Ambarella Inc Q1 FY2024 Earnings Call

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

Thank you, Jonathan. Good afternoon, and thank you for joining our first quarter fiscal year 2024 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO; and Brian White, CFO. The primary purpose of today's call is to provide you with information regarding the results for our first quarter of fiscal year 2024. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents that we file with the SEC, including the annual report on Form 10-K that we filed on March 31, 2023 for fiscal year 2023 ending January 31, 2023. Access to our first quarter fiscal 2024 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the Investor Relations page of our website. Fermi will first provide a business update for the quarter, Brian will review the financial results and outlook, and then we will all be available for your questions. Fermi?

Thank you, Louis, and good afternoon. Thank you for joining our call today. Our Q1 results were slightly ahead of our expectations. Despite the significant headwinds from the ongoing semiconductor industry cyclical downturn, we are not allowing this difficult environment to distract us from further developing our AI business. Before I talk about the details of the quarter, with all the cross currents in the market together with all the exciting developments in the AI market, I thought this would be a good time to review our strategic vision. Simply put, our transformation into an AI company is well underway, with AI already representing 45% of our total revenue last year and an estimated 60% this year. Now with our CV3 platform, we are expanding into a new phase of AI market development. The AI market is at a very early stage, it is also dynamic with many technologies and applications emerging. With all the excitement about AI, the key to our continued success will be our focus and the degree to which we can leverage our unique core competencies. Even with our focus, our current serviceable available market, or SAM, is sizable, exceeding $4 billion this year and approaching $10 billion in fiscal year 2028. So, what are we focused on? Ambarella is focused on deep learning AI processors and software, which are replacing the legacy and less powerful traditional machine learning approaches. Within the deep learning market, the AI processor market has been dominated by training processors used in servers typically for the cloud, data center, or enterprise. Our focus is on AI inference, which is where AI models get deployed and are practically utilized by end users. As the AI market begins to mature, most third-party research firms forecast the size of inference AI to surpass training AI. We have already demonstrated how we can leverage our rich heritage in human perception, also known as video processors, into AI. Our CV2 family was our first move into AI, and it targets inference AI perception processing at the edge where cameras are the principal sensing modality. We continue to expect the CV2 family to be approximately 60% of total revenue in fiscal year '24, and represent a material portion of our operating profit dollars. The CV2 SoC integrates our camera perception expertise with our proprietary second-generation CVflow AI architecture. The incremental processing to enable AI causes our CV2 blended average selling price, ASP, to be greater than two times a video processor. This contributed to an over 20% increase in our firmwide ASP in fiscal year '23. This year, the CV2 family is expected to become the dominant driver of our revenue and remain the key driver for several years. The solid stream of operating profit from video processors and the CV2 family of edge AI processors is now being reinvested into the significantly more powerful CV3 platform targeting mobility applications. The CV3 platform builds upon our CV2 family experience and utilizes our proprietary third-generation AI inference processor. For the typical Level 2 Plus application, the CV3 SoC provides the perception processing for all the camera and radar sensors, as well as the processing required in the fusion and planning layers. The significant amount of incremental processing is expected to facilitate a CV3 SoC ASP to be five to 20 times higher than a CV2 SoC. It is also very important to understand CV3 is a platform, as the SoCs in the CV3 family can capture incremental value by running our own autonomous driving, AD, software stack IP and/or radar perception software IP. We aim to bundle this software IP with our CV3 SoCs in a platform approach, providing our customers with the flexibility to pick and choose exactly what they need. Regarding our Autonomous Mobility partnership with Continental, I am pleased to share that we extended our partnership to Level 4 system development and confirm the first business award of our jointly developed stack as a complete Level 4 Fallback System. The system will be supplied to Continental for a customer in the commercial vehicle industry. To be clear, the CV3 platform is a major leap forward in terms of our value proposition, and it brings a new list of targeted customers; automotive OEMs. We are still in the early stages of building out the CV3 SoC portfolio and developing the market. However, we are not doing this alone, with leading Tier 1s like Bosch and Continental porting their software to CV3, validating our superior efficiency, jointly marketing to auto OEMs, using their scale and bringing more credibility to our CV3 market development efforts. Additionally, for the AI server inference market, we have already evaluated running large language models, LLM, on CV3-AD High, which has been sampled for nine months, and we believe the LLM performance on this existing SoC to be as good as the NVIDIA A100 with much lower power consumption and a superior total system cost. We are now establishing a software development effort as well as a business development program to engage with customers. Turning to new products and customer engagement in the quarter. In March, at the ISC West security show, we announced our CV72S for mainstream enterprise and public class security cameras. CV72 utilizes the same third-generation CVflow deep learning AI accelerator architecture utilized in the CV3 SoCs. This CV3 derivative SoC brings to the IoT market the highest AI performance per watt, the fusion of radar and camera data and it includes support for the latest transformer neural networks. Furthermore, CV72S offers six times the AI performance of CV2 family, enabling it to run Ambarella's groundbreaking neural network-based image signal processing software for 4K color, night vision and HDR with plenty of headroom for additional concurrent neural networks. CV72S is now sampling to leading IoT camera companies. In IoT, there were a number of new enterprise and public security cameras introduced, including: Motorola, who introduced the H6SL camera line based on CV25, as well as the V700 body camera based on our S6LM SoC; and Verkada introduced its TD52 video intercom featuring a five megapixel camera based on our CV25; iPro, formerly Panasonic and Japan's largest security camera supplier, introduced multiple new product families based on our CV2, CV22 and CV25, including dual and quad multi-imager models; and European market leader Axis, part of Canon, introduced its 3905 rugged dome models designed for surveillance on board vehicles, such as buses based on our S6LM; also in Europe, Dallmeier introduced Domera E series cameras which use our CV22 AI SoCs to enable imaging in total darkness utilizing adaptive IR illumination; in the home monitoring market, Alarm.com introduced its ADC-780 battery powered doorbell based on our S5LM. I'll now talk about progress in the automotive market. As mentioned earlier, our new CV72S SoC is an important CV3 derivative for the IoT market. However, it is expected to also be an important derivative product for the automotive market, and in April at the Shanghai Auto Show, we announced and demonstrated CV72AQ. This SoC targets multiple automotive applications including Level 2 Plus and other applications with up to six cameras and five radars running on the same SoC. CV72AQ demonstrations at the show included an ADAS plus parking system with a five camera configuration including an eight megapixel front camera and multiple three megapixel fish eye cameras running YOLO v7 neural networks on each camera. We also demonstrated, versus the leading GPU solution, superior performance and lower power consumption of CV72AQ running transformer networks. We received very positive feedback on CV72AQ from Tier 1s and OEMs in China. Also at the Shanghai Auto Show, a number of other Tier 1s demonstrated CV3-based systems. This included Continental which showed a 10-camera live demo with multiple neural networks running on each video stream. And Hyperview demonstrated its GT-HyperMax platform featuring a sensor suite of 11 cameras plus one lidar and three radar in a car, providing City Navigate on Pilot advanced functions and leveraging the latest transformer networks. In March, China's GAC introduced its electric AION Y Younger L2 Plus ADAS SUV with an intelligent 1V1R driving assistance system based on our CV22AQ AI SoC. And in April, Geely Zeekr introduced its Zeekr X electric SUV with a face recognition access control system based on CV28AX AI SoC. In summary, a majority of our new customer engagement activity continues to be for our AI products. AI is expected to be a majority of our revenue, for the first time, in FY 2024, and AI should continue to grow as a proportion of our mix. To bring our AI strategic vision together, first with CV2 and now again with the even more significant CV3 platform, we have leveraged our core competencies, cumulative knowledge and unique approach to establish a strong presence in the AI deep learning domain. Our investments yield differentiated products that are very efficient, and on open platforms that are scalable and flexible. The CV2 family is already very profitable and we are well into the development phase with the CV3 platform. In summary, there is still a lot of work left to execute to our strategy and the ongoing semiconductor industry cyclical downturn pressures our near-term financials. However, we are confident in the long-term secular growth opportunity for edge inference AI, we do not intend to stray from our strategic vision, and we are continuing to invest in our differentiated AI strategy. I will now turn it over to Brian to discuss the Q1 results and the Q2 outlook in more detail.

Thanks, Fermi. I'll review the financial highlights for the first quarter fiscal year 2024. I'll also provide a financial outlook for our second quarter ending July 31, 2023. 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. For fiscal Q1, revenue was $62.1 million, in line with the mid-point of our prior guidance range, down 25% from the prior quarter and down 31% year-over-year. As expected, total Automotive revenue was approximately flat sequentially, while IoT revenue was down sharply driven by customer inventory reduction actions. Non-GAAP gross margin for fiscal Q1 was 63.1%, in line with the mid-point of our prior guidance range of 62% to 64%. Non-GAAP operating expense for the first quarter was $46.2 million, up $200,000 from the prior quarter and below our prior guidance range of $47 million to $49 million. The lower operating expense was driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q1 net interest and other income was $1.3 million. This was higher than our original forecast driven by a higher cash balance and returns on cash invested. Our non-GAAP tax provision was $300,000, or minus 5.5% of pre-tax income. This was slightly lower than our original forecast, driven by the mix of pre-tax income across tax jurisdictions. We reported a non-GAAP net loss of $6 million or a $0.15 loss per diluted share. Now, I'll turn to our balance sheet and cash flow. Fiscal Q1 cash and marketable securities increased $20.5 million to $227.4 million. DSO improved significantly from 57 days to 43 days as the timing of shipments throughout the quarter normalized, after being back-end loaded in the prior quarter. Ending inventory increased slightly, up 1.8%. However, days of inventory increased more significantly, from 116 to 151, due to the sequential reduction in cost of goods sold on lower revenue. Cash from operations was strong at $22 million, driven by the decrease in accounts receivable, and capital expenditures for tangible and intangible assets were $2.3 million. Free cash flow, defined as cash from operations less CapEx, was 31.7% of revenue for the quarter and 6.4% on a trailing 12-month basis. We had two logistics and ODM companies represent 10% or more of our revenue in Q1. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 49% of revenue. Chicony, an ODM who manufactures for multiple IoT customers, was 16% of revenue. I will now discuss the outlook for the second quarter of fiscal year 2024: Customer feedback on end-demand remains generally healthy. However, at the same time, customers also continue to aggressively manage down their inventory levels. Considering these factors, we estimate that our fiscal Q2 revenue will be flat to Q1 and in the same range of $60 million to $64 million that we guided for the prior quarter. By end market, we expect that both automotive and IoT revenue will be approximately flat sequentially as well. We expect non-GAAP gross margin to be in the range of 62.5% to 64.5%, up slightly from Q1. We expect non-GAAP OpEx in the second quarter to be in the range of $48 million to $50 million, with the increase compared to Q1 driven by higher R&D tied to new product development activities. We estimate net interest income to be approximately $1 million, our non-GAAP tax expense to be approximately $700,000, and our diluted share count to be approximately 39.7 million shares. Ambarella will be participating in TD Cowen's Technology, Media and Telecom Conference on May 31st and June 1st, Bank of America's Global Technology Conference on June 6th and Rosenblatt's Age of AI conference on June 7th. 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.

Certainly. Our first question comes from Gary Mobley from Wells Fargo. Please go ahead with your question.

Hey, guys. Thanks for taking my question. I wanted to ask about inventory drawdown with customers. You mentioned that customer and demand appears to be healthy, but obviously, your demand is lower. Could you give us a sense of by how much we are close to inventories being back down to a normal level? And then, maybe you can comment as well specific to China-related demand?

Yes, this is Fermi. I think like Brian said, we haven't seen a huge change from the customer side. For example, last quarter, we talked about customers that have healthy growth based on our silicon, but our silicon revenue from them is strong 15%, 20% year-over-year. And that situation continues. And I think the customer continue to confirm that their growth and we continue to forecast lower revenue this year. So, I think from that point of view, I think the situation is very similar to last quarter and we have not seen any indication that this inventory correction will end. So, I think what we are looking for is really that the ramping up of new orders consistently from different customers, that will probably give us indication that it's recovered. We haven't seen that yet.

And as a follow-up, I wanted to ask about your win that you captured in conjunction with Continental. Is that automotive-grade win? And maybe if you can give us a sense of where automotive and other automotive-grade wins may stand?

That's a significant win in the automotive sector. This is a Level 4 car powered by an automotive-grade chip, marking our first design collaboration with Continental following our announcement. In this design, we are utilizing not just our CV3 SoC, but also our software IP, which we are co-developing with Continental. This represents a synergy between our software and SoC. We are actively pursuing other design wins, continuing our partnerships with Tier 1 companies like Continental and Bosch. Furthermore, in China, we see a growing number of opportunities in Level 2 Plus cars, particularly highlighted during the Shanghai Auto Show where we launched the CV72AQ. We are optimistic about securing design wins in that market this year, and the timeline for generating revenue from these potential wins in China is much quicker.

Thanks, Fermi.

Thank you. One moment for our next question. And our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.

Hi, guys. Thanks for letting me ask the question. Fermi, you mentioned that you haven't seen any signs of end of the inventory digestion that's going on and that growth would really resume when some of the new products kick in. Can you, I guess, dive a little bit deeper into that? And so, the two-part question would be, where do you believe the revenue level would be for your company versus the $60 million to $64 million if you are shipping to true end demand? And to the extent it's dependent upon new products kicking in, when do you believe that occurs?

Right. So, first of all, I think that we are now waiting for new products to kick in. We believe the current inventory correction, when they finish, the existing product line will come back to live and it will go back to the original level. So, we are now counting on new product design wins to fix this inventory correction problem. And for your first question in terms of level, last quarter, when we look at just one example of a customer, we think that we're probably like 25%, 30% below the realistic level. So, I think we still hope believe that's a level the differences we're looking at. And hopefully, when the inventory correction finished and all the customers went back to normal, I think that should give you an indication of where we think the normal level of revenue is.

Got it. And I guess for my follow-up on the automotive side specifically, it's good to see the design win with Conti turned into products, et cetera. That business has been basically flat sequentially, I think, for four quarters now; three quarters you've reported, and it looks like you're guiding it relatively flat. When is the timing where we should start to see that business picking up? You guys have talked about this investment. I know it's a longer-term strategy for the company, but it seems like one that should yield some pretty strong tailwinds off the size of company you're currently running at. So, just wondered on the timing that we should look for and what the drivers of that growth should be.

Well, I definitely think that’s flat. If you look at a few quarters before the inventory correction and now you're comparing to the inventory corrections period. So, I think the last two quarters have definitely been impacted by inventory correction in the automotive sector. So, I also believe that as soon as inventory correction finishes, auto should show some revenue growth from that point of view. But like you said, the really big auto growth should come with the ADAS market and also at Level 2 Plus market when they go into production.

Great. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Tristan Guerra from Baird. Your question, please.

Hi, good afternoon. Just wanted to have a follow-up on the inventory correction and also try to tie this with market share shift. So, it's no secret that some Chinese companies have tried to diversify away from U.S. supply, either because there is push for that from the Chinese government or because they're concerned about potential future sanctions. And I know you very much derisked your surveillance camera exposure to China in the past, but you still have exposure in automotive. So, I wanted to know if there is any signs that perhaps the ramp in China is not expected at the pace that you thought will happen a year ago? Are you getting any feedback? And also just to the extent that the inventory correction that you're describing seems to be a bit more pronounced than some of the other companies where it's been really more smartphone and PC centric for other companies. So, any elaboration around that would be great.

In terms of the geopolitical situation, I believe the impact on the automotive market is much less severe than on security. Security is perceived as a matter of national safety, which is why there's an effort to avoid U.S. components. However, when we look at the middle and high-end automotive components in the Chinese market today, they are predominantly U.S. made. This suggests that our solutions, alongside other U.S. components, still demonstrate better performance efficiency. Furthermore, we haven’t observed any significant actions from the Chinese government requiring automotive manufacturers in China to exclusively use local components. Therefore, I still believe that we won’t experience a significant downturn in the Chinese automotive sector.

Okay, great. For my follow-up question, you've made a software acquisition and you have the sensor fusion chip. Do you believe you have everything required to advance into L2 Plus and L3 applications? Are you receiving any feedback from customers regarding your company size compared to larger suppliers, or is it solely a matter of chip performance where you clearly excel? Are there any other factors influencing how you achieve design wins and how you plan to address those? This question also relates to the product roadmap and whether customers are curious about your future plans over the next five years.

From a product roadmap perspective, I believe we have everything necessary to target the Level 2 Plus and Level 3 car market. From both hardware and software standpoints, we can provide a complete solution. However, strategically, we are not bundling hardware and software; instead, we aim to offer a software platform that allows customers to select what they need, and we assist them in creating their own software stack, with our collaboration with Continental serving as an excellent example. Regarding scale, competing with larger companies presents challenges for us. This is why we focus on partnering with larger Tier 1 companies, as their scale and expertise can help us address this issue more effectively.

Great. And clearly, the Continental and Bosch design win speaks to that effect. Thank you very much. Very useful.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Tore Svanberg from Stifel. Your question, please.

Yes, thank you. My first question, Fermi, could you just talk a little bit about the main difference between the CV3-AD and the CV3-AQ? Whether it's functionality or ASPs or any other color you can share with us?

Right. So, CV3-AD and CV72AQ, first of all, they are all based on the same architecture, CV3 architecture. All of them use the third-generation AI inference processor. The main difference between the CV3-AD is designed for the auto-grade chip level, and CV72AQ is designed for the system-level auto grade. So, I think that's the main difference. So, I think for example, the CV72AQ platform is targeted for the Chinese market where people are willing to accept system-level ASIL systems versus chip-level ASIL systems. That's the main difference.

Very good. Thanks for clarifying that. And my follow-up question, you announced the design win for the software IP modules. Again, I was just hoping you could elaborate a little bit more on that. And it's surprising to me when I hear software IP module, right, because I think hardware and software. So, it's like how exactly is the accounting for this particular design?

So, I find it interesting that we announced our software partnership with Continental. Essentially, we are providing part of the software solution and collaborating with Continental's software team to integrate these modules into a comprehensive software stack that utilizes the strengths of both companies. For instance, Ambarella excels in perception, especially in video and radar perception, while Continental brings a wealth of system-level solutions and is well-known for its automotive-grade system software. This is an area where we can combine our strengths to develop a software stack. I believe this approach sets us apart from customers. Additionally, we are open to working with any OEMs interested in pursuing a similar business model.

And on the topic of revenue accounting, is this a module sale or IP revenue?

Yes, I see. That's basically a software revenue split. We need to decide how to share the software revenue together.

Thank you. One moment for our next question. And our next question comes from the line of Kevin Cassidy from Rosenblatt Securities. Your question, please.

Yes. Thanks for taking my question. Maybe a similar question to what Tristan had about automotive, but in the AI server, as you move to the adjacent market, AI server inference, and you said you have about the same performance as NVIDIA A100, but much less power. Can you say like you have all the tools you need to move into the server market or into the cloud inference market?

The similarity between our current automotive market and the new AI server market is that both are utilizing our chip for a new network. From a tools perspective, we continuously develop software to assist our customers in porting neural networks onto our chip. However, large language models are different since they are significantly larger than the typical neural networks we usually work with. This requires an optimization cycle. We believe we have a great opportunity here because we have working silicon to demonstrate, a wealth of expertise, and the software tools we've created for other markets. We simply need to fine-tune and optimize our existing software for these large language models to achieve optimal performance. Our efforts in this area are manageable, and we believe that only a few competitors can match our capability to showcase working silicon with real performance and low power consumption. This is a significant advantage for us, and we are confident we can handle the additional resources needed.

Great. And what would be the go-to-market strategy? Are you looking for a few maybe flagship customers to lead the way, or are you going broad with lots of different customers?

No, I think we need to concentrate. We need to pinpoint the ideal opportunities. We should discuss strategy at a later time since we are currently engaging with customers, but we must emphasize our strengths and target companies that can quickly utilize our chip and software. One lesson we have learned is to collaborate with customers who experience significant pain points with existing solutions, as they are the most likely to partner with us, and that will be our focus.

Okay, great. Very interesting.

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

Thank you for taking my question. Fermi and Brian, what do you think is the timeline for reducing our inventory? We've been working on this for a few quarters, but it seems like we haven't seen any positive signs in terms of orders. How many more quarters do you think we will need to clear this inventory? Do you believe we will be in a good position by the end of your fiscal year or the end of the calendar year, or could it take longer?

Yes, Quinn, this is Brian. A quarter ago, we said that our guidance for fiscal Q1, which was $62 million at the midpoint. We thought that would represent the bottom as it related to impacts associated with inventory adjustments and then it would likely not get worse from that point. And we're kind of sitting in the same place we were 90 days ago from the standpoint that we still believe that's the case. What becomes challenging is forecasting when this thing lifts off again and at what slope. We certainly have visibility to backlog. But that backlog has been shifting, right? We've had reschedules, cancellations that we've had to deal with. So, while in normal times, we can look at that backlog and have a lot of confidence as to how revenue might shape up, say, in fiscal Q3. Because of the movements that we've seen, our confidence in providing a forecast would be lower in this cycle than kind of a normal time. So, we don't see it getting worse, but the visibility to the second half and just how that recovery plays out, I think it's hard for us to talk to at this point.

I understand you're not guiding to the fiscal second half. Historically, you've seen some stronger seasonal trends in the second half. I mean, can you just provide any framework for how we might be thinking about it? If the inventory doesn't get any worse and you see normal seasonality, that would imply a lift? Obviously, if you start to see the inventory correction, that would imply a lift? I mean, are you sort of suggesting, 'Hey, keep it in the $60 million to $64 million range until you see inventory clear,' or do you think you can see some seasonal upticks in the second half?

Well, normally, we would see some uptick in the fiscal third quarter in particular. And we would hope that we do again. But we're just at a point where we don't have the visibility and the confidence to put a number out there and try to give you some magnitude of directional increase at this point in time.

Got it. Thanks, Brian. Regarding Fermi, I was surprised to see your first win with Continental being a Level 4 win. I thought the initial partnership announced late last year was for Level 2 Plus. Can you discuss how the Level 4 win came together? I know you expanded the relationship with CES, so maybe that was on a fast track. Were you surprised that the Level 4 win happened before the Level 2 Plus with Continental?

I believe the engagement significantly increased after we announced our software collaboration with Continental at CES, and things progressed rapidly from there. I'm pleasantly surprised by how quickly this developed, and I want to express my gratitude to Continental for their efforts in coordinating this. An essential aspect for us is successfully selling the joint software stack and gaining customer confidence, which we view as a major win. At the same time, regarding Level 2 Plus, we are focusing on two key areas. First, we are maintaining our momentum with Continental and Bosch, which is still ongoing. More crucially, with the Shanghai Auto Show and our CV72AQ announcement, along with recent sampling of components and software to customers, we are confident that we will achieve Level 2 Plus design wins this year, possibly leading to quick revenue returns. In China, the design cycle typically lasts less than two years, so we are optimistic about seeing a rapid revenue return from the CV72AQ. Additionally, we have a roadmap to continue addressing this market. Overall, I think our pursuit of Level 2 Plus design wins will remain our primary focus, and we are confident in our ability to deliver on our plans.

Perfect. Thank you, Fermi.

Thank you. One moment for our next question. And our next question comes from the line of Brian Ruttenbur from Imperial Capital. Your question, please.

Yes, thank you. Can you give me, first of all, housekeeping D&A and material depreciation and amortization?

Depreciation and amortization, is that the question?

Yes, that's affirmative.

Yes. For fiscal Q1, I believe it was $5.8 million.

Okay. $5.8 million for the first quarter. Also, in terms of DSOs, do you anticipate DSOs stabilizing here? So in other words, trying to understand your cash situation probably will just go down, you probably won't have stair-step event again, or do you anticipate DSOs continuing to go down?

In fiscal Q1, we observed a normalization of shipment timing throughout the quarter compared to fiscal Q4, which was characterized by a heavy concentration of shipments towards the end. Both fiscal Q3 and Q4 were heavily back-end loaded, while Q1 saw a normalization and a decrease in Days Sales Outstanding (DSOs), resulting in a $22 million benefit to cash flow for the quarter. Looking ahead, we expect DSOs to remain at similar levels, so we do not anticipate receiving a significant benefit from another decline in the future. As we transition into Q2, the forecast suggests a non-GAAP loss at the revenue level, leading to lower free cash flow in fiscal Q2 compared to Q1. Going forward, cash flow will be highly dependent on revenue levels, and we currently lack strong visibility for the revenue in the second half of the year.

Great. Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line of Suji DeSilva from ROTH Capital. Your question, please.

Hi, Fermi. Hi, Brian. Good to see the Continental win. I don't know if I missed this, but did you say the L4 commercial vehicle customer, what geography that was?

We didn't disclose that, and our customer prefers that we keep it under wraps for now.

Okay. Fair enough. And then, I think when we talked about a range of ASPs, five to 20 times, can you just talk about what drives the delta there? Is that more compute horsepower in the chip, or is that compute plus software? Any color there would be helpful.

I think that comment is purely for silicon, it does not include software. So, the difference is really from the low end to the high end. So, for example, the lower end for the high-end chip, we talk about $400 plus. And the lower end, for example, our 655 chips that we're talking about are probably in the $100 range. So it's really that level of the different performance of price range that we're talking about. I also believe that for automotive roadmap, you need to have a family of chips to address different performance levels for Level 4, Level 3, Level 2 Plus. Even multiple layers of Level 2 Plus require different ships. So, I think that's what we're actually talking about.

Okay. Thanks, Fermi.

Thank you. One moment for our next question. And our next question comes from the line of David O'Connor from BNP Paribas. Your question, please.

Great. Good afternoon. Thanks for taking my question, guys. Maybe Fermi, just going back to the question on the AI inference opportunity. Can you just give us a bit more detail there on what type of customers are potentially kind of you could engage with on the AI inference side? Is that data price or enterprise, or any particular vertical that you think may be open to you? And I know it’s early days, but as you mentioned, you have a working chip and you need to rework the software, but what kind of timeframe do you think you could potentially get to revenue there? Is that kind of three to five years now? Is it kind of before that? And anything around kind of content opportunity there would be helpful. Thank you.

Yes, there are many questions to address. As I mentioned, our primary focus is on the edge server market, specifically targeting enterprises and individuals managing their own neural networks. Currently, large users of frameworks like OpenAI might not be our ideal customers. However, there are numerous software services utilizing various neural network models, either for their proprietary code or at the enterprise level. These areas are likely the best fit for our chip since scalability is crucial in this industry, and we need to strategically select our target market. We are still determining the best path forward, but my comments reflect our ongoing considerations. In terms of content opportunities, we have a clear edge over our competitors, particularly when compared to the automotive average selling prices since the competition starts at a considerably higher level. Additionally, we maintain a significant advantage in power consumption, surpassing mere percentages and providing substantial savings in both energy usage and overall system costs. This perspective will enhance our standing in the market. I believe there was another question that I missed.

Time to revenue.

I believe we need to get the system operational and our software running, so customers can start porting. After that, we can discuss design wins and then talk about revenue. If you were to ask me today, I would estimate that's a 24-month process in total. It's just a rough estimate.

It's quite helpful to frame that. Thank you, Fermi. And maybe just a follow-up on that for Brian. Just on the ramping that software development team, just to clarify, that fits in with the current OpEx envelope? Are we going to see some kind of step up there to fund that new team? Thank you.

Yes, our plan is to leverage our existing expertise and team to facilitate this activity. The concept is straightforward since our internal team has experience assisting many other customers in porting their neural networks onto CV3. We recognize that LLM is quite large and requires additional effort, so the best approach is to fund it and allocate internal resources to this project. Naturally, this will involve some trade-offs. We do not intend to significantly increase our resources within the company, so it’s essential for us to concentrate on areas we deem important. It's crucial for us to have security cameras that generate revenue while maintaining our CV3 momentum with current design wins like Bosch and Conti, striving to secure a CV3 design win with OEMs, and seeking resources to fund the LLM. Everything else is a trade-off we need to weigh.

Very helpful. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Vivek Arya from Bank of America. Your question, please.

Hi, this is someone on for Vivek. Thanks for taking my question. First, regarding cash. I'm curious about the increased R&D investments you mentioned for the next few quarters. With your current cash flow, are you comfortable? Or do you anticipate needing to raise additional cash in the future?

No, we don't see any need to raise incremental cash. We have a strong cash balance, no debt, and we've got a history of being positive from a free cash flow perspective. So, no need to raise additional cash.

Great. And then quickly as a follow up. Just given the current revenue levels, we've seen a relatively substantial split between IoT and auto is now roughly 65%, 35%. Gross margins are still kind of held up relatively okay and above this the long-term range of 59% to 62%. So, just kind of curious if you can give us the puts and takes on the gross margin side and maybe beyond Q2?

Yes. I think we stick with that long-term model that we provided previously. In the recent history, we've been delivering higher gross margins than that, and we would expect that that would continue until we get into the impacts of potentially very large automotive opportunities, and that's why that long-term model provides for a slightly lower gross margin if we need to get there to secure those design wins. But for now, in the foreseeable future, we should be at recent gross margin levels and probably a little bit higher once we get through this inventory correction and get back to slightly higher gross margins that we were posting last fiscal year.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Martin Yang from Oppenheimer. Your question, please.

Hi. Thank you for the question.

I'm sorry, I cannot hear you well.

Can you hear me better now?

Yes.

I have a question about CV72. Do you expect most of your automotive and IoT customers to choose and adopt the Oculii integration that comes with CV72?

That's a good question. I believe the adoption of radar systems in the IoT space will be slower compared to the automotive sector. The IoT market is moving toward radar, but it’s not progressing as quickly as in auto, where radar is becoming ubiquitous. Everyone recognizes the necessity of having a radar solution in any Level 2 Plus systems. Therefore, I anticipate that radar will see earlier adoption in the automotive sector. For CV72AQ, radar integration will likely come later, as our current focus is on the video aspect. However, during the second phase of software development, radar integration will also be introduced.

Got it. Thank you, Fermi.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Fermi Wang for any further remarks.

Thank you very much for joining us today. Looking forward to talking to you next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.