Ladies and gentlemen, thank you for standing by and welcome to Ambarella's Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is recorded. I would now like to hand the conference over to your host, Louis Gerhardy, Corporate Development. Please go ahead.

Thank you, Sarah, and good afternoon, everyone. Thank you for joining our third quarter fiscal year 2021 financial results conference call. Calling in today from different locations 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 our third quarter of fiscal 2021. 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 upon information available today and are subject to risks, uncertainties, and assumptions. Should any of these risks and uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. 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, including the Annual Report on Form 10-K filed on March 27, 2020, for fiscal year 2020 ending January 31, 2020 and the Form 10-Q filed on September 9, 2020 for the second quarter ending July 31, 2020 and Form 10-Q filed on June 8, 2020 for the first quarter of the fiscal year ending April 30, 2020. Access to our third quarter fiscal 2021 results press release, historical results, SEC filings, and a replay and prepared transcripts of today's call can be found on the Investor Relations portion of our website. With that, I'll turn the call over to Dr. Fermi Wang.

Thank you, Louis. Good afternoon, everyone, and thank you for joining us this holiday shortened week. We are pleased to see our multi-year visual AI investment as the major force driving our accelerated business momentum, which was apparent in our Q3 results and outlook. Q3 revenue of $56.1 million was above the high-end of our original guidance range. CV led the way but we also faced stronger than expected demand for video processors, despite the persistent geopolitical and public health risks. Gross margin of 62.7% was above the high end of our long-term model for the second consecutive quarter, reflecting a favorable customer mix and continued operational execution. CV revenue was slightly more than 10% of total revenue in Q3 and we continue to expect it to be 10% for the full year. With an ASP about 2x our non-CV ASP, CV units were less than 4% of our total units shipped and an even smaller portion of the installed base, highlighting the very early stage of this opportunity and the significant multi-year headroom for growth. We anticipate CV revenue will represent about 25% of our total revenue in fiscal year 2022, and we have a flattish outlook for video processors. The megatrends for security, safety, and automation are very favorable, and the pandemic appears to be accelerating this digital transformation. To support this anticipated growth, we continue to build our team globally and we intend to further expand our presence around the world to support the rising interest in our CV SoCs from both existing and new markets. I will now talk about our markets and customers. As we have previously mentioned, Chinese IP security camera makers have become concerned about the continuity of supply from existing Chinese suppliers and have been evaluating alternative camera designs and other solutions. Ambarella's CVflow AI SoCs have won a number of design wins based on their AI performance, high-quality imaging, and low power. We have now received orders for shipment beginning in the fourth quarter of this year, including orders for our CVflow SoCs from Dahua, China's second largest security camera company. Outside of China, we are continuing to see customers introduce new IP security cameras based on our solutions including our CVflow AI SoCs. During the quarter, Johnson Controls launched its new Tyco Illustra Flex Multisensor Camera. Based on Ambarella's S2E SoC, the camera is equipped with four separate image sensors to provide up to 360° coverage via four separate non-stitched video streams. Each of the four sensors can capture 4MP images, enabling the camera to cover an area which might normally require four separate high-definition video surveillance cameras. Honeywell introduced its 60 Series IP cameras including 5MP indoor and outdoor dome, bullet, and outdoor speed dome models and a 2MP outdoor speed dome model. Based on Ambarella's S5L SoC, the 60 Series offers increased resolution and provides fast notification and verification of potential threats and responses. FLIR introduced its Elara thermal camera for accurately measuring skin temperature at medium- to high-throughput entry control points. Based on Ambarella's CV22 AI SoC, it is equipped with on-edge, intelligent face detection and issues on-screen prompts to individuals when they need to remove glasses, while also guiding them to the correct position for best measurement. Panasonic iPro continued to expand its portfolio of Ambarella-based models with the introduction of its Vehicle Capture Camera, the WV-X5550. Based on Ambarella's CV22, the camera can capture clear images of vehicle occupants on one channel and license plates on another, even in challenging lighting environments, including nighttime. In the body-worn camera market, Panasonic iPro introduced its BWC4000 camera. Based on Ambarella's CV25 SoC, the BWC4000 records 1080P video and has a 12-hour battery life. Also, during the quarter, Motorola introduced its VB400 body-worn camera aimed at security professionals and based on Ambarella's low power SoC. Integrated with Avigilon's Control Center, the VB400 can augment fixed video deployments by displaying first-person perspective video from the body-worn camera alongside fixed cameras for superior situational awareness. During the quarter, Comcast announced a new Xfinity Home offering called Self-Protection designed for consumers who want high-quality security cameras but may not need a professionally installed and monitored whole-home security system. The new Xfinity's HD home security camera is powered by Ambarella's S3LM SoC and is built for both indoor and outdoor use. This month, we introduced our CV28M camera SoC, the latest in our CVflow family, supporting the introduction of advanced AI features targeting a variety of cameras in new high-volume markets. It's highly efficient AI processing and low power will enable a new class of smart IoT devices for applications including smart home security, retail monitoring, home robotics, and occupancy monitoring. For new AI sensing applications, like retail monitoring or occupancy monitoring, the SoC provides the AI performance to make all decisions in the camera, preserving privacy and avoiding heavy video processing running on back-end servers. In home robotics applications, the CV28M can be connected to a wide range of sensors such as visible, structured light, and time-of-flight, to capture, and then process, the data required for navigation. We are currently sampling CV28M to our customers. The CV28M's software compatibility with existing CVflow families is allowing customers to enter production very quickly, and we have already received mass production orders for shipment beginning in Q1 next year. In the automotive market, we are continuing to make great progress as we promote our AI solutions for a variety of automotive applications including ADAS and AD applications to customers worldwide. Today we are announcing our total automotive revenue funnel for the first time, and we intend to update it at least once every year. Based on our best judgment, we currently estimate our automotive revenue funnel model is about $600 million, with a majority represented by CV for a variety of ADAS and AD applications. The auto funnel revenue runs through FY27, with some of the more significant programs commencing production in CY22 or CY23. This funnel covers business we have won as well as a pipeline of business we are currently competing for. We are seeing shipments of our CVflow-based ADAS solutions for commercial vehicles in China continuing to ramp with customers including Yutong buses, Shanqi trucks, and Dongfeng trucks. We are currently the market leader in the OEM car recorder category with customers including Nissan, Honda, and Toyota in Japan, and Great Wall, Geely, and BYD in China. We are now seeing a recovery in orders for OEM car recorders in both regions, as car manufacturers begin to ramp production back up following the impact of the pandemic. We are pleased to announce that we have our first design wins for our CV2FS automotive functional safety SoCs, which we introduced during CES at the beginning of this year. These SoCs include the AI processing and ASIL features required for safety-critical ADAS applications. During the quarter, we signed a development agreement to supply our CV2FS SoCs for level 2+ ADAS systems with an OEM manufacturer of electric vehicles. In this application, the CV2FS provides the AI processing performance and flexibility to support a wide array of driver assistance capabilities to improve safety and convenience. Also, during the quarter, we signed a new development agreement with a tier 1 supplier of electronic mirrors for the European commercial vehicle market based on our CV2FS functional safety AI SoCs. The CV2FS was chosen for its ability to process video from multiple cameras and perform advanced AI processing to support features such as vulnerable road user detection and prediction. We are continuing to win new designs for fleet management solutions for commercial vehicles as well as ride-sharing and taxi service. With 140 million commercial vehicles in the US and hundreds of millions worldwide, the ability to retrofit existing commercial vehicles with cutting-edge driver monitoring capabilities represents a major opportunity for Ambarella. Our CVflow AI SoCs have the required performance to support front ADAS applications, active driver monitoring, and video recording. In November, Ambarella announced a joint reference design for automotive camera applications that simultaneously monitors drivers while capturing vehicle occupants for one-way videoconferencing. The reference design uses software from Smart Eye, a world leader in developing AI-powered eye, mouth and head tracking technology, and image sensors from OmniVision Technologies. Ambarella's CV22AQ SoC simultaneously processes both RGB color images and IR and runs Smart Eye's algorithms to analyze the driver's state and alert the vehicle to any unsafe indicators, such as drowsiness. With the holiday season approaching, there have been a number of new consumer product introductions featuring Ambarella SoCs. During the quarter, DJI introduced its Pocket 2 handheld camera, equipped with a 3-axis motorized gimbal to stabilize movement. The Pocket 2 is based on Ambarella's H22 SoC and shoots 4Kp60 video, takes 64-megapixel photos, and includes 8x zoom capability. And on November 4, DJI introduced its Mini2 drone, the replacement for the popular Mavic Mini model. Featuring Ambarella's H22 SoC, the Mini 2 increases its maximum video resolution up to 4K at 30 frames per second, while also shooting 1080p video at up to 60fps. Also, during the quarter, Insta360 introduced its OneX2 pocket camera based on Ambarella's H22 SoC. The One X2 includes dual lens 5.7K capture for high-resolution 360-degree images, H.265 encoding, AI-based editing, and advanced image stabilization. In summary, you have heard today more evidence of the broad and expanding adoption of our SoCs in the automotive and security camera markets. In the professional security camera market, our CV momentum, already strong, should build as we have added new CV customers in Asia, and we expect to see CV become material in the home security camera market over the next year. In auto, our CV traction is strong and a significant part of our expanding funnel. In addition, we continue to develop other IoT markets including enterprise access control, smart locks, and counting/occupancy sensors, and we look forward to providing you with updates on our progress. We are making significant progress in our multi-year transformation to a visual AI company, and the return on the investment is ramping. I'm proud and would like to thank and acknowledge all our employees worldwide for their contribution to our leadership position in the market, and for their execution in the phase of the turbulent environment. I am also thankful for the support of our customers, vendors, and shareholders during these times. I will now turn the call over to Casey who will give you more details about what we are seeing and expect for the business.

Thank you, Fermi and good afternoon, everyone. Today, I will review the financial highlights for the third quarter of fiscal year 2021 ended October 31 and provide a financial outlook for our fourth quarter. 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 adjusted for the impact of taxes. Our revenue of $56.1 million was above the high-end of our original guidance. This represents an increase of 12% from Q2 and a decrease of 17% when compared to the same quarter of the prior year. In Q3, on a sequential basis, automotive revenue and other increased while security decreased. Non-GAAP gross margin for Q3 was 62.7% compared to 62.4% in the preceding quarter and remained above the high-end of our guidance primarily due to customer mix as revenue from the two large professional security companies in China remained at low levels. Margins were also supported by continued operational execution in a challenging environment. Non-GAAP operating expense for the third quarter was $32.4 million, compared to $30.2 million in the previous quarter. OpEx was slightly above the mid-point of our guidance range and the consequence of the increase was primarily due to additional chip development expenses and higher employee-related costs outside of the U.S. as normal activity resumed. Other income of $673,000 was due primarily to lower interest income as rates continued to remain low. Non-GAAP net income for Q3 was $3.3 million, or $0.09 per share compared to net income of $2.1 million, or $0.06 per share in the second quarter. In the third quarter, the non-GAAP earnings per share was based on 35.8 million diluted shares as compared to 35.4 million in the prior quarter. Total headcount at the end of the third quarter was 766 with about 81% of employees in engineering. Approximately 69% of our total headcount is located in Asia. Cash and marketable securities were $423.6 million, up from $410.7 million at the end of the second quarter. In Q3, we had positive operating cash flow of $13.1 million. Total accounts receivable at the end of Q3 were $24.1 million, or 39 days sales outstanding. This compares to $23.3 million, or 42 days sales outstanding in the prior quarter. Net inventory at the end of the third quarter was $23.7 million compared to $23.9 million at the end of the previous quarter. Days of revenue increased to 102 days in Q3 from 109 days in Q2. We did not repurchase any shares in the third quarter. In May, Ambarella's Board of Directors approved an extension of the current $50.0 million repurchase program for an additional twelve months ending June 30, 2021. As of today, there remained $49.0 million available for repurchase. We had two customers over 10% of revenue in Q3. WT Microelectronics, fulfillment partner serving multiple customers, came in at 62% of revenue, and Chicony, a Taiwanese ODM that manufactures for multiple customers, came in at 18%. I will now discuss the outlook for Q4 FY21. Our visibility has improved, but we remain on guard for risk related to the pandemic and geopolitical factors. Furthermore, as the semiconductor industry supply chain tightens, our operations teams remain vigilant in their efforts to manage manufacturing lead times and on-time deliveries. We have seen some customers request order pull-ins and orders placed within our lead times. CV design activity is at record highs. In our prior earnings calls, we estimated two professional security camera customers in China had pulled in roughly $10 million of revenue from FY21 to FY20. As they continue their video processor inventory reduction, we expect their orders will remain weak, offset to some degree by a ramp of computer vision SoC orders. During Q3, these two customers combined remained in the mid-single-digit percent of our total revenue, which will likely be the trough for the foreseeable future. Based on these factors and our best judgment at the current time, we expect total revenue for the fourth quarter ending January 31, 2021 to be in the range of $56 million to $60 million. Automotive revenue is benefiting from an early CV ramp and a post-pandemic rebound, and we expect auto to be up at least 20% on both a sequential and year-over-year basis. We anticipate security camera revenue will be up in the low double digits sequentially. Following a normal seasonal pattern, 'Other' revenue is expected to decline sequentially. We estimate Q4 non-GAAP gross margin to be between 59% and 61% compared to 62.7% in the third quarter, with product and customer mix the primary driver of this change. We expect non-GAAP OPEX in the fourth quarter to be relatively flat in a range between $31.0 and $33.0 million. Q4 other income should be modeled around $500,000. The Q4 non-GAAP tax rate should be modeled at approximately 10%. We estimate our diluted share count for Q4 to be approximately 36.3 million shares. Ambarella is registered to participate in virtual conferences in Q4 including Wells Fargo, Imperial Capital, UBS, Barclays, MKM, and Needham. Ambarella will also be hosting virtual CES meetings between January 11 and January 22; please contact Louis for more details on these events. With that, I'd like to turn it over to questions.

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

Great, thank you. Congratulations on the quarter. I wonder if you could talk a little bit more about the funnel, the $600 million, I believe, is the number. Can you compare that to the $200 million which was secured design wins from a quarter ago? How much of that $600 million is secured? And then, I assume that as you move forward, there's still an opportunity to add incremental revenues to that funnel in the timeframe that you suggested?

You're right, what we announced last quarter represented the design wins won for the first six months of the year. What we're talking about today is the $600 million is for the design wins that are won and also in our pipeline. So, based on what we have today and in our pipeline, we have $600 million. Now, to your point, that doesn't mean that we can't continue to add to that. We also give that a haircut, as you might imagine, related to what the customers think their revenue is going to be and also the probability of timing to market. So, I think it's a relatively reasonable and conservative look at it. And there is, to your point, an opportunity to add to that.

Okay, great. And I assume that's mostly computer vision. I mean, is there a video processing component to that?

There is, but there is also a healthy component for computer vision, as well. But there is some vision-based system as well.

Great, thank you very much.

Let me add one more thing. Hey Joe, I think the trends, as you mentioned, that the majority of that $600 million is non-CV.

Our next question comes from the line of Tristan Gerra with Baird. Your line is now open.

Looking at the design wins that you've announced in the security camera business and at the same time, your two large customers not reordering. Is the inflection point that you're expecting in terms of new orders coming from those customers? And when do you expect the inventory rebuild to happen?

We see that both of our customers are currently utilizing their inventory, and we have started to receive small orders from them. This is why we believe we have a steady stream of revenue from these two companies at this moment. Looking ahead, I expect Dahua to perform strongly in the computer vision area, while the video segment of the business is likely to remain stable. In contrast, Hikvision has not yet announced any design wins for the TV projects. I want to address this with the company separately. However, we believe that first, inventory is slowly being depleted; second, the ramp-up in computer vision in Chongdava will be crucial for us; and third, we plan to continue collaborating with Hikvision to explore opportunities in computer vision technologies.

Okay, great. And then a quick follow-up, as you expect your CV business to ramp meaningfully over the next fiscal year, I understand the higher ASPs, is there any impact or how should we look at the trajectory of OpEx as a result?

Yes, I believe the modeling for computer vision we discussed aligns with what you just mentioned. It involves roughly double the average selling price, a similar gross margin profile, and operating leverage, given the $450 million we've already invested in computer vision. Additionally, we are expanding our technology outreach to more customers, as Fermi noted. Therefore, the leverage from computer vision in terms of operations and revenue is as you described.

Great, thank you.

Thank you. Our next question comes from a line of Matt Ramsay with Cowen. Your line is now open.

Thank you very much. Good afternoon, everyone. I wanted to ask, and feel free to join in here, something from the prepared script. You mentioned that CV is expected to contribute 10% of revenue this year, which I estimate to be around $22 million to $23 million based on the guidance for the fiscal fourth quarter. I also want to confirm that you expect vision camera revenue to remain flat, while CV revenue will contribute 25% next year. This seems to suggest a tripling of CV revenue. I'm just trying to verify that I understood this correctly. Thanks.

Yes, I think that everything you say is correct, except one thing, that we continue to expect 10% of CV revenue this year. And also, we provided the guidance that we expect CV revenue will be 25% of total revenue next year. But that's 2.5 times not 3 times, as you described.

Thanks for your response. I would like to follow up on Joe's question regarding the auto pipeline number. Specifically, I'm interested in the $200 million in one business you mentioned last quarter. Within that $600 million, could you provide the progression of business won over the last three months, along with the same metric you shared previously? I understand that you'll be providing the full pipeline number moving forward, but since you provided one data point, it would be helpful if you could share a second one to help us analyze it further. Thank you.

We announced that we secured two new designs this quarter: one is an improved functional safety chip for smaller level 2+ ADAS applications, and the other is for an electronic mirror. We are committed to expanding our pipeline this quarter, but we haven’t disclosed full details yet as compiling this information accurately takes time. We intend to provide annual updates on these final numbers to keep you informed, and while we won’t specify the amounts, there will be indicators on how we continue to build our funnel.

Got it. Thank you. One last one for me and I'll get out of the way. I guess, if you are talking about forecasting CV revenue and the remainder of the business for fiscal 2022, what assumptions are you making at Hikvision and Dahua about their ability to secure high silicon chips and what that might mean for your business? Or are you assuming that things stay steady-state and whatever changes happen there may come in the future? Thank you.

I believe my assumption for this customer differs. I am once again considering Dahua in relation to the CV chip, which we have already discussed. Regarding Hikvision, our current revenue forecast does not account for any CV revenue with this version. We hope to persuade them to adopt our CV technology in the future.

Thank you. Our next question comes from the line of Tore Svanberg with Stifel. Your line is now open.

Yes, thank you, and congratulations on the solid results. First of all, it sounds like you're assuming the video process business to be flat in fiscal 2022. Is that just because of CV cannibalizing, or are you just being a bit conservative there, too, given the geopolitical tensions still?

Certainly, we always strive to be cautious when assessing future business prospects. Over the next couple of years, we will understand how much of our growth is genuine and how much is simply replacing existing products; both factors will play a role. However, we currently lack sufficient information to make that judgment. Clearly, as we reach that point, we will see increasing cannibalization since we are not introducing new video products, only processors for customers to extend their usage. Therefore, they will either need to continue utilizing our existing products or gradually transition to CV technology.

Let me add one more thing. I believe when we talk to all the customers out there, I think all of the planning to use CV to gradually replace their video processor technology, because everybody views that, although it's two different technology, it's a continuance of the powerline; all the video processor market will be replaced by CV in a span of three to five, maybe even longer years. But eventually, CV cameras will replace that. In my opinion, I really think that in three years, 50% of the video processor market will convert to the CV market which is great for us, because not only will it help give us the chance to grab new market share, but also increase ASPs.

That's great perspective. And I have a question on CV28; it sounds like this is more of a consumer product for you. I'm just wondering if this is something that goes after higher unit volumes? And if so, what implications does that have for ASPs and potentially margins? Thank you.

First of all, you're correct. We've previously mentioned our aim to create a comprehensive family of CV chips based on the CVflow architecture, and the CV28 is specifically designed to target a high-value market that is very sensitive to average selling prices and costs. I should also note that the pricing for CV28 reflects a 2x average selling price compared to our video processor technology, primarily because our low-end video processors are priced quite low. Regarding gross margin, I would indicate that this chip's gross margin may not match or could potentially exceed that of equivalent video processor technology. However, it will not reach the levels of our corporate gross margin. This represents a balance where we focus on a higher value market while also having to consider competitive pricing, which is the intention behind the CV28.

That makes sense. Thank you again, and congratulations.

Thank you. Our next question comes from the line of Quinn Bolton with Needham. Your line is now open.

Hey, congratulations; just wanted to follow up on the auto funnel for clarification. Did you say that was extended through fiscal 2027? I'm just trying to get the date right.

Yes. It was fiscal 2026. It's a total of six years.

Okay, six years. Can you give us any shape of that funnel? It sounded like you said the bigger ramps happened in calendar 2022 and 2023. I would assume, sitting where you are today, there may not be a lot of business that's been added at this point for, say, 2025. So, should we think about it that you ramp up to a steady state level by, say, 2023 with this current funnel, and then it would be flattish for several years? Can you give us any idea how you're viewing that shape? Obviously, anything you add to the funnel in the future will add to this, but just wondering what the shape of that funnel looks like.

It's Louis. You're right about the shape. So, there's some large programs that start to go into production in calendar year 2022 and calendar year 2023. And then, it levels out in terms of annual contribution. But over time, we'd expect those numbers to change as we win new programs or bid on new programs.

Got it. Understood. Okay, thanks. And then Casey, I guess, maybe I missed something on the gross margin guidance, it sounds like Hikvision and Dahua, or maybe just more broadly, China professional is going to remain at a fairly small percentage of revenue in the January quarter, yet margins are going to be down nearly 200 to 400 basis points. It doesn't feel like you have an adverse mix ship back to China professional security. So, what's the cause for the margins to come back down in the January quarter?

It's an overall general mix between several different customers. But there is a fair amount of revenue that we will start to see, I think, in Q4, from those two customers, some of the vision-based in is, Fermi just mentioned some of them being CV-based around Dahua. And I think that will be a nice contribution to the top line, but it will also put pressure. It's not the only factor. But it certainly is one of them. As I mentioned, the consumer side of the business is always down this quarter. That's a seasonal thing. So that changes the mix. Not only customer, but also product mix. And so, there's more than just one thing going on, but there will be some recovery in that revenue. And again, as I mentioned, I think while the vision will be relatively stable or not as much growth, we will see that CV start to come in in Q4 in that, while it helps revenue, will also have some margin impact.

Is it safe to say that you're mostly done with the $10 million inventory purge, or do you believe that some of it will still carry over into the January quarter?

I think we continue to see that they are burning through this inventory. But I have not seen the end of it. Among all the product lines of the video processor product line of Hikvision and Dahua ordering from us, we’re only seeing several items coming back to new orders, but remaining still, we haven't seen many orders yet. So, I think that's a sign for two things. One is they continue to burn through the inventory, and two, the CV ramp in addition, will be important for us; and three, in the future, we're going to continue to work with Hikvision to see where we'll have opportunities to work with computer vision technologies.

Thank you. Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.

Thanks. And congratulations on the great results. As you're introducing the new CV devices, the CV28 in particular now, now that all of your customers have done some CV designs, is there a change in the time to market, from the time you introduce the product to the time your customer comes out with the product?

Yes. I think you're absolutely right; all of our CV-family chips, from CV to CV20 to CV25 to CV28, they share the sensor for SDK. So to assure CV28 works, the chip was simple to customer; people can port the existing SDK that they already have onto CV28. And that's why we think that time to market is much, much faster. And we also, in my script, I talked about that we expect to see; we already received orders in Q1 next year, and we expect to call the ship on time.

Okay, great. And on the OpEx side, looks like it's under control, very flat quarter-over-quarter, even with 5-nanometer products coming in the pipeline. Are there any foreseen expenses coming up? Or should we expect this through fiscal year 2022 to be kind of tight controlled over OpEx?

Yes, I think you're going to continue to see the drivers in OpEx be two things. One is, we're going to continue to be hiring, not only in engineering, but we're starting to do some hiring outside of that as we start to really deeply pursue some of these markets that we haven't been in in the past. The second thing is, although there can be a little bit of lumpiness to it, there will be a build in the cost of designing, as you mentioned, in lower technologies, not only the CAD tools and boundaries costs but the overall costs of being on the front edge of this technology will continue to be a driver. Generally, that gets smoothed a little bit, the way we treat that over the quarters. But you can as projects start and stop, have a certain amount of lumpiness to it. But I think those are really the two drivers; the rest of the business in pretty good shape.

Thank you. Our next question comes from the line of Charlie Anderson with Colliers Securities. Your line is now open.

Thanks for taking my questions and my congrats on a strong quarter and outlook. I wanted to start with some of the opportunities in automotive, thinking your software partner was acquired, but in Europe was acquired by an automaker, I'm curious how that maybe changes the complexion over there. And then, there's been some reporting on potentially some mandates or some goals in China around partial driving and self-driving. And I wonder if you're seeing that manifest itself in any of the design activity that comes off some of the push over there? And then I've got follow up.

Yes, thank you. First of all, Hyla, they are very important moving forward, and they were required by VW, and I think the change was absolutely significant. Since then, I also realized that we need to have a new software product for other businesses. We definitely spend a lot of time developing the potential applications. In terms of your second question, Charlie, can you remind me of your second question?

It was about China; it seems like there's a push toward more partial autonomy and full autonomy, some mandates potentially. I wonder if you're seeing any of that manifest itself in the design activity and some of the planning?

Yes, we do see that. First of all, I believe that more for the commercial vehicle sector, this mirrors our strong revenue in the Chinese industry for our APAC market. I really think that's a market where we are starting to see a framework emerge from government regulations, and I believe that will continue. We haven't encountered a requirement for super vehicles, so we will provide updates whenever we hear anything.

As Louis mentioned, we're in two different sites. And it seems like we're getting a little feedback for some reason at this point, but we'll see what we can do.

Okay, great. And I just had a quick follow-up. I was curious if you could maybe update us on the HiSilicon situation? I know last call, you talked about a lot of inventory being out there. Just curious how that's looking now in terms of some of the opportunity to capture some of those sockets. Thanks.

In the last few months, we continue to monitor the situation. We believe the situation is just like what we said last time. There's still plenty of inventory out there but many stay with the peak customers. I think, for example, Hikvision; I believe, we don't have any proof, but we do believe Hikvision has a lot of inventory of HiSilicon chips, so they can continue to ship. But however, for other smaller HiSilicon customers, I think they are looking for newer suppliers. And that's why we are seeing opportunities that we can win. And we mentioned we win a handful of Chinese professional security camera customers in the last three months, including Dahua, and also we believe they are going to gradually ramp up the production with us in Q4 moving to next year. We also see in other video markets, we see a lot of customers are looking for solutions, and we definitely believe we have an opportunity and technology that we can serve them.

Great. Thank you.

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

Congrats on the strong results and guide. I guess my first question, just another clarification on the automotive funnel side of things. And forgive me if I'm cutting this a little too finely, but was that $600 million a combination of both existing design wins? And then I thought, Fermi, you said designs you're competing for, is that like a SAM analysis? Are those design wins that you're competing for that you think you're going to get? I just want to clarify how concrete those design wins are.

Hey, Ross, this is Louis. For that $600 million funnel, as Fermi said, a majority think of 70% is business that's won, and that business has been discounted, based on our confidence in the revenue forecasts that's been given to us at the time we won the business. The other $200 million are opportunities that we're bidding on, with two discount factors. Discount factor one is the probability of winning that business, discount factor two is the confidence in the revenue forecast that's been provided to us at the time we're bidding on the program. So it's a six-year funnel. And again, as Fermi said, a majority of that business is won.

So another way to say, with the $200 million you gave last quarter that at that point, you had year-to-date, you've pretty much added another $200 million until today. And then, there's the final $200 million is the part that you hope to win?

Last quarter, Ross, what we provided was $200 million won in the first six months of the year. So there's an additional $200 million on that that we had won before that period of time, or more recently.

Okay, thanks for the clarification on that. Then maybe one for Casey, a lot of good questions have been asked and answered already. But you gave great granularity on the sequential guide by your three primary segments. But you just gave directional guidance of what they actually were in the prior quarter. So whether it was for the fiscal third quarter, or if you wanted to do it for the entirety of the fiscal year, how do you revenue split between the IP security, automotive, and then consumer and other buckets? Just so we just have a baseline to work these percentages off of going forward.

Yes, for the full year, we've said it, and it remains true that the auto side of the business is probably going to be between 15% and 20% of total revenue, that the consumer business was probably going to be close to 20% of total revenue, and then the balance would be IP security. So we were saying in the past 2020, but it's changed a little bit obviously as the course, but not a lot.

And then as you go into the fourth quarter; this goes back to the gross margin question I think either Tori or Quinn asked about, the revenue mix side of the equation, I get that it sounds like Dahua and Hikvision are going to be a little bit more of the business, still mid-single digits, maybe a little bit more. What is the other mix-related headwind? Are there positives in the consumer segment that were big tailwinds in the fiscal third quarter that seasonally go away? Or is there something else going on?

It’s a combination of factors. I would clarify that for security camera revenue, we indicated that it will experience low double-digit growth sequentially in the fourth quarter. This growth is influenced by key players like Dahua, as well as Fermi and some contributions from HiSilicon, although they are not the sole factors in the overall mix.

Got it. Perfect, thanks.

Thank you. Our next question comes from the line of Andrew Buscaglia with Berenberg. Your line is now open.

Good evening, I wanted to follow up on your comments regarding computer vision as a percentage of sales projected at around 25% next year. I had projected it to be just under 20%. You seem quite optimistic about this, and I would appreciate it if you could provide a breakdown of what this 25% includes. I assume it is mainly from professional security, but is there any additional insight you can share about its composition?

Yes, you're correct that a significant portion of that 25% comes from professional security cameras. We also anticipate our home security camera business will be boosted by a computer vision product next year, which we believe could contribute meaningfully to our revenue. Additionally, on the automotive front, we see potential for our computer vision revenue to grow, especially in China with commercial vehicles and buses. Outside of China, our fleet management customers are utilizing our computer vision chip for advanced driver-assistance systems and federal monitoring applications. All of this presents an opportunity for us in fiscal year 2022, but indeed, professional security cameras will be the largest contributor.

So presumably though, you're talking pretty positively on what's going on in automotive, too, with that funnel. So presumably, the real driver for computer vision even comes beyond that calendar year 2022 and beyond? I would think that would be an even bigger driver for that computer vision segment.

I agree with you.

Okay. Interesting. Fermi, you mentioned having some notable insights about the security market's adoption of computer vision over the next three to five years. Are you essentially suggesting that the products sold in that timeframe will need to incorporate these new computer vision capabilities? What are the factors motivating people to upgrade? This could lead to a significant upgrade cycle.

For professional security cameras, the main driver is the shift from server-side computer vision to edge computing. Previously, all video had to be sent to servers for storage and offline analytics, which is manageable for a few cameras but becomes a significant burden with millions. This approach strains bandwidth, infrastructure, and storage costs. Our discussions with customers have shown that they see edge computing as the solution, enabling them to analyze data locally and only send essential information to the server, thereby reducing the need for extensive video transmission and server resources. This shift represents significant cost savings for customers. Although current computer vision cameras are more expensive than traditional video processors, we anticipate that in three to five years, advancements in the economy will lower camera costs, making them more appealing for upgrades. We expect to see continued growth in our computer vision revenue due to these technological and financial shifts. Similarly, in the automotive sector, we're noticing a strong trend where new designs are increasingly incorporating computer vision, even if it's not immediately needed, to facilitate future upgrades and ensure long-term viability.

Got it. Alright, thanks for the color.

Thank you. Our last question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Thanks for taking my question and congratulations on the strong growth. Fermi, I had a few conceptual questions. First one, when do you think automotive CV becomes more than 10% of your sales? Is that something that can happen in 2022, 2023, just conceptually, when should we expect automotive CV to be more than 10% of your sales?

Fermi provided further insight into revenue and the emergence of certain markets; during this early stage, as Fermi noted. We aim to guide as best as we can from quarter to quarter. I'm not sure we are prepared to commit to specific timelines today. Conceptually, we believe that CV will continue to be a key driver of all our revenue platforms. We are very optimistic and observing strong development activity, including in the automotive sector. However, how this unfolds in the early stages over the next few quarters is something we will be able to address more comprehensively over time. For now, we've done our best to describe the situation.

I understand. For my follow-up, in relation to your successes in automotive with CV, how many of these are exclusive, meaning you are the sole CV processor in the vehicle? In cases where you are one of multiple processors, are there specific applications where you perform better? Are there areas where customers seem to prefer a competitor? I'm curious about the technology aspect regarding exclusivity and which applications showcase your strength against the competition.

It can be helpful to view this from the perspective of various automotive applications, such as e-mirrors, ADAS, or recorders. When a CV chip is used, typically there is only one end-processor for ADAS applications, meaning if we are selected, we serve as the sole processor for CV in that device. While there are other applications, like level 2+, where multiple chips are employed for CV, we sometimes are the only provider of multiple chips in certain scenarios. However, there are instances where other chips handle some functions, and we contribute to different parts of the applications. The decision largely depends on the customer's preferences and the current market landscape. For example, in the level 2+ segment, mobile AI is prevailing, which leads some customers to prefer retaining their existing mobile devices, like iPads, as cameras instead of switching to alternatives, which we are certainly open to considering and want to pursue.

Got it. And just lastly, how should we think about operating expense growth? As you're starting to grow your top line at a faster pace and these emerging markets; I understand that you have done a lot of upfront R&D; but is there a simplistic model to drive your operating expense growth? From here will it grow at half the pace of sales growth or what is the right way to think about your OpEx growth for the next one to three years? Thank you.

I think you will definitely see leverage coming into the model. This is partly due to the competitive advantage and the increased average selling prices, which boosts our revenue. However, our operating expenses will not reflect this increase; instead, we expect our operating margin growth to continue over the next few quarters and even in the coming years. You will see the leverage in the margins returning to the model. Historically, we maintained operating margins of 20% to 25%, and I see no reason why we can't return to that target range over the next year or two.

Thank you. Our last question comes from the line of Suji Desilva with ROTH Capital. Your line is now open.

Hi, Fermi. Hi, Casey. Looking past the January quarter and the growth there, are there some elements of seasonality looking into the fiscal first quarter 2022? Or are your program ramps, you think, and maybe restocking perhaps going to carry? What's the dynamic looking into the next six months?

Historically, when we look at the transition from the third quarter to the fourth quarter, we typically saw a decline of 10% to 15%. Then, moving from the fourth quarter to the first quarter, we generally experienced a decrease of about 10%. This decline was partly influenced by the consumer-driven nature of the business. However, we are now observing the early stages of positive growth in the CV sector. Due to the updates and the profile changes, I believe some of the seasonality we usually see will be mitigated. That being said, seasonality still plays a role in our model, and we need to monitor how both the overall business and the CV sector evolve in the upcoming quarters. Clearly, we are not expecting the usual decline from the third quarter to the fourth quarter this time, and as we move into the first quarter, certain seasonal factors related to market and product changes will diminish.

Okay, Casey. Regarding the situation with Hikvision in China, it appears that if Hikvision faces challenges in obtaining HiSilicon chips and does not collaborate with you, some of the tier 2 companies you're beginning to engage with in China may start to capture market share comparable to Hikvision. Is this how you see the market evolving, or do you believe those two will continue to dominate, or could one of the tier 2 companies rise to a similar status as them for you?

Well, I need to be very careful about this because some of the tier 2 you have mentioned are my customers. But however, in China, my personal belief is that Hikvision, Dahua, and Huawei, now become the third largest security camera provider; those three will continue to have a majority of the market share. Just because of their size, and the momentum, and their product portfolio they already have. I think all the others will have a chance to increase their market share but you will not get to the point where they can challenge the market share of our Hikvision, Dahua or Huawei.

Okay, great. Thanks, Fermi.

Thank you. This concludes today's question-and-answer session. I would now turn the call back over to Dr. Fermi Wang for closing remarks.

And thank you, everybody, for joining us today. I really think that we made great progress on the CV side, and I'm looking forward to providing you more updates next time. Thank you, now.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.