Ambarella, Inc. (NASDAQ:AMBA) Q2 2024 Earnings Call Transcript

Ambarella, Inc. (NASDAQ:AMBA) Q2 2024 Earnings Call Transcript August 29, 2023

Ambarella, Inc. beats earnings expectations. Reported EPS is $0.15, expectations were $-0.21.

Operator: Thank you for standing by, and welcome to Ambarella’s Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program, Louis Gerhardy, Vice President, Corporate Development. Please go ahead.

Louis Gerhardy: Thank you, Jonathan. Good afternoon, and thank you for joining our second quarter fiscal year 2024 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, and Brian White, CFO. The primary purpose of today’s call is to provide you with information regarding the results for our second quarter fiscal year 2024. 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 based on our currently available information and 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.

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We’re under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents we filed with the SEC. Access to our second quarter fiscal 2024 results press release, transcripts, historical results, SEC filings, and a replay of today’s call can be found on the Investor Relations page of our website. The content of today’s call, as well as the materials posted on our website are Ambarella’s property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business update for the quarter, Brian will review the financial results and outlook, and then we’ll be available for your questions.

Fermi Wang: Thank you, Louis, and good afternoon, everyone. Our fiscal Q2 revenue was approximately flat sequentially and consistent with our guidance. Our AI business grew sequentially and year-over-year, while our Video Processor business was down sequentially and down about 50% from a year ago. Our blended ASP in Q2 was above $12 and is on track to grow about 20% year-over-year. Thanks to the reach and mix of AI SoCs, highlighting the value of our emerging AI Inference Processor (ph) business. Our mid-to-long-term growth outlook for the AI Inference Processor business remains positive. However, the near-term environment is very challenging for our overall business. Customers are now more aggressively reducing their inventory and we are now seeing some pockets of weak end-market demand, which complicates our customers’ ongoing inventory reduction efforts.

Given this, we have reduced our second half outlook. We are not expecting a recovery in calendar 2023, but we do anticipate our customers’ inventory will normalize by the end of the year and set us up for a return to growth in calendar 2024. We continue to expand our position in the rapidly evolving AI inference processor market. Cumulatively, we have shipped more than 17 million AI inference processors into device and end point for IoT and automotive applications, and we are now expanding our AI inference processor reach into vehicle autonomy. As announced on the last earnings call, we continue to evaluate the AI inference accelerator market opportunity. I will now summarize the status of our three major SoC product families, Video Processors, CV2, and CV3.

First, Video Processors are human viewing, I expect it to be about 40% of total revenue this year, down from 55% last year and they typically come in a single-digit ASP. For several years, we’ve been prioritizing our limited resource on AI technology and products and for this reason we anticipate our video processor revenue to continue to contract. However, the revenue impact from the video processor contraction in fiscal year 2025 is anticipated to be significantly lower than what we are experiencing this year. Second, our CV2 family of SoCs establish Ambarella’s in the AI inference market and this SoC are expected to approach 60% of our total revenue in fiscal 2024, up from 45% last year. This family of AI inference SoC commences and ASP close to $20 and serves computer vision applications for auto and IoT.

CV2 remains an important growth market for Ambarella in mid-to-long term. Third, our CV3 family SoC first began to assemble a year ago. Based on our third-generation AI inference technology, this SoC target more challenging AI inference workload such as partial or complete mobile system autonomy. The CV3 family SoC range from $50 to more than $400 per SoC and autonomous driving software stack optimized to run on CV3 can add hundreds of dollars per unit of incremental software value. The AI inference processor embedding our CV3 SoC is a starting point for our evaluation of the Gen AI acceleration market. In the last quarter, we began to port Meta’s Llama 2 to the CV3 ADI and we expect to have chatbot demos available later this year. We will provide updates on our continuing evaluation and encourage to see Generative AI opportunities emerging on both the server and the device side of the market.

I will now summarize representative customer activity in the quarter. Design activity in the enterprise security camera market remains robust at medium customer worldwide. Motorola introduced its H5A multi-sensor camera based on our CV2 AI SoC. The camera offers up to 360-degree view utilizing through four image sensors with upto 32 mega pixel resolution and AI analytics. Axis, a unit of Canon announced the 2 megapixel M4215 cameras and the 4K M4218 cameras both based on our CV25 AI inference — SoCs, targeting indoor surveillance applications. Japanese market leader, i-PRO, announced the expansion of its Rapid PTZ X-Series and S Series with 16 new models based on our CV25 and CV22 AI inference processors. DynaColor introduces Smarter Q next-generation multi-directional camera using our CV5 AI processor to support four 5-megapixel sensors.

And in South Korea, Hanwha launched three new bi-spectrum AI cameras based on our CV2 AI SoC. These cameras provide 4K video and thermal view simultaneously for the rapid detection and the classification of vehicles or insurers. I will now talk about representative customer activity in Automotive market. In our May 30 earnings call, I mentioned the positive feedback we received at the Shanghai Auto Show for our CV72AQ AI inference processor, a derivative over the CV3 family of SoCs. During Q2, this is a Tier 1 in China and I am pleased to report multiple Tier 1 wins for Level 2+ applications. We expect some of this Tier 1 projects to commence production in the second half of the calendar year 2025. We are pleased to announce our first CV5 win in passenger vehicle.

We expect this win to enter production in the next 12 months. In this application, the CV5 will support AI inference processing for multiple cameras. Additionally, in July, GAC Motor in China unveils its hyper GT intelligence coupe, including an L2+ ADAS intelligent driver assistance system based on our CV22AQ. And recently, the Chinese government has a new policy allowing camera monitoring system, CMS to replace conventional left and the right side mirrors. The policy also covers interior rear mirrors with a CMS enabled the models being legal, beginning in July 2023. This CMS system represent a significant opportunity for Ambarella’s CV2 family of AI inference processors. During the quarter, BAIC, one of the largest automotive OEMs in China began selling SUVs equipped with the CMS system based on our CV22AQ.

In the automotive aftermarket, Toyota introduced its wireless backup camera system for trailers based on our H32AQ video processor. The camera will be an option for Toyota’s model year 2024 Sequoia and Tundra trucks. Canopy, the startup resulting from Ford and ADT’s 2022 joint venture introduced its first product, the Canopy Pickup Cam based on our CV25 AI inference processor. The camera provides a full HD recording, 180 degree field of view, person detection, and Reach-in detection for the back of a pickup. And in June, action camera maker, Insta360 announced its GO 3 camera, a lightweight, but powerful 2K camera that utilizes our H22 video processor. These representative engagements indicate a healthy pace while continuing customer design activity for AI inference processors.

Our investment strategy is aligned with the anticipated market demand for more sophisticated software intensive AI influence applications. In the last three years, thanks to the CV2 family, we have demonstrated the ability to capture more value per win with customer demand migrate to AI from video processors. Looking forward, we believe our newer products such as the CV5, CV72 and CV3 are well-positioned to support the increasingly sophisticated AI inference workload our customers are anticipating. This new product ramp and as we also capture more software value, we anticipate our blended ASP will continue to rise. While actively managing expenses through the current market turmoil, we will continue to drive our strategic R&D investments to fully realize the AI inference market opportunities we have discussed today.

With that, Brian will now discuss the Q2 results and outlook in more detail.

Brian White: Thanks, Fermi. I’ll review the financial highlights for the second quarter of fiscal year 2024 and provide a financial outlook for third quarter ending October 31, 2023. I’ll be discussing 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, we have eliminated stock-based compensation expense and acquisition-related costs adjusted for the impact of taxes. For fiscal Q2, revenue was $62.1 million, in line with the midpoint of our prior guidance range, flat to the prior quarter and down 23% year-over-year. Sequentially, IoT revenue was up slightly, while automotive revenue was down slightly. Non-GAAP gross margin for fiscal Q2 was 64.6% at the high end of our prior guidance range.

Non-GAAP operating expense was $46 million below our prior guidance range of $48 million to $50 million, driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q2 net interest and other income was $700,000 and our non-GAAP tax provision was $800,000. We reported a non-GAAP net loss of $6 million or $0.15 loss per diluted share, equal to the prior quarter. Now I’ll turn to our balance sheet and cash flow. Fiscal Q2 cash and marketable securities decreased $10.9 million to $216.5 million. DSO was relatively flat at 45 days, while inventory declined from 151 to 147 days, down $6.5 million from the prior quarter. Cash used in operations was $6.8 million and capital expenditures for tangible and intangible assets were $5.4 million.

Free cash flow defined as cash from operations less CapEx was minus 20% of revenue for the quarter and positive 4% on a trailing 12 month basis. We had two logistics and ODM companies represent 10% or more of our revenue in Q2. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia came in at 54% of revenue. Chicony and ODM, who manufactures for multiple IoT customers was 14% of revenue. I’ll now discuss the outlook for the third quarter of fiscal year 2024. The near-term revenue outlook is challenging. Customer inventory management actions have accelerated and pockets of end demand softening have appeared. Considering these factors, we estimate that our fiscal Q3 revenue will decline to approximately $50 million plus or minus 4% driven by our IoT end market.

At this time, we anticipate that this revenue range could continue into our fiscal Q4 with sequential revenue growth resuming in our fiscal Q1. We expect fiscal Q3 non-GAAP gross margin to be in the range of 62% to 64%. We expect non-GAAP OpEx in the third quarter to be in the range of $46 million to $49 million with the increase compared to Q2 driven by higher R&D tied to new product development activities. We estimate net interest income to be approximately $1 million. Our non-GAAP tax expense to be approximately $700,000 and our diluted share count to be approximately 40.1 million shares. Ambarella will be participating in Evercore Semiconductor Conference on September 6, the Asia Investor Conference on September 12 hosted by NASDAQ, the Morgan Stanley Bank of America future car series on September 28 and the Mobility Conference hosted by UBS on October 2, please contact us for more details.

Thank you for joining our call today. With that, I will turn the call over to the operator for questions.

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Q&A Session

Operator: Certainly. [Operator Instructions] One moment for our first question. And our first question comes from the line of Christopher Rolland from Susquehanna. Your question, please.

Christopher Rolland: Hey, guys. Thanks for the question. So if you guys could highlight a little bit more pockets of weaker end demand that you’re seeing there. And then, maybe you can put this in terms of under-shipment by end market. Last quarter, you talked about as an example, a customer that was under shipping by 30%, has that under shipment changed at that customer, and have new customers joined that kind of level of under shipment as well? Thanks.

Fermi Wang: Right. So first of all, in terms of the pockets of weak end market demand, I think there are two areas, one is on the — of course, in China, we generally think that the China market is weaker than the other market, but I think more specifically there is our whole IoT business, we do see some weakness and we were expecting some demands for the year-end sales, but we don’t see that. So we expect to see — we are expecting a weaker market in consumer IoT. Those are two areas that cause our allowance. In terms of the, you said that from that particular customer last quarter, we quote about the under shipments. In fact, that customer come back with even further push-out demand and so that our shipment to them will be even lower than the 30% we talked about last quarter.

And I don’t think there are people adding to the list, but it’s just really a lot of customers already on the list and we see a new wave of push-out and cancellation coming to the end of quarter and come to the — and all the way go into August, that’s where we talk about.

Christopher Rolland: Understood. Perhaps also the revision for next quarter was pretty significant. Can you talk about what kind of backlog coverage you have going into each of these quarters? What kind of visibility you have? What kind of turns you typically need in each of these quarters? And then, just kind of broader picture, I think you guys kind of thought maybe July would be the last of all of this and now looks like the weakness is going to continue through January. I couldn’t quite sense it, it didn’t — I don’t know was January going to be flat, was it going to be up a little, down a little, any of your thoughts there? And why — do we have confidence that that is indeed going to be the bottom and will bounce from there? Thank you.

Brian White: Hey, Chris. This is Brian. In terms of backlog coverage coming into any quarter for the company, we typically come in with the quarter in backlog and don’t really rely on turns to make the forecast that we provide and that remains the case. So as we give guidance for Q3, Q3 is covered with backlog. And as we look forward into Q4, you asked about kind of whether that’s flat or up or down. In the prepared remarks, we talked about an expectation that our range of revenue in fiscal Q4 will likely remain in a similar range as Q3, and again that’s based on additional clarity that we’ve obtained as we’ve moved through this cyclical correction. Certainly, we’re much farther through that correction at this point. We’ve seen some new information.

We’ve incorporated that into our current outlooks. We think, it’s — we think we have greater confidence enable to — in our ability to get our heads around how this is shaping up at this point. We think that there is an opportunity for sequential revenue growth as we move into our fiscal Q1 for ’25, but that’s what we see at this point in time.

Christopher Rolland: Thanks, Brian. Appreciate it.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham and Company. Your question, please.

Quinn Bolton: Hey, guys. Thanks for taking my question. I guess, first, Fermi, you mentioned some of the opportunities for the CV72S in China, where I think you mentioned having secured several Level 2+ ADAS wins that ramp, I think you said towards the end of 2025, but just wondering if you could give us any more color, what’s the magnitude potentially of the lifetime revenue of those wins? Are they significant or are they sort of smaller projects? And then, I’ve got a follow-up. Thank you.

Fermi Wang: Right. So, we — I talked about the several design wins with Chinese Tier 1 for this Level 2+ application and the application is very specific, which is Smart ADAS plus parking for the Chinese market. And we believe this is going to be the next high volume opportunity in China to replace current single camera ADAS market. I think that — I think the price is right and feature is right and we also have major OEMs looking at and evaluating the product at this point. So I think — we think this could be as big as current ADAS market given time. Of course, that we are ramping up the revenue in early — in the second half of 2025. The value will be just ramping up, but I think on that peak, I think it can be a significant value for the Chinese market point of view.

Quinn Bolton: Great. Thank you, Fermi. And then second question, it sounds like you guys continue to make progress on the data center or enterprise AI inferencing application, I think you mentioned — you reported the Meta Llama model to the CV3 chip. Wondering, as you look out kind of what are the next steps to — for that project, where are you on the software and platform development? And are you still sort of thinking of this is probably an 18 month to 24-month time to revenue, is that the right timeframe to be thinking about potentially for revenue from this opportunity?

Fermi Wang: Yes. So, first of all, we start porting Llama to us as soon as it becomes available and I think we’ve made great progress on that. We are in the plan to demo this Llama in a chatbot demo to our customer sometime in the coming quarter. And also, I think that we continue to believe that we — our current CV3 represent now only cost-effective and power-efficient but also performance wise is capable to compete with A100. So from that point of view, we continue to develop, but I think you hit one important task is could continue to build out the softer infrastructure to support customer that’s definitely another area we are ramping up the resource. We talk about — we already carve out resource from the current employee pool to support that effort.

But as we move forward, when we start engaging customers and provide customer support, we probably need to increase headcount, but that’s a second phase after we start engaging customers with our chatbot demo. In terms of revenue, last quarter we talked about, this is more like a 24-month cycle, I continue to believe as a case.

Quinn Bolton: Perfect. Thank you, Fermi.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please.