new Parrot drones and the high-end from DJI.

Wearables declined from last year as we experienced weak sales across most consumer categories that we believe are due to weak end-market demand. Non-GAAP gross margin for Q2 was 61.4% compared to 61.8% in the preceding quarter.

Gross margins continued to reflect the shift in market mix to lower margin, China security revenues, and a drop in higher margin drone and wearable camera revenues. Non-GAAP operating expenses for second quarter were $29.9 million compared to $31 million in the previous quarter.

OpEx decreased from the previous quarter primarily as a result of a decrease in employee bonus costs as a result of lower revenue projections and non-recurring employee costs incurred in Q1, partially offset by increased headcount cost.

Non-GAAP net income for Q2 was $88.5 million or $0.25 per diluted ordinary share compared with adjusted non-GAAP net income of $19.3 million or $0.56 per diluted ordinary share for the same period in the previous year. The non-GAAP effective tax rate in Q2 2019 was approximately 7.1%.

The non-GAAP effective tax rate for fiscal ‘19 includes a change in the allocation of stock-based compensation across the company’s tax jurisdictions to improve alignment of the non-GAAP tax rate to the GAAP tax rate.

For Q2 2018, non-GAAP net income was adjusted from $16.5 million to $19.3 million, and EPS was adjusted from $0.48 to $0.56 per share for comparative purposes. The change has no impact on GAAP net income or tax rate.

In the second quarter of fiscal 2019, the non-GAAP earnings per diluted ordinary share were based on 34.2 million diluted shares as compared to 34.6 million diluted shares for Q2 of fiscal 2018. Total headcount at the end of Q2 was 741 compared to 733 at the end of the previous quarter, with about 82% of employees dedicated to engineering.

Approximately, 71% of our total headcount is located in Asia. We ended Q2 with cash and marketable securities of $376 million, adding $6.9 million of cash from operations in the quarter. During the quarter, the company repurchased 1,119,193 shares at an average price of $40.18 for total consideration of approximately $45 million.

As of July 31, 2018, approximately $66.1 million remained available for repurchases under the $100 million repurchase program through June 4, 2019. From August 1 to August 24, we repurchased an additional 598,892 shares for a total consideration of approximately $23.1 million.

Total accounts receivable at the end of Q2 was $29 million or 43 days sales outstanding. This compares to accounts receivable of $25.7 million or 40 days sales outstanding at the end of the prior quarter. Net inventory at the end of Q2 was $30.8 million compared to $23 million at the end of the previous quarter.

Q2 days of inventory increased to 100 days in Q2 from 96 days in Q1. Although inventory is higher than we normally carry and our intention is to reduce inventory value in the second half, we do not anticipate any valuation issues as the inventory consists of high volume chips for our primary markets. We had two 10% plus revenue customers in Q2.

WT Microelectronics came in at 62.7% of revenue compared to 67.1% in the second quarter of the prior year. Chicony came in at 15% as compared to 8.7% in the second quarter of the prior year. I will now discuss the outlook for Q3 and update you on the fiscal year 2019 outlook.

We expect revenues for our third quarter ending October 31, 2018 to be between $55.5 million and $58.5 million representing a decrease of between 37.7% and 34.3% respectively from Q3 of last year. We expect non-GoPro revenues at the midpoint of guidance to decline approximately 20% from last year, with GoPro revenues being immaterial in the quarter.

In the quarter, revenues will be negatively impacted by the substantial decline in demand for drones and consumer products, camera products during what is normally our high-holiday selling season.

Demand in consumer wearable markets, including non-GoPro sports, VR and other wearable cameras will be substantially below our earlier expectations and last year’s volumes.

Sales in these markets so far this year are below our expectations; and based on our customer feedback, we see this year-over-year decline accelerating through the normally strong holiday selling season. We estimate Q3 non-GAAP gross margins to be between 59% and 60.5% compared to 61.4% in Q2 2019.

The decline of higher margin drone and wearable revenues as a percent of total revenues continues to have a negative impact to margins in the quarter. We expect non-GAAP OpEx in the third quarter to be between $30.5 million and $32 million with the increase from Q2 primarily coming from increased engineering headcount.

We estimate our diluted share count from Q3 to be approximately 32.9 million shares.

For the second half outlook, the substantial weakness in consumer cameras, particularly non-GoPro sports cameras, along with the previously discussed decline in consumer drones, is expected to continue through the remainder of the year negatively impacting our fiscal 2019 outlook.

In addition, we believe the auto market will be below our previous growth expectations in the second half as delays in launching new customer and products will reduce our year-over-year growth expectations in this market.

As a result of these changes, we now see non-GoPro revenues being minus 10% to minus 12% as compared to fiscal ‘18 non-GoPro revenues of $258 million.

In addition, as has discussed on our last call, we expect GoPro revenues to be immaterial to the total revenues for the remainder of the year as compared to approximately $37 million for the full fiscal ‘18 year. As a result of the U.S.

ban on purchases of security cameras from Hikvision and Dahua, we are seeing some near-term reduction in our orders, particularly in the high end of the product range normally associated with our export business.

We have seen an offsetting increase in orders from non-Chinese customers, but we will not see the positive impact to revenues until later in the year. As it relates to other trade disputes, we are not currently impacted by any tariffs that have been put in place by non-U.S. governments, but continue to monitor the situation.

Other impacts from the trade dispute remain a risk such as China customers shifting to domestic suppliers. But at this time, we have not seen these affect our business. In addition, we do not see the dispute impacting the development efforts of new security cameras based on our CV chips at our China customers.

We expect gross margins to remain within our previous forecast at the low end of our target range of 59% to 62% for the year. We have lowered our OpEx estimate for the year from the high end of the range of $120 million to $130 million to the midpoint of the range.

Lower revenue expectations along with a reduction to the budgeted hiring rate are driving the lower OpEx levels. Due to the forecast reduction in the consumer markets, we are transferring some of these headcount resources to the development of our security, automotive, and new robotic market thereby reducing the need to add as many new employees.

Before I turn the call over for questions, I would like to extend my deepest thanks to the rest of the executive team and all the Ambarella employees that have supported me during the last 7 years plus of my time with the company.

I believe Ambarella has some of the most talented and innovative minds in the industry, and I have been lucky to have been part of the team. Thank you for joining our call today. And with that I will turn the call over to the operator for questions..

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

Hi. Thank you for taking my questions. And congrats George on your retirement and great working with you and welcome Casey.

My first question is on the CV devices, do you have any estimate yet of when you might see the first revenue for your CV devices?.

Yes. So Kevin, this is Fermi, we too believe that we will see our first CV revenue from IP security camera in the first half of next year, and in fact we are tracking the progress very well. Like I said, we have several design activities with several international professional IP security cameras at this point.

And with the progress, we do believe that we have a chance that -- to deliver first CV revenue in the first half of next year..

Okay, great.

And on the automotive, you have mentioned some delays in product ramps, is that related to the three way camera systems, maybe from Gentex?.

No, it’s for the – I think I think you are referring to what George said about second half auto revenue. I think that’s really related to our recorder business in Japan. There are some product delays, and there is promotion by one of our key customer.

They delayed the promotion, so I think we started seeing some drop on the forecast on our auto recorder side, but I don’t think that’s a long-term effect..

Okay.

And maybe if I can, let me just follow-up with Gentex, is there a forecast from Gentex yet ?.

We haven’t talked about Gentex forecast yet. We are working with E-Mirror solution three-channel E-Mirror solution with Gentex today. And like I have said, our first 3-channel E-Mirror revenue came from China, and we haven’t given any guidance on the Gentex revenue yet..

Okay, thank you..

Our next question comes from Joe Moore with Morgan Stanley. Your line is now open..

Great. Thank you. I have one shorter-term question and one longer-term question.

In terms of the quarter that you are guiding for, can we just get a sense for how much consumer business is left there versus the surveillance and automotive, and I guess as you think out to next year, I feel like surveillance and automotive should both grow, and so I guess could we be getting close to the end of these consumer headwinds, just give us a ballpark of that exposure?.

Yes. I think if you look at second half and the year in total, I would think security in total is going to be at least 60% of revenue. And then, auto will be in the low-20s, so that leaves wearable and a little bit of infrastructure for the remainder. So, yes it’s getting to a relatively small percentage of our revenue at this point..

Okay, that’s helpful.

And then longer term, when I think about the automotive opportunity, I feel like a lot of people think that you guys are sort of competing directly with big companies like Nvidia and yet it seems like when we talk to people who both at Ambarella and other places who are working on this that there is opportunity for you to co-exist with some of those existing solutions, and I think you might think that’s the right way and is there a role for sort of multiple vendors and for you to sort of do perception offload in those vehicles that are already established prototype customers for people like Nvidia?.

Right. So, for you referring to the – we competing with Nvidia is really referring to the market levels 2 to Level 5 autonomous driving, because for the front camera ADAS category, I don’t think that we are competing with Nvidia on there. So let’s focus on Level 2 to Level 5 at this point.

I think for that particular market, because we are offering a really flexible open perception platform, we are focusing perception module at this point, and we have shown our customer that not only we have a much better CNN performance for power per watt and also that we can do a very high quality video processing, high performance CNN performance, and that really helped our position to become a perception solution provider for those Level 2 to Level 5 guys.

Of course, in the long run, we want to have a complete solution, but today with the CV2 and CV22, we are really providing a perception solution for those customers and being well received, and I will say that we have several very serious engagements in this autonomous vehicle category right now.

And I also want to add another point, which is in the front camera ADAS category, where Nvidia is not now there, I think our main competitor is really Mobileye. And in fact, in order to accelerate the time to market, we kind of focus on customer and partners that are developing their own algorithms.

And so, we are really a hardware and platform supplier and working with Tier 1 or OEMs with their own algorithm or third-party algorithm to enable their front ADAS cameras in this category, and we have made a significant progress with several OEM Tier 1 projects and engaged in that evaluation with multiple other parties globally.

So really that – if you look at these two markets separately, the front camera ADAS category as well as the Level 2 to Level 5 side, I think both have made progress..

And then just to clarify that, I mean the perception module that you are talking about, I mean you actually in some cases could be sitting alongside in video and complementing the functionality of Nvidia solution?.

That’s correct. In fact, I think some of our engagement is in that kind of category..

Great. Thanks so much..

Thank you..

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

Hi guys. Thanks for letting me ask a couple of question, and George thanks again for all the help over the years and welcome onboard Casey. I guess the first question, in the near term, George you updated the full-year guidance, the implied fourth quarter is down kind of I don’t know 5%, 10% quarter-over-quarter again.

I suspect the same general trends would be the reason for that incremental dropdown, but just wanted to confirm is it a continuation of the trends and nothing more specific to the core IP security and auto businesses?.

That’s correct. Actually, the wearable section is causing decline to the whole second half. Actually, in Q4, when you take out GoPro revenue from last year, the decline year-over-year in non-GoPro revenue is going to be less than it was in Q3, so a smaller decline in Q4..

Got it.

And then I guess switching over to the CV side of things and maybe you just want to talk in the first half of next year or even more long-term, but Fermi as we think about the implications of what that can bring, I know there’s a couple different end markets that you guys are targeting, but if I recall correctly from some of your prior comments, there is a good ASP uplift as that business rolls through as well, can you just talk about how we should think generally about that mix between units and ASPs in the various markets, and is it fair to assume that the ASPs being higher is a good proxy for it being a tailwind to gross margins or is there a COGS dynamic within those CV chips that makes that a poor assumption?.

Right. So, I think that both CV22 and CV2 will increase our ASP dramatically, and we -- although we are just starting engaging on the price negotiations with our customers, our feeling is CV22 will be 2x to 3x higher than our current average ASPs in the security camera market, and CV2 is probably even higher than that.

And from a gross margin point of view, I think we are targeting to having the gross margin stay within our corporate gross margin..

And it’s still that 59% to 62% range, I believe?.

That’s correct..

Got it.

And then I guess the last question just bringing in the whole tariff dynamic in and thank you for your detailed comments on that, but is the biggest risk here that the non-China based folks just don’t offset the China based folks in the near-term or do you believe that what DJI is doing etcetera, bringing it in-house is something that could occur outside of the drone market and occur in the IP security side of the equation as well if in fact tariffs would be something that would be a catalyst for those companies to move that direction?.

Yes. I think the impact on the, let’s say the U.S. government ban is going to be relatively small in the second half, a little bit more in the near-term as cancellations will be in the books before actual shipments into the new customer. Longer term, I actually think it will benefit revenue.

First of all, our ASPs are higher to the non-Chinese customers, so they will be fulfilling demand at a higher ASP and a higher margin, so I think there is some longer-term benefit.

In addition to that, I believe the view of the high silicon chip outside China is becoming more negative, so that becomes less of even our competitor in the marketplace outside China. So, I think that will also benefit us..

Well, in terms of our customer continue to do their own silicon, I think that’s a trend, a lot of silicon companies are taking on because the DJI and GoPro, their ASP is so high, in fact we know that we have a much cheaper, smaller die size and much better product, but they don’t really need to care about die size.

But we come to a competitive market that -- and IP can’t – I knew that Hikvision and Dahua has to have working on their chip, but through all years, we continued to be their supplier.

So, I won’t rule out the possibility that our customer continued to work on it, that’s something we continue to deal with, but I think when the CV chip comes out, we’ll really raise our bar at this time, when people catch up our video only solutions, I think that CV will create a bar for us to provide us our barriers of entry for a while..

Thanks Fermi.

One quick housekeeping one for George and you provided a lot of details about the taxes currently and looking backwards, but if we think looking forward on a pro forma basis, how should we think of the tax rate?.

I think the tax rate will probably, if I was to estimate it now, it’s probably around the 10% level for next year. For the rest of this year, probably slightly below that..

Perfect. Thanks and congrats again George..

Thank you..

Our next question comes from Matt Ramsay with Cowen. Your line is now open..

Thank you very much everybody.

Good afternoon, I want to follow-up on some stuff that Ross was just asking about guidance with respect to the security market, maybe you could sort of remind us what the mix of that business is today both Chinese customers versus Western customers or maybe camera shipped into the China market versus cameras externally, however you want to divide it up, I think just level setting those mixes within the business would be helpful to investors? Thanks..

Yes. I think the mix right now we can just use dollars it’s probably about 55% into China customers, 45% into sales into non-Chinese customers..

Got it. That’s helpful. Just to kind of level set that.

And then a question that I guess I get most often now from investors is really around the CV engagement in the automotive market, you guys have obviously done some demonstrations at the Analyst Day around some driving platforms and there has been lots of discussion about engagement, but I think investors are just looking for some more formal engagement announcements with partners in Tier 1s.

And maybe you could update us on what kind of timelines we should expect around more formal engagement announcements that and sort of give some guideposts to where investors are thinking about timelines for revenue in the automotive space? Thank you..

So, like I said, since we already have some significant progress with some of the OEM, Tier 1 discussion on ADAS as well as some engagements in autonomous vehicle, we are still targeting to have some announcement at end of year. That’s our target right now. And in terms of revenue, in fact, it’s going to take a while.

We start working on recorder business for OEMs 3 years ago and we start seeing revenues just last year. So, just showing you even a relatively simple solution like a recorder take 2 years in China to be in production, so we expect that CV will take longer.

However, I do believe that the requirement and performance requirement and the power consumption limitation in the automotive space will benefit us, and we assume that we have a very significant advantage with our solutions. So I remain very optimistic about our chance to making into market..

Got it. Thank you for that, Fermi.

And then just the last one I could sneak in, George, you had talked about sort of the new guidance range for this year and it seems like the majority of the consumer businesses will be out of the run-rate here exiting the year, is it too early or is there an opportunity here to sort of set expectations for where you guys are forecasting the business for fiscal ‘20 just on the top line to 50 folks level set on expectations that will be really helpful? Thank you..

Yes, I think it’s a little early to do that. We really need to get a handle on launch of the new products in the first half and then once we understand this little better, I think it will be better to wait until those facts are in – or at least a better picture of those facts before we talk about next year.

But as you said pretty much most of the consumer business will be down to a minimal level by the end of the year, so we will be running pretty much a high percentage of security business, 60% plus, plus 20% plus in the auto space..

Got it. Thank you very much and good luck with the Golf game, George..

Yes, thank you..

Our next question comes from Suji Desilva with ROTH Capital. Your line is now open..

Alright, guys. George, I am not going to comment on your Golf game. Casey, welcome and hey, Fermi.

So, in terms of the end-market for the CV products, I am wondering how you would size the addressable market for auto versus non-auto and if the robotic security camera portion of CV might come in sooner than the auto opportunities?.

Well, first of all, I think IP security camera will come first. I think the industrial machine learning type of robotic application will come second and the auto will come last. In terms of the size, I really think security camera because of the audio cumulates, the total market size is more than 100 million units already.

And based on our conversation with customer, they have different expectations, but I won’t be surprised that as soon as the very cost effective CV based security camera be available in the market.

The transition from current video-only solution to CV based solution won’t be fast, because it remains real and there is real use for those kinds of CV function. So I think that we are expecting a quick transition from video-only solution to CV for security camera.

And for the robotic application, I think you can see that there are many companies working on it, several companies is big enough to generate meaningful revenue at this point, but however, we do believe that this is a great opportunity for us because our CV2 back definitely then was the highest possible performance.

And also that – and also we have stereo processing which is important for machine learning as well as the CNN performance and power consumption. So I do believe that industrial level robotics or even robotics by consumer level is a huge opportunity for us moving forward..

Yes. Just one comment on robotics, I mean since our launch of the CV2 chip, now we have been able to actually start engaging in discussions with robotics companies. So I think the initial response is positive. And I think the architecture of what we are delivering fits their need..

Interesting, are you seeing revenues already for CV from IP security cameras or is that – if not when will that be coming?.

First half of next year as we have said in the past, it’s still on target..

Got it.

And then let me, more a technical question in terms of the software and how you provided that with the CV, are you guys – do you guys have your own software stacks? You are allowing customers to have fast time to market or you entirely relying on customers software stacks and allowing programmability or is it a hybrid approach I was curious I heard some comments and remarks, any clarification?.

In one sentence, it is hybrid, but let me be more clear, if you take all the neural network first, if it’s just camera by itself, we provide complete software stacks so that customers can leverage without wasting too much of their time to build the camera, right.

For the neural network portion we have our tools to help customer their neural network for other platforms to our inference engine on our chip.

And that’s how we helped several customers already and have many customers already to put their network on our chip, that’s how we confirm our performance not only running the public domain neural network but running customer neural network.

However we also have our in-house neural networks, the development of that is tracking proof of the concept we have very high performance, lower power solution and if customer choose for using our neural network we will sell them as a complete turnkey solution, but that’s not our main business model.

Our main business model is to using our HDK, helping our customer build camera and helping them to put their own neural networks on to our platform, that’s our key business model..

Okay. I appreciate the clarification. Thanks guys..

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

Thanks. And George just wanted to say it’s been a pleasure working with you and welcome Casey.

George just wanted to come back if you look at the third quarter guidance, I don’t know if I caught this, if you mentioned it, but both security and auto be up year-over-year?.

I believe auto will be flat, but security will be up..

Okay.

And then you have mentioned a couple of times that the consumer business is probably down to an immaterial level by the end of January quarter, do you guys have any sense of what fiscal ‘20 might hold I mean is that a market that you expect to rebound, do you think for modeling purposes we should just assume that it stays at an immaterial level, any thoughts just directionally how that business may or may not recover in calendar ‘19?.

Yes. The business is running will be the non-security and auto business. So taking those two out you are going to be running other businesses in the high teens maybe 20% of revenue.

I don’t see it expanding from that base and even if the revenue dollars stayed flat they would probably will be start declining as a percent of overall revenue as we roll out CV next year..

Just a clarification George, it sounds like it may be high teens for those businesses in fiscal ‘19, but your exit rate is going to be likely in single digits, correct?.

No, it will be higher than that in Q4, still be – it will still be in the teens in Q4. But what I am saying is as the dollar value I don’t see that expanding going forward. So to become the percent of revenue will decline next year as the other markets expand in CV..

Got it. And then just trying to come back to the professional security market, you talked about a very nice ASP increase on the CV22 family of 2x to 3x increase relative to the current video processors your shipping today. What percent of the professional security market you think will be able to afford that kind of price premium.

I mean, are you talking about selling that CV22 really only into say the high 10% to 20% of the market or you think you can see better penetration? And then a follow-on question is you sort of hinted at a third 10-nanometer phase-out of a cost reduced chip.

Is that cost reduced chip for the security camera market and will that help drive adoption of CV in the security market as Fermi alluded to in the previous question? Thanks..

Correct. First of all, I think the percentage of penetration is really depends on how aggressive our customer want to price their camera. And then with our CV22 ASP, I do think that you're performing to the category probably top 20% of the market right now based on the current market price of security camera system price.

But you are absolutely right to that we are expanding our performance price point by taping out another 10-nanometer chip, because we do expect that for us to continue to expand our transition from the video to CV solution, our customer will demand lower price, but competitive solution that we need to be prepared for that..

Fermi, just for that new 10-nanometer price, I assume that, that will still carry some ASP premium to your current video processor, is it just probably not going to carry a 2x to 3x premium, is that a fair assessment?.

That’s correct..

Got it. Okay, thank you..

Our next question comes from Adam Gonzalez with Bank of America/Merrill Lynch. Your line is now open..

Hi, thanks for taking my question. Just wanted to focus in on the first half ‘19 revenues for CV and security, just wondering if you could perhaps quantify what the impact will be if those revenues will ramp into the rest of the year and if you could just give us a rough percentage of what CV will be as a percentage of security next year? Thanks..

I think it’s a little too early to do that until we get the launch dates and determine how many cameras each of the customers are going to build and launch. I think we would have better visibility towards the fourth quarter of this year to be able to view that kind of data..

Okay, got it.

And then on OpEx, just can you remind us, I don’t know if you put this number out there, but what percentage of your OpEx or R&D do you spend on CV development?.

Yes, that’s been increasing. The last number we gave it was around 60% of our engineering dollars are spent on CV and/or auto. And I think this year that will shift probably closer to 70% to 75% of our engineering dollars will be shifted over there..

Got it. Thanks..

Our next question comes from Charlie Anderson with Dougherty. Your line is now open..

Yes, thanks for taking my questions and my congrats on George as well and welcome, Casey. Great to hear about the CV wins on the security camera side, I wonder given the split you mentioned with China, non-China, do you have any China customers among those wins? And then I have got a follow-up..

Yes. Actually, we are being very successful in China with the CV products. They are probably ahead of the non-Chinese customers as far as end camera product development and testing. Right now, outside of China, we have multiple customers in evaluation and starting to build cameras, but China actually is ahead of non-China customers..

Great.

And then for my follow-up, Fermi, you mentioned that 10x faster processing, I wonder if you could maybe help us with how you are defining that, is that image recognition kind of thing and is that based of CV2 and then as you are comparing it, what we are we comparing to is that the HiSilicon chip, are we also talking about Nvidia and internal solutions, add more color there would be helpful? Thanks..

We compare to HiSilicon, we compare to other GPU-based solutions, we compare to [indiscernible] that has been the frontrunner in the IP security for CV in the past and we also compare with some of the traditional automaker guys who has shipping some kind of DSP-based solution out there.

And the way we compare is twofold, one is running some public domain neural network on our CV22 or CV2 and also running the same network on those platforms I mentioned if we can get access to it.

So for example, if platforms out there you can buy, then you can run the same network and then you also – because some platform has public domain information about the performance, we can collect all of that to benchmark ourselves. That’s one portion of the data we collect.

The other data collection is really that our customer doing similar evaluation based on the same neural network, the public domain network running our platform and our competitor platforms [indiscernible] and we collect some of the results from that, get feedback on that.

The third thing we did is really we also help our customer port their own network running on CV2, CV22 compared to the same network and the customer network running under existing hardware platform based on the other competitive solutions.

So we collect all the data and when I say 10 times and [indiscernible] comparing to CV22 and CV2 is even higher, better advantage over there..

Excellent. That sounds great. Thanks so much..

Thank you..

Our next question comes from Richard Shannon with Craig-Hallum. Your line is now open..

Great. Thanks for taking my questions. Well, George, congratulations on retirement, Casey, I look forward to working with you.

I guess my first question will be on consumer security, since I don’t think there has been any real questions on this, I think you talked about some growth in that business and talking about some growth outside of the United States and if you can give us a sense first in terms of scale in that business, talked about security being I think roughly 60% a little bit more, maybe give us a sense of how big consumer is? And then what kind of growth path can that deliver, is that a 10% grow a little faster and could we see some contributions even outside the U.S.

and Europe?.

Well, I will take the split and then I will let me Fermi talk about the outside of the U.S. Right now, it’s about one-third consumer cameras, two-thirds professional cameras, and that’s based on dollars. And then I will answer the other one. As far as expansion of the home security market, we are actually starting to see Europe.

We have several as Fermi announced in essence, we have several customers in Europe now are starting to market the products into the home there. So, we think that will help growth in that marketplace.

We still don’t have really clear visibility in Asia, but we do know both Hikvision and Dahua are producing home security cameras we just don’t have necessarily a good split as to professional versus home security. So, we think that marketplace can continue to grow and will be – the growth will be assisted by some geographic expansion in customers..

Okay, perfect. I will ask one more question, jump out of line.

You talked about fairly fast transition within the IP professional security market from non-CV to CV solutions, any sense of how fast you expect that to be and do you expect that to happen with virtually all the kind of the other top Tier 1 OEMs out there?.

Well, I think you get different feeling when you talk to different customers. I will say that our Chinese customers are the most aggressive one, because they have real demand to switching for the current video-only solution to CV1.

When you talk to our international customers, among Chinese customers, some of them are very aggressive, some of them will be behind, because they think that they can use different ways to solve these problems, for example using cloud.

So that’s become more controversial discussion for the CV solution, but nonetheless and just, for example, Hikvision has been telling in their own conference call saying they are shipping 1 million units over CV based camera today and that one is very high-priced compared to the current – very, very high-priced compare to what they are selling right now.

So, that just give you an indication at that kind of price, they still try to push media units of CV based security cameras in China, but that show you that there is real demand for these kind of functionalities..

I think one thing we have to take into consideration is also the Chinese government who are pushing very heavily for more and more information. And security cameras are one of the areas they are pushing and computer vision helps actually develop some of the data they would like to collect.

So, I think one of the reasons there is more acceptance in China is because of government push to install these cameras..

Okay, that is helpful. Thank you. That’s all for me..

I am showing no further questions in queue at this time. I would like to turn the call back to Dr. Fermi Wang for closing remarks..

Thank you. And I would like to thank all of our colleagues for their outstanding effort to deliver our CV platform so that we can establish ourselves a competitor in the space. Thank you very much. And I will talk to you next time..

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