Ambarella Inc Q2 FY2020 Earnings Call

Good day, ladies and gentlemen. And welcome to the Ambarella Second Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct the question-and-answer session and instructions will follow at that time (operator instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Louis Gerhardy, Head of Corporate Development and Investor Relations. You may begin.

Thank you, Skylar. Good afternoon. And thank you for joining our second quarter fiscal 2020 financial results conference call. Our speakers will be Dr. Fermi Wang, President and CEO, and Casey Eichler, CFO. The primary purpose of today's call is to provide you with information regarding the results for the second quarter of our fiscal 2020. 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 filed on March 29, 2019 for fiscal 2019 ending January 31, 2019 and the form 10-Q filed on June 7, 2019 for the first quarter of the fiscal year ending January 31, 2020. Access to our second quarter fiscal 2020 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.

Thanks, Louis and good afternoon everyone. Before I discuss our results, I will provide an update on geopolitical factors that may continue to impact our business. New and higher tariffs, market share shifts between our customers and supply chain issues continue to be potentially disruptive, and several of our customers in China continue to face the risk that may be added to the U.S. government entity list, which could limit or restrict our shipments to them. At the same time, our largest competitor in the security camera semiconductor market, HiSilicon, a unit of Huawei, is facing challenges that are helping us gain market share. As you can see, there are multiple factors, positive and negative, that yield a wide range of outcomes for us. We continue to demonstrate strong progress toward our strategy to transform from a pure video processing company to an AI and computer vision company. During Q2, three customers, including one in the automotive market, generated mass production CV revenue. CV design activity remains strong. In Q2, we generated pre-production CV revenue for more than 40 customers, ordering engineering parts, evaluation kits and/or development boards. Driven by demand for our core video processing portfolio, our confidence in our fiscal year 2020 outlook has increased despite the geopolitical uncertainty. Our Q2 fiscal year 2020 revenue of over $56.4 million was above the high end of our guidance range, and revenue increased 20% from the $47.2 million in the prior quarter. Three factors are driving the strong outlook in our core business. First, underlying demand at our largest security camera customer in China has improved, as noted by this customer in their recent earnings reports. Second, this solid demand outlook for security camera is being fortified by our global market share gains. And third, there's some inventory restocking in China. I will now talk about our progress in our target markets starting with security. We've seen professional security camera makers increasing orders for shipments in the second half of the year. We are continuing to gain market share at customers outside of China, as well as at Chinese customers for camera models to be exported to Europe and the U.S. We're also seeing widespread adoption of our CV solutions in the professional security camera market with both large established players, as well as with a new group of emerging private players. We're excited to announce that Avigilon, a Motorola Solutions company, will be releasing its new H5A AI-powered camera line in the coming weeks. The new camera line lays the foundation for Avigilon's next generation of intelligent video solutions, and offers a new era of AI innovation in video security. Based on Ambarella's CV22 CVflow AI processor, the new cameras feature Avigilon's next generation video analytics that leverage the chip's neural network-based video processing and event and image capabilities to help recognize and classify different objects with extremely high accuracy. In July, German engineering giant Bosch honored Ambarella with its prestigious Bosch Global Supplier Award for their energy and building technology business. The award recognized Ambarella's performance in the manufacture and supply of products and services, notably in the areas of innovation, quality, costs and logistics. This year, Bosch awarded 47 of its 43,000 suppliers, representing its top suppliers across an array of industries and in 15 different countries. Ambarella has been a supplier of SoCs for Bosch IP cameras for over 10 years. During the quarter, leading Korean security camera supplier Hanwha Techwin released its new Q series of cameras with models ranging from 2 megapixel to 5 megapixel resolution and in-box, mini-dome and multi-PCB form factors. All of the new models are based on Ambarella's S3L HEVC SoCs, our first wins in professional models as its customer. Hanwha has stated that they will use Ambarella's CVflow SoC as they introduce new cameras with integrated AI capabilities. At IFSEC, the international security show held in London in June, Israeli professional IP camera maker Vaion introduced its Vcam dome and the panoramic cameras based on Ambarella's CV22 CVflow SoCs, with embedded video and audio analytics powered by AI algorithms. Vaion’s end-to-end surveillance solutions can detect threats at an earlier stage and perform fast and effective investigations. In August, U.S.-based Verkada introduced its new Ambarella-based CM61 camera design to give customers the flexibility to add 4K video coverage everywhere. The solution's hybrid cloud architecture supports ease of installation and usability while minimizing bandwidth usage without sacrificing 4K quality or performance. In the consumer home monitoring market, which we previously mentioned is the second wave of our CV revenue, we see increasing demand for camera solutions with greater intelligence as customers demand cameras with smart motion detection that notify users only in the event that something interesting is happening. In the future such cameras will also be capable of identifying people as well as classifying objects, and this level of intelligence will increasingly require dedicated AI hardware in the cameras. We also see cameras being offered as part of a broader IoT ecosystem that supports integration with other devices in the home. During the quarter, U.S.-based Alarm.com introduced its V723 and V523 intelligent outdoor and indoor cameras based on Ambarella's S5L SoC, operating with Wi-Fi connectivity, full HD video and night vision. Samsung SmartThings introduced its SmartThings Cam camera based on Ambarella's H2LM SoC; at a price point of about $90 it offers full HD video, wide-angle operation, HDR processing and two-way audio. LifeShield, an AT&T company, introduced its LifeShield HD Video Doorbell, which integrates seamlessly with its security systems. Based on Ambarella's S2L SoC, the camera offers voice support for Amazon Alexa, allowing it to control alarm systems, adjust lighting and manage thermostats via voice commands. We are also seeing new opportunities for cameras being integrated into smart locks. During this quarter, Hikvision's consumer division, EZVIZ, introduced its DL30VS smart-lock with a built-in 720p wide-angle camera and night vision capabilities. Based on Ambarella's H3LM SoC, the lock camera can detect when intruders are lurking and take a snapshot or record a video clip to send to the homeowner. In summary for the IP security camera market, our sales are expanding as both professional and consumer markets are growing, as we take market share and as we continue to make excellent progress in designing our CVflow SoCs into a next generation of AI cameras. I will now update you on our automotive market progress. In July, leading Korean automotive tier-one supplier Hyundai Mobis announced that it had developed a camera monitor system using cameras and monitors to replace a vehicle's rear and side view mirrors. The system enables vehicles to achieve greater fuel economy by eliminating the drag of the side mirrors, while the cameras' wide field of view enhance driver safety by reducing blind spots. Ambarella's A9AQ Automotive SoC provides the image processing for all three video channels. We're also seeing increasing interest in our computer vision SoC from companies that provide fleet management solutions for commercial vehicles, such as trucks and buses. Existing camera solutions for the commercial market typically lack intelligent features and can only run analytics in the cloud. With Ambarella's CVflow portfolio of AI chips, solution providers can now deploy AI-based applications, such as front ADAS, active driver monitoring systems and blind spot detection in vehicles. Our CVflow solution has been chosen by multiple providers in Asia and the USA with one generating mass production revenue in Q2, and others expect to be entering production by the end of the year. We continue to win car recorder designs as Asian automotive OEMs increasingly offer this feature in new car models as a pre-installed option. During the quarter, Chinese car maker Geely introduced its new Emgrand GS and GR models featuring full HD car recorders based on Ambarella's A12 automotive SoCs. Additionally, Great Wall Motors introduced its WEY VV6 SUV with one camera and three-camera DVR options based on Ambarella's A12A and H22A automotive SoCs, and the new electric car, the ORA R2, featuring a recorder based on our A12A. In the aftermarket dash camera category, Korean supplier Thinkware announced its QXD MEGA recorder based on Ambarella's A9AQ Automotive SoC, the first four-channel full HD car recorder in Korea. Additionally, Thinkware introduced its V500 Plus 2-channel dash camera based on Ambarella's A12 SoC. Also in Korea, Fine Digital introduced its GX200 and GX2000 models based on Ambarella's A12 SoC, featuring Quad HD front and full HD rear recording, smartphone connectivity and auto night vision. In summary, we're just starting to realize our vision to enable Big Data analytics in video HD endpoint devices, or AI in the camera. As this plays out, we expect to see multibillion dollar increases in our addressable market. Our CV solution integrates our state-of-the-art video processing heritage with our recently deployed deep neural network AI processor. This is evident now that customers who are experienced with our video processors are able to efficiently migrate to our CV solutions, and our CV portfolio is also attracting new customers and expanding our customer base. We are on schedule to realize the three ways of CV revenue articulated on our last earnings call, and we're pleased to see the improvements in our Q3 forecast of core video processing models. There are many distractions in the market today and I'm thankful Ambarella's global team is keeping up with a strong pace of execution. Also thanks to all of our stakeholders, including our 754 employees, customers, vendors and shareholders for their support. Now, I will turn the call over to Casey for the second quarter financial details and guidance for our third quarter of fiscal year 2020.

Thank you, Fermi, and good afternoon everyone. Today, I'll review the financial highlights for the second quarter of fiscal 2020 and provide a financial outlook for our third quarter of fiscal 2020 as well as full 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, we have eliminated stock-based compensation expense and adjusted for the impact of taxes. Our Q2 revenue of $56.4 million exceeded the high end of our guidance of $51 million to $53 million. These results represent an increase of 20% from Q1 and a decrease of 10% when compared to the same quarter of the prior year. In Q2, on a sequential basis, security revenue increased, automotive was relatively flat and other revenue was down. Non-GAAP gross margin for Q2 was 58.1% compared to 59.6% in the preceding quarter, and was slightly above the midpoint of our guidance of 57% to 59%. Non-GAAP operating expense for the second quarter was $27 million compared to $29.9 million for the previous quarter. This was below our guidance range of $29.5 million to $31.5 million due to R&D grants of $3.2 million for fiscal year '19 and the first half of fiscal year '20. We will be including this benefit on a quarterly basis in our operating expense guidance in future quarters. Other income was $2.2 million and primarily represented interest income on our cash and marketable securities. GAAP net income for the second quarter was $7.3 million or $0.21 per share compared to $266,000 or $0.01 per share in the first quarter. The non-GAAP effective tax rate in Q2 was 9.1%. In the second quarter, the non-GAAP earnings per share were based on 33.9 million shares as compared to 33.5 million shares in the prior quarter. Total headcount at the end of the second quarter was 754 with about 81% of our employees dedicated to engineering, most of whom are software engineers. Approximately 70% of our total headcount is located in Asia. In Q2, we generated positive operating cash flow of $8.1 million. Cash and marketable securities were $376 million, up from $366 million at the end of the first quarter. We did not repurchase stock during the quarter under the $50 million repurchase program authorized through June 30, 2020. Total accounts receivable at the end of Q2 were $27.9 million, or 46 days of sales outstanding. This compares to accounts receivable of $26.5 million or 50 days sales outstanding at the end of the prior quarter. Net inventory at the end of the second quarter was $17.4 million compared to $17.6 million at the end of the previous quarter. Days of inventory declined to 67 days in Q2 from 85 days in Q1. We had two 10% plus revenue customers in Q2. WT Microelectronics, our fulfillment partner in Taiwan, came in at 55% of revenue and Chicony, a Taiwanese ODM who manufactures for multiple customers, came in at 21%. I will now discuss the outlook for the third quarter of fiscal 2020. For Q3 fiscal 2020, we are raising our revenue guidance above the current street consensus. We expect total revenue for the third quarter to be in the $63 million to $67 million range. We anticipate all market segments, led by automotive but including security and other, to increase sequentially. We continue to expect other revenues, comprised primarily of consumer electronics products, to remain volatile and decline as a percentage of revenue over the next two to three years. Although forecasting is difficult in the current environment, we continue to expect our revenue to increase in the second half of the year when compared to the first half with fourth quarter revenue experiencing the normal seasonal sequential decline. The global economic and political environment is generating a significant amount of uncertainty with our customer outlook and our customers' supply chains. Three key factors are impacting our gross margin results and our outlook. Our professional security camera business is experiencing strong underlying demand globally. Combined with some restocking at our Chinese customers, they are growing faster than the market. And with their purchasing power as the number one and number two suppliers globally, this puts pressure on our gross margin. To support our increased revenue outlook and meet supply chain challenges from geopolitical factors, we may also experience increased costs as we accelerate orders to our suppliers. In addition, rising tariffs may have a greater impact on our customers' ability to sell their products incorporating our higher margin devices. Based on these factors, we estimate Q3 non-GAAP gross margin to be between 56% and 58% compared to 58% in the second quarter. We expect non-GAAP OpEx in the third quarter to be between $30 million and $32 million. We expect to continue to provide positive operating leverage as revenue increases. The Q3 tax rate should be modeled at 10% versus 9.1% in Q2, and 36% in Q1. The tax rate has started to normalize from Q1 levels as our increased level of profitability enables tax losses in certain jurisdictions to be utilized. We estimate our diluted share count for Q3 to be approximately 34.4 million shares. Ambarella will be participating in the Dougherty & Company Institutional Investor Conference on September 5th in Minneapolis and the 26th Annual CLSA Investor Forum on September 12th in Hong Kong. Please contact Louis for more details on these events. Thank you for joining us on our call today. And with that, I'll turn the call over to the operator for questions.

(Operator instructions.) Our first question comes from Joe Moore with Morgan Stanley.

I wonder if you could talk about the Chinese inventory accumulation you referenced again. Any sense for how much that's contributing to the top line last quarter and this coming quarter? And how long you expect that to continue to happen?

Well, like Casey said, I think the upside that we have seen right now is a combination of our Chinese customer accumulating inventory, as well as their business getting stronger. At this point, it's hard for us to differentiate between these two. However, we continue to believe that our Chinese customers will continue to build inventory until to a level they feel comfortable with, and that reflects in our Q3 forecast. Also because their ongoing business has strong demand, that's why we provided a higher revenue forecast for Q3. I do believe that with the uncertainty that two customers might get onto the entity list they will definitely try to build inventory levels until they are comfortable.

And then it seems like with the visual announcements and the others, you're starting to see real kind of announceable traction in the surveillance space. Can you give us a sense for when the CV contribution is starting to become material in the second half, and just, if you look at your professional business next year? Can you kind of just give us a qualitative sense for how much CV ramps within the portfolio?

Like I said last time, we expect that— we said that nine of the top 10 professional CV customers are doing design with us. Now, we believe five of them will get into the mass production stage at the end of this year, so we do see revenue coming out this year. But I think material revenue contribution will come from next year, particularly on the professional security camera side. That will definitely help us to get better gross margin as well as market share.

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

I guess, Fermi, you'd talked on the call about a number of different design wins and engagements that you guys have for the computer vision program. Obviously, some are in China, many are not. Maybe you could just talk a little bit and Casey, obviously chime in where you can. But how do you feel about the pipeline for CV in terms of what percentage of that might be in China versus outside?

First of all, the answer is different from market to market. So let me repeat some of the things we said. First, we said there are three CV customers in production with us at this time in Q2 and Q3. One is outside China and two are inside China. But as I mentioned, we also had more than 40 customers with pre-production CV revenue this quarter, and almost all of them are in security cameras as well as in automotive. In security cameras, the majority are outside China and in auto it's roughly split half and half. That's the split we're seeing. One thing I have to say is that CV design activity continues to be strong as customers seek pre-production chips and evaluation boards.

I guess as a follow-up, Casey, in your prepared script you mentioned the guidance for the third quarter would be led by automotive. Maybe you could talk a little bit more specifically about which programs you see ramping and the split across e-mirrors and different types of cameras that are going into automotive that might be driving that revenue for the third quarter? Thank you.

On the product side, I'll let Fermi talk about that a little bit. But clearly, the revenue today is being driven in the automotive space by our vision-based or video-based products. As we talked about in automotive, the ability to get mass production revenue off of CVs is a longer-term story, and that's why we talked about the first two waves being the professional security or surveillance and the consumer home segments. Initially in vision-based automotive we were led by the aftermarket in the video recorders and that's now getting adopted more and more in the OEM market. So that is leading the revenue in the auto space—the recorder business. But we are seeing traction across the e-mirror space, cabin monitoring, driver monitoring and the fleet-type opportunities that we announced during the quarter. It will become more broad-based, but today it is still primarily driven by the video recorders.

As you can see in our announcements, we mentioned several design wins with Chinese and Japanese OEMs for recorders. We also mentioned that we have a mass production product for driver monitoring systems in the aftermarket business, which is basically fleet management with CV revenue. We also announced a Korean company doing e-mirror with us. So although the majority of Q3 revenue comes from recorders, especially OEM recorders, we have started to see revenue coming from other portions of the OEM business.

If I could just sneak one more in, Casey, you mentioned Q4 being normal seasonality. The last couple of fiscal years have been a bit abnormal, I would guess. Maybe you could remind us what you guys consider normal for Q4?

If you look back over a longer period of time, say three to five years, you would see that Q4 is usually down in the low double-digits, somewhere between 12% and 15%. That's based off of the last few years, so I would expect we'd see that similar type of activity in our Q4 as well. As you point out, sometimes you're surprised by other activity; it's not always the case, but that would not seem unreasonable as an estimate for Q4.

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

Fermi, on your prepared remarks you outlined the three factors that are driving your better outlook for Q3 and the year. I know it's hard for you to decipher, at least from a quantitative perspective, how much is from inventory restocking versus just market share gains. But qualitatively, could you help us understand which is the biggest factor: is it inventory restocking, is it unfettered demand from your underlying security camera customers, or is it this market share gain factor that you mentioned?

It's hard to really put quantity on that. If you have to prioritize, our best estimate is that the main driver of the improved outlook is stronger underlying demand, followed by inventory restocking. Market share gain is also important, though it tends to be more of a longer-term effect. Share gains happen as customers switch from competitive solutions to us, and it takes time for them to go into production, but cumulatively in the long term it will help our revenue growth.

And on seasonality for Q4, I know you just mentioned down 12% to 15%, but in the past I think that's really been driven by your outsized consumer exposure, and now that that's a less meaningful part of the business, what's driving that deep sequential decline in Q4 specifically?

The consumer security camera is still part of the business, and professional security camera demand also tends to show some weakness seasonally, based on our historic experience. So I think we still expect typical seasonality this year.

If I can sneak one more in, I saw that R&D was down quite a bit in Q2. Just wondering what caused that and how we should expect that to move forward?

We had an R&D grant that totaled about $3.2 million in the current quarter that was an accumulation. As you remember, at the end of last year we took similar grants. For fiscal year 2019 and the first half of fiscal 2020 we were able to book that benefit, and we will include similar benefits on a quarterly basis going forward. This was somewhat of a catch-up; going forward R&D and OpEx will be at more typical levels, and the guidance for Q3 incorporates any expected grant benefits.

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

Thanks for taking the question. On the AI-based professional camera market in calendar 2019, I believe you said before that Hikvision is the largest player there and they developed 1 million units in 2018 and were targeting 3 million this year. Is that still in line with their expectation? Are you hearing anything different there? Any idea to get a unit perspective would be helpful.

When we talk about Hikvision, the 1 million units was last year's number. I think they are still looking at significant growth. They haven't given us a new public update on that, but they are likely aiming for substantial growth relative to last year. I definitely think the growth from last year to this year in terms of AI cameras is significant for Hikvision.

And they still haven't given any sort of target for 2020 as well, right?

We haven't seen any new public target from them yet.

And then on the Chinese automotive market, have you done any design activity changes with automotive OEMs in China due to trade tensions, or are you seeing signs that Chinese OEMs are becoming increasingly cautious designing because of trade relations?

Purely from a trade point of view, we haven't received feedback from our automotive OEM/ODM customers in China indicating resistance due to trade issues. The larger concern has been in the China security customers, particularly the two that might be put on the entity list. In general, the Chinese automotive market growth this year was relatively weak compared to historical data, and OEMs are looking to add differentiation. I really think CV features are one direction many Chinese OEMs are focusing on, and we are seeing that interest. So I don't see concern from automotive customers related to trade at this time.

And one last one: have you seen any indication of additional enforcement on Hikvision or Dahua given the threats about being added to lists?

No, we don't see any additional enforcement beyond what we've discussed. The pressure is still there and customers want to prepare for the worst, which is why some continue to pull in products from us.

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

Just wanted to look into the 40 customers or so that are pre-production revenue at this point. Could you speak to some of the end-market applications you're seeing from those customers? What are the more promising ones in terms of underlying volume?

The 40 customers basically fall into the three waves of CV revenue we talked about previously. The first wave is professional security. That covers almost all the major professional security camera brands plus several start-ups focused on CV differentiation. That's a big chunk of the 40. We are also starting to see consumer security camera demand and there are a few companies in that category. On the auto side, there's a large number of companies across multiple categories: some use CV purely for DMS, some for cabin monitoring, some for ADAS, some for e-mirrors and blind spot detection. If you divide the automotive customers by category, you'll see several in each category. Overall, I would say the security camera and automotive customers are roughly equally split among the 40.

And then as a follow-up, can you give an update on the HELLA Aglaia partnership? Roughly where it's at in terms of responding to RFPs? Are you actively in that phase and what's the timeline for seeing volume associated with that partnership?

For HELLA Aglaia, we continue to work together on porting more of their neural network AI onto our platform. The major milestone is that ADAS requires ASIL-capable chips. We believe our current software preparation on our CV22 or CV2AQ chips is preparing the software to run on ASIL-capable chips when they come out. We continue to work on software and algorithm development. As soon as our ASIL-capable chip comes out, the software should run on it and we can assemble solutions for OEMs. We're preparing now so that when the hardware is production-ready, the software and integration will be ready.

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

Casey, on the inventory restocking, I want to understand whether the relative impact of it was stronger in the fiscal second quarter or the guided fiscal third quarter? And along with that, for the seasonal fiscal fourth quarter, are you no longer expecting inventory restocking to continue into that timeframe?

As Fermi referenced, it's hard for us to have perfect visibility. There's no question customers are going to restock and build some inventory for the reasons we discussed. It's a combination of both restocking and stronger demand. It definitely affected this quarter and will affect next quarter as well. We don't have perfect visibility into Q4; there could be some activity in Q4 as well. But I think what you'll continue to see over the next few quarters is the strength Hikvision and Dahua talked about in the market overall and the growth they see outside China. We should see good growth, particularly with CV products coming online. Remember, CV systems generally have about twice the ASP of comparable vision-only systems. Restocking is part of the current dynamic with global tension, but the longer-term story is revenue building from vision- and CV-based products.

In the professional security market, you couldn't give specifics for Hikvision's expectations, but more broadly for calendar 2020, given your programs and interest, what might the attach rate of AI be to special security cameras? Maybe a range for calendar 2020?

It's hard to predict exact attach rates today because it depends on pricing and customer strategies. However, we are seeing customers spending more resources building AI-based products. I believe next year customers will introduce more CV SKUs than vision-only SKUs. I would expect next year to be the first year we see material revenue from security camera customers for CV products, and that could be a strong ramp. But I don't have specific numbers to provide—it's more of a directional statement.

So the point you're making is that the new SKUs coming out next year, the majority will now have CV incorporated?

That's what I'm saying, yes.

Our next question comes from Gus Richard with Northland. Your line is now open.

China is implementing extensive security systems. The numbers I see are about 600 million cameras by the end of 2020, up from about 180 million in 2018. How much of this professional security camera demand is coming from China in terms of internal consumption and how fast do you think the overall market is growing? I have a follow-up.

Hikvision and Dahua are seeing strong demand. Our products that we ship to Hikvision and Dahua are mainly used in their export business. I think the security camera market continues to grow, I'd estimate in the high single digits overall, though Hikvision and Dahua may be growing faster than the market. This is a trend we continue to see in professional security cameras.

So the strong results are primarily a function of market share gains?

Yes, market share gains and also stronger demand outside China in particular.

Then in terms of manufacturing at Samsung, it looks like only EUV photoresists are going to be banned. In conversations with Samsung, your foundry, what are they telling you in terms of their availability and capacity moving forward?

The majority of our products are still on 28nm, 14nm and moving to 10nm. We are not in EUV yet. When we talk to Samsung, they have given assurances that our current product lines will not be impacted by Japan-Korea tensions.

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

On the security market, you said you're engaged with nine of the top 10 OEMs and expect five to be shipping CV this year. Do you expect any of the other four remaining to be shipping at some point next year? And any comments on the competitive landscape—are the bigger public players still the main competitors or are there new entrants?

We definitely believe the remaining four will go into production sometime next year based on our current visibility. In terms of competition on the CV side, HiSilicon remains our biggest competitor. Earlier, Intel's Movidius and Qualcomm have tried to enter this market with AI processors, but for professional and consumer security cameras, HiSilicon remains the main competitor. We do expect some competition at the low end, but on the higher-end AI-based security cameras we believe we're in a relatively strong position.

Do you expect particular customers among those top 10 to use one supplier versus another, or will they use multiple suppliers for CV solutions?

I expect customers to have multiple suppliers. Some customers may develop internal solutions and run dual sourcing—one internal and one external. For our design wins announced so far, they're using our solution. Over time, some customers will develop their own chips, but we believe we are in a good position, especially outside the U.S., for AI-based security cameras.

At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Wang for closing remarks.

Thank you, especially thank you to all of you for joining our earnings call today. I will talk to you next time. Thank you and goodbye.

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