Ambarella Inc Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to Ambarella’s Third Quarter 2023 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. I would now like to hand the conference over to your speaker for today, Louis Gerhardy. You may begin.

Thank you, Tewanda, and good afternoon. Thank you for joining our second quarter fiscal year 2023 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 of fiscal year 2023. 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. And 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 we file with the SEC, including the Annual Report on Form 10-K that we filed on April 1, 2022 for fiscal year 2022 ending January 31, 2022 and the Form 10-Q filed on June 8, 2022 for the first quarter of fiscal year 2023. Access to our second quarter, fiscal 2023 results press release, transcripts, historical results, SEC filings and a replay of today’s call can be found on the Investor Relations portion of our website. Fermi will provide a business update for the quarter, Brian will review the financial results and then we will be available for your questions. With that, turn it over to Fermi.

Thank you, Louis, and good afternoon. Thank you for joining our call today. Q2 results were mostly as expected; revenue was down 10% sequentially and up 2% versus the year-ago quarter. CV revenue increased significantly on a year-over-year basis, driving our blended average selling price above $10. We have cumulatively shipped more than 10 million CV SoCs, including more than 20% into the automotive market, and we remain on track to achieve our prior estimate that CV will represent about 45% of our total revenue for the year. In Q2 we absorbed the worst from both the China lockdown and the 14 nanometer shortage, and incomplete kits remained a bottleneck for many of our customers. Collectively, we should see some improvement from these factors in the second half, but our recovery outlook is tempered as some customers are now reducing their inventory levels, in particular as lead times contract. In July we commenced a global roadshow to leading automotive Tier 1s and OEMs with live demonstrations of our CV3 SoC. As a reminder, CV3 is our first central domain controller integrating in a single monolithic die all of Ambarella’s core competencies; including perception processing from cameras, radars, sensor fusion and path planning, as well as our functional safety and application software. Just one month after the SoC came out of the fab, we demonstrated full functionality across multiple live cameras to many global automotive OEMs and Tier 1s. The superior performance and efficiency, as well as the scalability of our SoC roadmap, were clearly recognized and well received, leading to many follow-on development discussions. Now, we expect to be able to share more about some of these customer engagements by the end of the year. We are also proud to announce that CV5, our first 5 nanometer SoC, entered production in Q2, at least a quarter ahead of expectations. We have three IoT customers that each purchased production volumes in Q2, and we are engaged with many other companies developing their first CV5 products. I will now provide some examples of our market development activity, where production has already, or is expected to commence this year. Toyota introduced its 16th generation 2023 Toyota Crown model featuring a two-channel digital video recorder based on Ambarella’s CV25AX AI processor. Capable of recording from both the ADAS system and the electronic mirrors, the car recorder is supplied by Japanese tier 1 Denso-Ten. BMW began shipping two dash camera models, the Advanced Car Eye 3.0 and 3.0 Pro, providing both front and rear view recording. Based on Ambarella’s H22 video SoCs, the dash cams will be sold in over 80 markets, with the Chinese version also including electronic toll charging features. In June, China-based FAW Hongqi introduced its latest generation of B-class cars. The H5 sedan includes an L2 ADAS system based on our CV22AQ automotive SoC and supplied by tier 1 Neusoft. Also in June, China-based Dongfeng introduced its Haoji SUV. The SUV includes an Occupant Monitoring System based on our CV28AQ and supplied by tier 1 BCS. And in August, Israel-based Cipia announced Chery’s SUVs will integrate Cipia’s Driver Sense DMS running on Ambarella’s CV28 AI processor. The integration of the CV28 and driver sense software utilizes neural networks to offer robust driver monitoring capabilities. I will now talk about some of the new IoT product announcements. Johnson Controls introduced its 4th generation Illustra Flex camera series, including mini-dome, PTZ and bullet models, based on our CV28S AI SoCs. Also during the quarter, Ubiquiti announced its AI Bullet camera. Based on our CV25S AI SoC, the 4 megapixel camera includes smart detection of people and vehicles. Korean IP-camera maker IDIS launched four new 8 megapixel and 6 megapixel PTZ cameras based on our CV28 and CV22 SoCs. The cameras are designed for wide-area surveillance operations with the capability to identify objects and recognize faces at distances of up to 300 meters. Japan-based iPro introduced a new 2-megapixel machine vision camera aimed at manufacturing sites and based on our CV22 AI SoC. The camera performs automatic visual inspections and supports up to 100 different object types, for example detecting the presence of cables and connectors, different colors, or the presence or polarity of electrical components. Also in Japan, JVC introduced its new PZ2510 videoconferencing camera focusing on live broadcast and recording applications such as concerts and lectures. Based on Ambarella’s CV22 AI SoC, the camera supports full 4kP60 video streaming, face detection, automatic tracking and wide viewing angle. In other IoT markets, Insta360 introduced two new products based on our H22 video SoCs. The Insta360 Sphere is an accessory for a drone and works by placing one camera above the drone and one below to create a seamless spherical image. In the smart home IoT market, Insta360’s Link is an AI-powered 4K videoconference device using a 3-axis gimbal design and powerful AI tracking, automatic zooming and framing to ensure that the presenter is always center stage. These representative engagements, a majority of which are based on our higher value CV SoCs, provide insight into the early and continued success of our strategy. We have successfully leveraged our human viewing perception processing expertise into the larger machine sensing markets, addressing megatrends such as security, safety and automation. These machine sensing unit opportunities are incremental and much larger than the human viewing market we have, and will continue to serve. Furthermore, we are demonstrating we can capture more value in these sensing applications from incremental processing functions such as radar and other sensor perception, sensor fusion, planning, functional safety and application software. CV3 ties all this functionality together. So, we are confident we are implementing the right strategy and demonstrating early signs of success. Despite the current market turmoil, we will continue to drive our organic R&D investments to fully realize these market opportunities, leveraging our leadership position in the AI endpoint market. With that, Brian will now provide our prepared financial comments.

Thanks, Fermi. I’ll review the financial highlights for our fiscal second quarter and provide a financial outlook for our third quarter, ending on October 31, 2022. I will 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. Revenue for fiscal Q2 was $80.9 million, slightly above the mid-point of our prior guidance range, down 10% sequentially and up 2% year-over-year. As expected, supply chain-related disruptions were the primary factor in the sub-seasonal performance, and both IoT and Auto revenue declined sequentially. Non-GAAP gross margin for fiscal Q2 was 64.5%, above the high-end of our guidance range of 63% to 64%. Our gross margin outperformance was driven by a higher mix of NRE revenue than originally expected. Non-GAAP operating expense for the second quarter was $44.2 million, compared to $39.8 million in Q1. This was $700,000 above the mid-point of our prior guidance range of $42 million to $45 million, driven primarily by engineering materials for new products. Our non-GAAP tax provision was $361,000, or 4.5% of pretax income, and we reported non-GAAP net income of $7.6 million or $0.20 per diluted share. Now, I’ll turn to our balance sheet and cash flow. Cash and marketable securities decreased by approximately $3 million as unusual working capital benefits in the prior quarter reversed and metrics normalized. You will remember that in the prior quarter accounts receivable benefited from a front-end revenue skew and inventory declined. For fiscal Q2, DSO increased to 43 days from 28 days and days of inventory increased from 117 to 125. 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 59% of revenue. Chicony, an ODM who manufactures for multiple IoT customers, was 13%. I will now discuss the outlook for the third quarter of fiscal year 2023. While we expect some improvement in the second half from the broad supply chain disruptions, we have started to see some customers reduce the amount of inventory they are willing to carry into year-end, in particular as component lead times contract. Our guidance, to the best of our knowledge at the current time, contemplates these challenges. We estimate our Q3 revenue to be in the range of $81 million to $85 million, or approximately flat to up 5% sequentially. We estimate Q3 non-GAAP gross margin to be between 63% and 64%. We expect non-GAAP OpEx in the third quarter to be in the range of $44 million to $46 million, with the increase compared to Q2 coming primarily from increased headcount and sales activities taking place during the quarter. We estimate net interest income to be approximately $400,000, our non-GAAP tax rate to be in the range of 4% to 6% and our diluted share count to be approximately 39 million. Ambarella will be participating in Deutsche Bank’s Technology conference on September 1st, Credit Suisse Virtual Asia Technology conference on September 6th, Citi’s Technology conference on September 8th, and UBS’s virtual Future of Mobility conference on October 3rd. Please contact us for more details. Thank you for joining our call today. And with that, I will turn the call over to the operator for questions.

Thank you. Our first question comes from the line of Matt Ramsay with Cowen.

Congratulations from me on sampling CV3. I wanted to ask if you could give us a few updates and anecdotes as to how the sampling is going with customers. Maybe how many customers have formally sampled, what those engagements have been like and sort of the early performance feedback on the part relative to what you guys had modeled and just how the software portals to CV3 are going with the customer samples? Thanks.

We demonstrated CV3 to about two dozen customers, including some major players and OEMs. There are three key points from these demos. First, all customers were very impressed that we conducted a detailed demo just four weeks after the chip returned from production. The demonstration featured a live board with CV3 at the center, processing live video from multiple cameras. This video was handled by CV3, which performed standard image processing, with the results going into both our compression engine and the CV flow engine that runs various neural networks vital for autonomous driving. All the video passed through this neural network processing, and the final outcomes were displayed on a TV monitor. This thorough demo covered all significant data paths of the chip, demonstrating not only the chip's stability but also the robustness of our fundamental software that allowed for live demonstrations. Customers were pleasantly surprised by this. The second key point is performance. Prior to the demo, we communicated our performance expectations to customers, and we met those expectations accurately, surprising them with the actual chip's capabilities. Unlike other cases where performance results tend to be lower than projected, we delivered on our promises for CV3. The third takeaway is related to power consumption. We provided projections for power usage, and we met those numbers. To summarize, we showcased a chip capable of delivering multiple times the computer vision performance of competitors while consuming significantly less power, presented through a live demo rather than a PowerPoint presentation. This made a strong impression on our customers regarding CV3. Our next important milestone is to provide our hardware and software SDKs to customers for their software development and neural network porting, and we are currently engaging with customers on this. We expect to have more updates on customer engagement by the end of the year.

Thank you for all that, Fermi. That’s really helpful. And congratulations on the progress. As my follow-up, Brian, I wanted to ask about some of the customer kitting issues and your commentary about the potential for customers to want to hold less inventory into year-end. Any way to quantify what that impact is to maybe the second half of the fiscal year? And if you have any color on which geographies, which specific end markets you’re seeing that inventory coming down or folks being willing to take less inventory? Any anecdotes there would be really helpful. Thanks, guys.

Sure. Well, we gave you our outlook for revenue for fiscal Q3. We’re not going to venture out into Q4 at this point. But in terms of where we’re seeing this type of feedback, it’s with customers in various areas. So, it’s not specifically targeted to a single exposure. I think we’re in a situation where customers have been experiencing supply disruptions for quite some time, right? And those disruptions are beginning to abate to some extent. Things are getting a little bit better. But they’re also looking ahead to some of the economic risks that could be on the horizon, and the uncertainties associated with that. And so there’s, I think, a return to a focus on inventory management that maybe didn’t exist for a period of time, particularly as we head into the end of the calendar year. So, we are getting some requests for pushouts from various customers, and we’re reflecting that in the guidance we provided.

Our next question comes from the line of Joseph Moore with Morgan Stanley.

Great. Thank you. Following up on that last question, on the customer inventory stuff. When you talk about lead time contraction, is that your lead time, or is that lead time for other components? And then, I had a follow-up.

I think we are discussing both aspects, but I can provide an update on our own lead time changes. Previously, our lead time peaked at around 40 weeks, and now it has reduced to about 30 weeks. Before COVID, our typical lead time was 24 weeks. So, we are gradually returning to normal, which pertains to our lead time. Additionally, we have observed that some components from our partners are also experiencing reductions in lead time.

Thank you for that information. Regarding October, I understand you typically experience a seasonal increase in your consumer-focused businesses, including surveillance. Given that your previous quarter's revenues were affected by the foundry issue, are you still experiencing that seasonal effect? Is it being counterbalanced by these other challenges you've mentioned, or is the impact primarily coming from the seasonal products? It appears there's a significant decline in something if you're experiencing the usual seasonal growth. I want to ensure I grasp the situation correctly.

Right. So, Joe, I think, first of all, those three supply chain issues we have been talking about, although it’s kind of reduced, but didn’t go away, even for the second half, we believe will persist, but in a lesser degree. On top of that, we just talked about the inventory reduction at the customers. I think those two things are probably the major factors. And also, I think this is a really unique year. I think with all the supply chain situations that we’re monitoring, geopolitical situation, I have to say, I don’t think that our normal seasonality applies this year.

Our next question comes from Vivek Arya with Bank of America.

Actually, I had a clarification, and two quick questions. Brian, you mentioned there were some NRE revenues that helped to improve gross margins. I was hoping you could quantify how much in incremental NRE in Q2, and what’s embedded in your Q3 outlook?

Yes, Vivek, we don’t break out those numbers specifically, but typically, NRE for the company runs between 1% to 2% of the total. In the second quarter, total NRE was in the low to mid-single digits in millions of dollars of revenue. It will be variable as we move forward. However, looking at the near term, we expect Q3 to normalize and return to a typical run rate. As we move further ahead and increase activities related to CV3, it’s possible that NRE becomes a slightly larger portion of our overall revenue mix, but we’re not at a sustained level yet.

Got it. And on the inventory reduction by your customers, is that more on the automotive side? Is that more on the IoT side? Because on the automotive side, when I look at the results and outlook for most of the other automotive-exposed semiconductor suppliers, they seem to have been pretty strong, at least in the near term. Obviously, I understand that every company is supplying different kinds of components, so it might not be exactly apples-to-apples. But I’m curious, where are you seeing the somewhat softer demand signals? Is that more automotive or more IoT?

No, I think you are correct. We are observing a slight reduction in inventory from the automotive customer, which constitutes 25% of our total revenue. However, in the rest of the business, particularly on the security IoT side, especially with security cameras, we see our customers attempting to lower their inventory levels.

Got it. And then finally, your overall inventory kind of stands out, right, because it has now reduced for the fourth straight quarter, which is kind of an anomaly in this sector where inventories are up for most of the semiconductor suppliers. What is the right way to view the lower level of inventory on your balance sheet? Is it a signal of your demand outlook for the next two to three quarters? Is it something else? What is the right way to look at your being able to manage with lower levels of absolute dollars of inventory?

Yes. Inventory has decreased in dollar terms over the last couple of quarters. However, in the second quarter, it actually increased in terms of days because the cost of goods sold decreased. We moved from approximately 117 days of inventory in the first quarter to about 125 days in the second quarter. This is a relatively high level of inventory days for the Company. We have maintained a higher inventory level to buffer against supply disruptions. Looking ahead, if we can resolve these supply issues and return to a more normalized state, I anticipate that we should be operating with under 100 days of inventory in the future.

Our next question comes from the line of Gary Mobley with Wells Fargo.

I appreciate the disclosure about how your blended ASP is now trended above $10, but maybe if you can give us some baseline in terms of thinking about it on a quarter-over-quarter basis, year-over-year basis and how that compares to your unit growth.

Since we launched our CV product line, our average selling price has been increasing, and we anticipate this growth will likely continue. Once we start production of the CV3 or CV3 product family, we expect further expansion of the average selling price. In terms of unit numbers, these are two distinct issues. The majority of our lost unit numbers came from high vision, which has a very low average selling price, probably the lowest we've seen in years. We essentially lost that segment, which also contributes to improving our overall average selling price. However, I believe our average selling price growth will persist primarily due to our CVflow product line.

And I wanted to confirm that the Samsung 14-nanometer supply issue, the lingering impact in the July quarter was as you approximated $5 million, and I wanted to be clear that that’s no longer a headwind looking into the October quarter. Is that right?

First of all, the $5 million in the July quarter is accurate. In October, I believe it will be much less, but we will take that into account when providing guidance.

Our next question comes from the line of Blair Botha with Arete.

I have a question regarding CV5. I see that it has entered mass production ahead of schedule. Could you explain how you anticipate the adoption of CV5 will unfold over the next 6 to 12 months? How should we consider the revenue trend for the upcoming year? Do you expect a rapid adoption, and could this be a significant growth driver for the business? Any insights into how we should perceive it as a future revenue stream would be appreciated.

Right. I think you should consider CV5 as our next-generation high-end CV4 engine. And the target applications are high-end enterprise class security cameras, the enterprise video conferencing system as well as some high-end home applications. Almost all of our security cameras, if they do high-end products, they are looking at CV5, and some of them, like I said, while they will take that into production this quarter and multiple will take that into production in the second half of this year. So I think CV5 revenue will start in the second half of this year and ramp up next year. It definitely helps us on the ASP expansion as well as helping us to maintain our gross margin.

Okay, great. Thank you. That’s helpful. And then, I guess just as a follow-up. In terms of the two segments, IT and automotive, I know you mentioned they declined sequentially in the quarter. Could you give us any color about how to size them in the quarter as a percentage of sales? And then, I suppose just to add to that, looking at the Q3 guidance, could we expect something similar for the October quarter? Thank you.

Yes. This is Louis speaking. So, auto and IoT, roughly the same when you consider everything included, including the NRE. And the outlook for Q3 is to have both of these areas growing sequentially.

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

Thanks for letting me ask a question here. On the automotive side, it seems like it’s been at about that 25% of revenue range now, given the answer to the prior question, it seems like for three quarters in a row. When do you expect that to really accelerate? I know it takes longer in the CV stuff, the majority of that’s been impacting to the benefit of the IoT side. But how do you think about the growth rates of the two segments? And specifically automotive, when should we expect either a steer step-up or a bigger ramp, given all the design wins that you’ve highlighted in the preamble, for me?

I believe that a significant milestone for our automotive revenue growth will be the production of an ADAS Level 2 plus vehicle by a major OEM. This is crucial for our long-term growth strategy. While I expect automotive revenue to continue increasing, the substantial leap I’m looking for hinges on this major OEM launching ADAS in the market.

Any sort of rough color of when that may occur? Is that something that you think you have the design wins, or is that going to be more CV3 dependent, so it’s a couple of years out, given the design cycles? Any sort of rough color on that?

I believe CV2 will provide some boost, but as we mentioned previously, CV3—due to the average selling price—will really offer the most significant increase for us. However, I expect our automotive revenue to continue growing between now and when CV3 is in production.

Our next question comes from the line of Tore Svanberg with Stifel.

I know you’re not going to comment beyond Q3. But just thinking about the lead times and the sort of inventory adjustment, do you think that you’ll be down to sort of the mid-20s lead times during the October quarter? Or when you talked about sort of going from 40 to 30, that process started a little bit later.

Well, I think 30 is now. And whether we’ll move to 20 or 24, like before, it would really depend on our supply chain, right? So I think it will take a while because there’s still, I think, on the high-end process node, probably 30 will be stable for a while. So, I wouldn’t expect that to happen to go back to 20 or 24 immediately. However, I think the trend is there, and I think our customers are really reacting to the trend, expecting that the lead time will go back to normal soon.

Very good. And as my follow-up, can you confirm that you’re going to be updating us on your sort of vehicle revenue funnel 3.0 next quarter? And since you’re obviously not going to shed data now right now, could you at least talk qualitatively about how that funnel continues to improve?

We definitely will give you an update on the 3.0 in November.

Okay. Any comment qualitatively or am I jumping the gun here?

I think we are a little too early to talk about.

Alright. Very good. So, since you’re not going to answer that question, I’ll have one last one. So, could you just elaborate a little bit on the supply chain dynamics? I know you talked about the 14-nanometer but I also know there’s been maybe some potential yield issues at 10-nanometer. Now that you are in production in 5-nanometer, how do you feel the yield improvements are going on with your current supplier? Thank you.

There has been a lot of media coverage regarding Samsung’s 5-nanometer technology. Based on our experience, we initially faced yield challenges when we started working with Samsung's 5-nanometer process. However, we are now ready for production, which began in Q2. I am pleased to report that yield is no longer an issue for us; it is improving and can continue to do so. We've established a strong working relationship with our foundry supplier over many years. It's typical for new advanced nodes to experience low yields at first, but we collaborate closely with our foundry partner to enhance it. At this point, I can confidently say that the 5-nanometer yield is within a normal range and has potential for further improvement in the near future.

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

You mentioned the CV3 and some of its implementations, and you referred to potential NRE. Could you discuss the design cycle length compared to previous products? I understand it may be more software-intensive. Will tier 1 automotive companies play a role in establishing this within the industry? Thank you.

I believe that for any Level 2+ design win, it will likely require around 3 to 4 years to reach production outside of China, while it may happen slightly quicker within China. In terms of design win momentum, we are engaging with both OEMs and Tier 1 suppliers, as both are crucial. OEMs seek to make decisions and manage software, but they still rely on Tier 1 suppliers to produce the final product. Collaborating closely with our Tier 1 partners is essential for delivering these products. This is why, when we demonstrated CV3, we ensured that all significant Tier 1 suppliers and major OEMs were present to showcase the capabilities and potential of CV3. When they converse about design wins, we want CV3 to be a key consideration.

And then, on the Oculii acquisition Radar, can you just update us on what expectations are for incremental fundamental contribution, revenue contribution or how we should think about that over the next few quarters as you integrate that in?

We didn't provide a breakdown of Oculii Radar revenue by quarter, but we expect it to be around $3 million to $4 million this year, and we are on track with that. We will keep monitoring our progress with current customers and are working on a few design wins. We hope to see results in the coming year, including ramp-up revenue. Another significant milestone to track is our ability to demonstrate Oculii software running on our CV3 silicon. This will likely be the first silicon platform capable of performing sensor fusion with both video and radar data simultaneously. This capability is crucial not just for enhancing perception and sensor fusion for our customers, but it also offers substantial cost savings. Therefore, achieving this milestone is very important for us.

Our next question comes from the line of Kevin Cassidy with Rosenblatt.

Just as you’re looking at the opportunities for CV3, is there a difference between consumer vehicles and, say, robotaxis and shuttles? Is there a shorter time to market or any one that might be better suited for the CV3?

I believe that the design cycle is likely similar for both consumer and commercial vehicles outside of China, as even commercial vehicles require auto-grade silicon hardware and software. Inside China, the situation is different; there is a greater willingness to test and introduce products in the market. Therefore, there are two different timelines to consider. We will definitely aim to leverage the shorter design cycle in China to quickly introduce some products there.

And going back to the NRE question, is Oculii part of that NRE revenue?

Yes, it is.

Okay. That’s expected to go forward, also?

I think now we are engaging with a new customer after we acquired them. Yes, we expect that we’re going to see new revenue opportunities with Radar, also.

Our next question comes from the line of Andrew Buscaglia with Berenberg.

Into the quarter, there seemed to be a growing sense of optimism regarding decision-making moving forward with some automotive original equipment manufacturers, especially considering recent announcements in adjacent technologies, like those from VW. While I understand the comments on inventory, what can you share about your discussions in the automotive sector concerning decision-making in the near future? Given the nature of these cycles, one would expect to start seeing some movement shortly, despite the current inventory situation.

So, you are talking about CV3 engagement?

Yes, CV3, particularly your latest technology and shift, specifically CV3.

Yes. Firstly, we have made good progress in the initial phase of the CV3 demonstrations, and we need to enhance our engineering engagement to assist customers in integrating the software into the new network and demonstrating the system. This is certainly a key focus for us. Additionally, we are developing derivative chips within the CV2 family to cater to various applications. For instance, we are working on a 5-nanometer silicon chip designed for automotive use, which will enable our customers to start production in 2024 or 2025. We are committed to continuing our work on different derivatives of the CV3 chips, as this is a crucial part of our investment strategy moving forward. I hope that answers your question.

Well, I guess that was more so in terms of being able to announce the design wins, just that we’re seeing some movement and we are seeing some decision-making move forward with some adjacent technologies. I guess, where does CV fit in there? I would think that you would start to see some movement, even despite these inventory pressures.

We believe we can provide more updates before the end of the year. We plan to give a final update in November, which will likely include details about our progress with the OEM regarding design wins, as well as our engagement with CV3, which we mentioned we would talk about by the end of the year. We hope this will continue to provide you with relevant information.

Our next question comes from the line of Richard Shannon with Craig-Hallum.

I think just one question for me, and following up on the topic of CV3 here. Well, I know the discussions in demos are very early stage here. Fermi, wondering what you see in terms of future discussions and competitive sourcing dynamics with large automotive customers. Do you expect them to be choosing one domain controller across the entire portfolio, or do you expect them to possibly use two or more? In other words, is this an all or none situation, or is there kind of a split situation over time?

It's interesting because many companies we speak with initially prefer to select one software solution. However, I believe they ultimately recognize the risks associated with relying solely on a single option. Therefore, there's a possibility that some may opt for two solutions, while others may still choose just one, leaving us with these two potential outcomes.

Our next question comes from the line of Tristan Gerra with Baird.

You’ve mentioned that the CV5 will start ramping in the second half and into next year. Should we assume that CV5 is going to be material to your revenue the second half? And is it material to your Q3 guidance, or is it just initial shipments and then it becomes more meaningful next year?

I believe that significant revenue will come next year. The third and fourth quarters will be a time for ramping up with several customers, but meaningful revenue is likely to shift to the first and second quarters of next year.

Okay, you've mentioned some inventory reduction across customers, both in the automotive and IoT sectors. I would like to know more about the situation in the China automotive market. What are the current inventory levels there? Have you noticed any delays in deliveries or new projects? How is the overall situation, and what are your expectations for its evolution over the next few quarters?

You’re talking about the China market, right?

Yes. Automotive.

In the China automotive market, it's important to distinguish between consumer and commercial vehicles. The commercial vehicle segment is experiencing significant demand challenges, though it represents a smaller portion of the market. In contrast, the consumer vehicle sector is still dealing with short supplies, which is why we haven't observed any reduction in inventory levels for Chinese consumer automobiles at this time.

And when would you expect then this supply to get back in balance? And will that create more of a slowdown on your existing revenue base to the automotive end market in China by then?

I’m not certain about the exact inventory levels of our current customers. For our chip, I can imagine that some customers might have built up a bit of inventory while others might be more cautious. Therefore, discussions will vary from customer to customer. For instance, in the IoT sector, not all customers are facing inventory issues; some are more conservative about increasing their inventories, resulting in a minor reduction for them. However, there are customers who have aggressively built up their inventories over the past 24 months, and they will need a significant amount of time to manage that stock. Ultimately, it’s a discussion that needs to happen on an individual customer basis, and it’s quite challenging to find a generalized answer.

I’m showing no further questions in the queue. I would now like to turn the call back over to Dr. Wang for closing remarks.

I would like to thank you all for your time and your consideration today. And I’m looking forward to see you in the upcoming events. Thank you, guys.

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