Earnings Call Transcript - AMBA Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Ambarella’s Third Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised today’s conference is being recorded. It’s now my pleasure to hand today’s conference over to Louis Gerhardy, Corporate Development. Please go ahead, sir.

Louis Gerhardy, Corporate Development

Thank you, Holly. Good afternoon and thank you for joining our third quarter fiscal year 2022 financial results conference call for the three months ending October 31, 2021. With me on the call today is Dr. Fermi Wang, President and CEO; and John Young, VP of Finance. The primary purpose of today’s call is to provide you with information regarding the results for the third quarter of our fiscal 2022. 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 we file with the SEC, including the Annual Report on Form 10-K filed on March 31, 2021 for fiscal year 2021 ending January 31, 2021 and the form 10-Qs filed on June 8th and September 8th of 2021, for the first and second quarters, respectively, of fiscal year 2022. Access to our third quarter fiscal 2022 results press release, historical results, SEC filings, and a transcript of our prepared remarks and a replay of today’s call can be found on the Investor Relations portion of our website. Fermi will begin the call with a business update, John will review the financials and then Fermi, John and I will be available for your questions. With that I’ll turn it over to Dr. Fermi Wang.

Dr. Fermi Wang, President and CEO

Thank you, Louis, and good afternoon, everyone. Before proceeding with our Q3 fiscal year 2022 call, I want to note on November 9th we filed an 8-K stating that our CFO, Casey Eichler, would be taking a leave of absence for health reasons. We have received many of your kind thoughts and prayers, which we have shared with Casey and his family, and we wish him a speedy recovery. Meanwhile, John Young, VP Finance, has been named interim Principal Financial Officer and Principal Accounting Officer during Casey’s absence. On October 26th our strategic transformation into a deep learning AIoT processing company took another leap forward when we announced the acquisition of Oculii, a provider of advanced algorithms for imaging radar systems. Oculii enables us to not only capture incremental perception business, but most importantly feeds our long-term strategy to provide a more comprehensive AIoT processing SoCs for our customers. I’m also pleased to report our market and financial momentum was strong in Q3, with revenue slightly above the high end of our range of guidance, up 64% year-over-year. Driven by a richer mix of CV SoCs, our average selling price continues to rise, contributing to strong positive operating leverage with non-GAAP operating margins reaching 25% of revenue versus 5% a year ago. Supply dynamics remain a key challenge. On one hand we started to see an expected recovery in supply from Samsung’s wafer fab in Texas, however the shortages of other companies' components has become a more significant and a gating factor to our results and outlook. Despite these constraints, we are on track to achieve record revenue this year with CV representing more than 25% of revenue. During Q3 the number of unique CV customers in production grew sequentially and quadrupled versus a year ago. As of today, on a cumulative basis, we have shipped more than 5 million CV SoCs including more than 1 million into the automotive market. Our automotive revenue funnel is expanding. A year ago, we announced a six-year, discounted, automotive revenue funnel of about $600 million, and using the same methodology, this figure has approximately tripled. We will provide more details on January 4th at our Capital Markets Day. I will now provide you with some examples of progress in our target markets. During the quarter, we were excited to see that Rivian, the American electric vehicle maker, started customer deliveries of its R1T truck. The R1T’s Driver+ features 11 cameras, 5 radars and 12 ultrasonic sensors to deliver true hands-free driving assistance along with a full set of safety features. The R1T’s Driver+ system utilizes multiple CV2AQ CVflow automotive SoCs for its AI vision processing. Additionally, the R1T also uses Ambarella’s CV22AQ CVflow automotive SoC for its surround view camera processing and gear guard security system. The Rivian design highlights the use of Ambarella’s AI vision SoCs in centralized automotive computing applications. These applications represent a major new opportunity for Ambarella moving forward. And during the quarter, Chinese truck maker Shanqi entered into mass production with an ADAS system providing lane detection and forward collision warning features. The system is based on Ambarella’s CV22AX automotive AI SoC and is supplied by Tier 1 Baolong. In the after-market automotive dash camera market, European market leader Nextbase announced a pilot program with Uber for its 232GW dash cam. The dual camera design is based on Ambarella’s A12 SoC and includes a Cabin View Camera that uses infrared night vision technology and wide-angle 140-degree angle lens to provide an extra level of security for Uber drivers and riders. Also in the dash camera market, Korean market leader Thinkware introduced its QXD7000 and QXD5500 HD designs based on Ambarella’s H22 and A12 automotive SoCs. The QXD7000 includes a radar support mode that helps to pre-record video 10 seconds before impact, while both models offer ADAS features including forward collision warning, forward vehicle start alert, and lane departure warning. In the professional IP security camera market we continue to enjoy strong revenue growth based on worldwide market expansion and our increasing market share outside of China. In Europe, market leader Axis, a unit of Canon, announced its first cameras to use Ambarella’s CVflow SoCs. The new M series cameras offer great image quality even in challenging light conditions and take advantage of analytics based on deep learning on the edge. Verkada, based in the U.S., is simplifying the management of video security at scale through its hybrid cloud approach and its latest CD62 4K Dome security camera features intelligent edge-based video analytics, powered by Ambarella’s CV22 SoC. Also, industrial giant, Johnson Controls, introduced its Illustra Pro Gen 4 mini-dome, indoor and outdoor PTZ models with resolutions up to 8 megapixels and based on our CV22 SoCs. With built-in AI-based object classification, the camera enables events to be narrowed to different classes including person, car, bus, and motorcycle. In Korea, market leader Hanwha Techwin introduced multiple camera models spanning dome, bullet, panoramic, and license plate recognition designs and leveraging Ambarella’s CV2 and CV22 CVflow SoCs. Also in Korea, IDIS introduced four new cameras based on our S3L SoCs, replacing HiSilicon designs, while CPRO introduced its first 4K AI camera based on our CV22 SoC. In November, Chinese electronics giant Xiaomi introduced a new line of multifunctional, smart door locks with facial recognition, using Ambarella’s AI vision SoCs. The smart door locks fuse structured light and RGB camera technology and AI-based facial recognition software for hands-free access, while also incorporating other unlocking methods including fingerprint recognition and near field communication. From these customer engagements, you can see the breadth of AI applications emerging, ranging from L2+ ADAS in EVs with a leader like Rivian, to enterprise-class security cameras with an industrial giant like Johnson Controls, and door locks with sensor fusion for the smart home and enterprise market with a major company like Xiaomi. This traction can be traced back to the premium growth R&D investments we have, and will continue to make, into camera and radar perception technologies, automotive functional safety such as ASIL B or D, and next-generation AI processors on 3 nanometer manufacturing process nodes, all optimized specifically for IoT endpoint applications. In fact, in the last three years Ambarella invested 59% of revenue into R&D on a GAAP basis, a level far beyond the maintenance levels you see at most companies. Of course, it is not just about the quantity of R&D investment, but the quality, and as you know we consider our visual AI R&D to be the best out there. Evidence supporting this continues to mount as we successfully leverage our well-established video processing leadership into the computer vision AIoT market. This large growth R&D investment has been focused on processing data collected from the lens of a camera with an algorithm-first approach. Now we have augmented this investment with the acquisition of Oculii, which uses a similar algorithm-first approach for the high definition imaging radar market. Radar perception is an incremental market for Ambarella. However, we are most excited about the synergies with Oculii that we expect to be derived from two principal areas. First, we expect our combined camera and radar R&D investment to enable breakthrough levels of perception at economical price points, as Ambarella is now one of the very few semiconductor companies to have advanced camera and radar technology development under one roof. Second, through our CV SoC roadmap we are able to provide the processing power not just for the perception processing, but we target the incremental processing for the fusion, planning and control layers in a variety of AIoT markets. All of this is expected to drive more value, both higher selling prices and improved market share for Ambarella and its stakeholders. In summary, during Q3, we demonstrated progress on the strategic front with the acquisition of Oculii and our CV portfolio ramp continues. Our financial results are providing an early look at how we intend to capitalize on an entirely new phase of the digital AI transformation, a phase where deep learning is not just executed in servers, but in our SoC platform designed for the unique needs of the edge AIoT endpoint market. And I want to thank all our stakeholders, employees, suppliers, partners, customers, and shareholders for your continued support. With that, John will now provide our prepared financial comments.

John Young, VP of Finance

Thank you, Fermi, and good afternoon, everyone. I will review the financials for the third quarter of fiscal year 2022 ending October 31st and provide a financial outlook for our fourth quarter of fiscal year 2022 ending January 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. Our revenue of $92.2 million was slightly above the high end of our guidance range, representing a sequential increase of 16% from Q2 and a 64% increase from the year ago quarter. The previously anticipated wafer supply recovery from Samsung’s Austin, Texas, fab helped sequential growth in the quarter. Automotive and IoT camera revenue, combined, increased more than 10% sequentially, and other revenue experienced seasonal growth. Non-GAAP gross margin for Q3 was 63.1%, slightly above the 62.8% in the preceding quarter and slightly above the high-end of our guidance range. The pricing environment for our products is stable, our mix remained favorable, and we are managing higher supply chain costs. Non-GAAP operating expense for the third quarter was $35.6 million, compared to $36.4 million for the previous quarter. Our Q3 operating expense was below the low end of our guidance primarily due to the timing of non-recurring R&D expenses. Other income of $408,000 was higher than expected primarily due to the realization of gains on investments as they were sold to finance the acquisition of Oculii. The non-GAAP net income for Q3 was $22.2 million or $0.57 per diluted share compared with non-GAAP net income of $13.1 million or $0.35 per diluted share in the second quarter. Total headcount at the end of the third quarter, before the Oculii transaction closed, was 824, up 8% from a year ago, with about 82% of employees dedicated to engineering. Of these engineers, about 69% are developing software and algorithms. Total accounts receivable at the end of Q3 were $44.8 million or 45 days of sales outstanding, versus $38.3 million or 44 days of sales outstanding at the end of the prior quarter. Net inventory at the end of the third quarter was $47 million compared to $42.1 million at the end of the previous quarter. Days of inventory increased to 118 days in Q3 from 115 days in Q2. In Q3 our operating cash flow was a positive $8.3 million, versus a positive $14.4 million in the prior quarter. Cash and marketable securities were $457.8 million, up from $449.2 million at the end of the second quarter. We had two 10% plus revenue customers in Q3. WT Microelectronics, a fulfillment partner in Taiwan who ships to multiple customers in Asia, represented 63% of revenue and Chicony, a Taiwanese ODM who manufacturers for multiple customers, was at 13%. Dahua and Hikvision, combined, declined sequentially and represented a mid single-digit portion of our total revenue. In the professional security camera market, market share shifts between some of our customers are becoming noticeable. I’ll now turn to our guidance for the fourth quarter of fiscal year 2022. We completed the acquisition of Oculii on November 5th, and our fourth quarter guidance incorporates Oculii’s results from operations from that point, or about 12 of the 13 weeks in the quarter. As reported by many of our customers, underlying demand remains solid but the supply-side dynamics remain challenging. In Q3, we began to experience the expected improvement in wafer supply following the shortfall from the Texas freeze, however shortages of other companies’ components at our customers became more acute in Q3 and continues into Q4. As a result, our guidance contemplates some of our orders may continue to be rescheduled to ship at a later date. Based on these factors and our best judgment at the current time, we expect total revenue for the fourth quarter ending January 31, 2022 to be in the range of $88.5 million to $91.5 million. Revenue from the automotive market is expected to increase sequentially, with non-auto IoT camera business expected to decline sequentially. In Q4, we expect the revenue from Dahua and Hikvision, combined, to decline to the low-single-digit percent of our total revenue. We estimate Q4 non-GAAP gross margin to be between 63% and 64%. We are experiencing some higher costs to manage the supply chain, but a healthy customer and product mix, together with a relatively stable pricing environment, are likely to enable our gross margin to continue to temporarily remain above the high-end of our long-term model of 59% to 62%. Non-GAAP operating expense in Q4 is projected to be between $39 and $41 million, due to higher SoC development expense, increased hiring, and the inclusion of Oculii’s operations. The Q4 non-GAAP tax rate should be modeled in the 3% to 6% range. We estimate our diluted share count for Q4 to be approximately 39.5 million shares. Ambarella will be participating in Wells Fargo’s TMT Summit tomorrow, December 1st, Imperial Capital’s Security Investors Conference on December 15th, Needham’s Growth Conference on January 12th and Baird’s Vehicle, Technology, and Mobility Conference in the last week of January. Our Capital Markets Day will be held on Tuesday, January 4th from 1 PM to 4 PM at our CES hotel location in Las Vegas, and we will be offering sell-side analyst hosted tours of our demos on January 5th, 6th, and 7th. Please contact us if you would like to participate. I will now turn the call over to the operator for questions.

Operator, Operator

Thank you. And our first question is going to come from the line of Gary Mobley with Wells Fargo Securities.

Gary Mobley, Analyst

Hey, guys. Thanks for accommodating me and fitting me in here early in the queue, and wishing Casey a speedy recovery. And I want to start off by asking about the puts and takes as embedded in your December quarter guidance to what extent does seasonality play into it, to what extent do extraneous supply chain factors factor in here? And if not for the extraneous factors that seemingly are constraining your Q4 guide, given the backlog that you have, how many quarter-over-quarter gains or sequential improvements in revenue can you see just based on your backlog support, assuming all of the supply chain issues that you’re dealing with now work in your favor?

Dr. Fermi Wang, President and CEO

Right. This is Fermi. I think, the seasonality is still there, but hardware has reduced from the past. If you look at the historical numbers in the last five years, our Q3 to Q4 on average reduced by 11%, but our guidance is much smaller than that, just reflecting that the mix of the product is changing and definitely helping us to reduce the magnitude of the seasonality. However, the other gating factor is really the supply chain issue of other components for our customers, which we start seeing become bigger problems. It’s hard for us to size up the degree and the impact to our revenue, but we do believe there is an impact to our revenue forecast. However, all those factors have been considered when we provide this 85% to 95% revenue guidance.

Gary Mobley, Analyst

Okay. I appreciate that. And hopefully, I’m not catching you flat-footed with this question, but per your fourth quarter revenue guide, you’re expecting roughly 49%, 50% revenue growth in fiscal year ‘22. Given the increasing mix of CV revenue, which I believe is going to be more than 25% of that fiscal year ‘22 revenue, can you give us a sense of the unit growth versus the ASP tailwind for the fiscal year?

Dr. Fermi Wang, President and CEO

I believe most of our growth is attributed to the average selling price. We are seeing significant growth in that area. We previously mentioned that we have doubled our average selling price, and we expect this trend to continue in the near future. Additionally, our user numbers are increasing. In total, we have reached 5 million cumulative units, which I consider a substantial figure, including 1 million in automotive silicon. Therefore, while we are observing growth in both areas, the average selling price is currently a much more important factor.

Operator, Operator

And our next question is going to come from the line of Matt Ramsay with Cowen.

Joshua Buchalter, Analyst

This is Joshua Buchalter on behalf of Matt. Thanks for taking my question. And congrats on a strong quarter. I was hoping if you could dig into diversity and potential timeline of the funnel that you mentioned tripled. Are there any particularly large wins contributing? And I realize it’s early, but is there any radar processing or Oculii related revenue embedded within that funnel?

Louis Gerhardy, Corporate Development

Yes. Hi Josh, this is Louis. We’ll go into a lot more detail on the funnel at our Capital Markets Day on January 4th. But just to give you some of the high-level parameters, it continues to be a six-year funnel. It uses the same methodology that we employed a year ago. There is no radar in this funnel yet, and looking at the two key elements that add up to the $1.8 billion, one component increased from $400 million a year ago to about $700 million in this current funnel. And the pipeline portion of it is now about $1.1 billion. The other thing that we can add to this funnel description and characterizing the current funnel is that a vast majority of it is CV SoCs and in particular, the increase from a year ago, a vast, vast majority would be computer vision SoCs. Hopefully, that gives you enough color. And again, we’ll go into more details at the Capital Markets Day.

Joshua Buchalter, Analyst

I appreciate that you got the Capital Markets Day coming up. I was also hoping you could provide some more details about the Rivian win. It seems like you’re doing more sensor fusion and centralized processing than some of your other announced wins. Is that the direction you’re planning to take moving forward?

Dr. Fermi Wang, President and CEO

Yes. Thank you. Absolutely, Rivian side, we talked about we have 3 silicons in there, 3 types of silicons in there. The first type is CV2AQ, we have multiple CV2AQ in the Rivian R1T car. The function of the CV2AQ is doing video perception. So, that’s definitely the key component that we want to aim for in the future. And you can see that we’re definitely providing the majority of the perception in the R1T car. The second type of silicon is CV22AQ, which provides the surround view as well as some security camera functions that R1T has. The third type is B8, which is really a SerDes serial/deserial chip for the MIPI interface. And those are three components we provided through the R&D.

Operator, Operator

Our next question is going to come from the line of Tore Svanberg with Stifel.

Tore Svanberg, Analyst

Yes. Congratulations on the solid results. First question for you, Fermi. As it relates to Oculii, obviously, you talked about the radar perception market being an opportunity itself. But you said longer-term, obviously, this is much more about creating more value SoCs with more integration. Could you elaborate a little bit on the timing of that? When could we potentially see combined products from the two companies in the marketplace?

Dr. Fermi Wang, President and CEO

Right. So, the product planning for integrating Oculii software into our silicon comes in two steps. The first step is that we are working on integrating the software into our CV2 family. That’s a product we are actively developing, and we believe that it can be a product we start selling, I’d say, later next year. The idea is to use that for the Level 2 ADAS application as well as non-automotive applications. And of course, for all our next-generation chips, we’ll have well-integrated radar technology into our silicon. You should assume that every silicon we’re going to announce in the future will have our radar technology integrated.

Tore Svanberg, Analyst

That’s very exciting. As my follow-up question, you talked about the landscape for the security camera market kind of changing a little bit. Could you elaborate on that? I mean, I think you did mention it when you talked about the two Chinese customers, but it sounds like there’s some more specific things there, especially as those two customers will be very low percentages of revenues going forward. So, if you could talk a little bit more about that, that would be great.

Dr. Fermi Wang, President and CEO

Right. So, I think from a momentum point of view, outside of China, we’re doing very well. We talked about almost all the major customers outside China are using our CV silicon. In fact, most of them are already in production. We mentioned Axis, we mentioned Johnson Controls, and we mentioned some Korean companies this time. Inside China, I think Dahua continues to use our CV chip. But if you look at what Hikvision and Dahua announced in the latest quarter, I think there are two things to be noticed. One is, they all talk about a slow Chinese market because government spending has reduced. Also, they have a huge amount of inventory. We think one company has about 150 days of auto inventory at hand. Those two factors really contributed to the weak performance of Hikvision and Dahua. However, we continue to see that there is still a lot of HiSilicon inventory sitting in the channel. I think we haven’t seen the end of HiSilicon chips yet.

Operator, Operator

Our next question is going to come from the line of Quinn Bolton with Needham & Company.

Quinn Bolton, Analyst

Hey, guys. Congratulations on the nice results and best wishes to Casey for a speedy recovery. I wanted just to come back to the $1.8 billion pipeline. I know you said it doesn’t include any radar. But could you give us some sense as to what you think that radar opportunity might be as you look out several years? I mean, I assume that’s probably an opportunity that could bring hundreds of millions of dollars of TAM to the Company, but hoping you might be able to size that.

Louis Gerhardy, Corporate Development

Yes. This is Louis. The radar market today in the automotive space is estimated at maybe $90 million units, and the Oculii technology, let’s call it, for the imaging radar is just beginning to penetrate the market. If you consider two parts of their business, they have a licensing business and then they have a module business. On the licensing basis, they can realize low-single-digit license fees per unit, and at the higher end, it could be up to $15 of license fee. On the module side, our expectations for the units in that market are much lower than what we’d anticipate on the software licensing side. But the ASPs in that market, on the other hand, are quite high, and let’s say, it ranges from $200 to $2,000, depending on the type of module and the application, of course, the volume. So, those would be some of the parameters that you’d want to consider. The key question is what’s the penetration rate of this technology going to be into what’s already a large existing market.

Quinn Bolton, Analyst

And next question I had is just you talked about some of the supply constraints of other components potentially affecting shipments or causing shipments of your devices to push into future quarters. Do you think any of the demand that’s affected may be perishable, or would you expect anything that sort of slips out of the January quarter would most likely be captured in the April or July quarters?

Dr. Fermi Wang, President and CEO

Yes. This is Fermi. I think, part of the business is perishable. For example, all of the consumer security, which is more like a holiday season sale, I think those are perishable. For the most automotive designs, I think it will be pushed out to next year. We see that the short supply really impacts all of our customer products out there, including security cameras and automotive. Obviously, automotive is a bigger hit than the security camera at this point. But I think that we don’t see any mitigating factors being reduced anytime soon. So, we definitely continue to watch the progress. And hopefully, we can give you more guidance for next year when we talk in the CMD.

Operator, Operator

And our next question will come from Andrew Buscaglia with Berenberg.

Andrew Buscaglia, Analyst

I wanted to follow up on home security this quarter and look ahead to Q4, as well as some potential momentum into 2022. I'm interested in hearing more about the factors that are influencing the Q4 guidance specific to that market.

Dr. Fermi Wang, President and CEO

Yes. We believe that the percentage of our CV revenue from consumer security cameras will increase significantly from Q3 to Q4 and continue growing into next year, especially as some customers are expected to enter production soon. We anticipate that the second wave of revenue will persist. The importance of this business lies in the need for justifying the use of computer vision on the server side instead of the edge side. Most of our customers recognize this need, but it requires time to optimize the products for delivery. We expect this trend to continue, and we foresee playing a significant role in this market.

Andrew Buscaglia, Analyst

Got it. And your comments on some of your customers having issues. I know you kind of touched on this in the last question a bit. But specifically for auto, do you see this influencing any of the more recent design wins you expect to see converting to revenues beginning early next year, just given what you’re hearing, all the headlines in the market suggest there may be some delays?

Dr. Fermi Wang, President and CEO

Well, I think the delay is not because of short supply. It’s really about how much volume can be delivered. I think that all of our customers show their desire to take the product into market as quickly as possible. But I think the number of shipments into the market will be limited by the supply situation. That’s why it’s hard to really size it up. So from the product production and delivery point of view, I don’t see much of a delay. I think the biggest concern for all of us, including our customers, is whether they can get enough supply to meet the whole demand they have.

Operator, Operator

Our next question will come from Kevin Cassidy with Rosenblatt Securities.

Kevin Cassidy, Analyst

Congratulations on the great results. Fermi, you gave us a lot of information, a lot of good updates. One thing, I just wanted to know if you have an update on the CV5 progress.

Dr. Fermi Wang, President and CEO

Yes. Thank you for the question. We didn’t talk about CV5 this time on the script. But I think, first of all, CV5 has been successfully sampled to many customers, including security camera, automotive, and as well as some consumer products. Both hardware and software samples have happened. I believe that CV5 will be in production in the second half of next year.

Kevin Cassidy, Analyst

Okay, great. You mentioned that research and development for the 3 and 4 nanometer technologies is currently underway. When can we expect to see developments in that area? Is it two or three years from now?

Dr. Fermi Wang, President and CEO

Yes. Well, I think we are focusing more on the 3-nanometer at this point because 3-nanometer is auto-grade, and that’s where we focus on. The timing of using 3-nanometer really depends on how fast the sensor can be matured. We definitely plan to kick off a test chip sometime next year to test out all of our IPs and engineering development, but the product really depends on how fast we can get yields out of 3 nanometers. During the meantime, we’re very confident and comfortable with the sensor of 5 nanometers now, and we’re going to see multiple projects going to a 5 nanometer process next year.

Operator, Operator

Our next question will come from Suji Desilva with Roth Capital.

Suji Desilva, Analyst

Hi, everybody. So, you talked about supply chain shortages impacting your customers’ components. Did you specify which end markets were being impacted, or was it broadly across the end markets?

Dr. Fermi Wang, President and CEO

It’s across the board. In fact, every customer we talk to got a different type of impact. Some just a little, but almost all of our automotive customers are talking about different types of supply shortages. Microcontrollers are probably the biggest issue. For consumer security cameras, even the supply of Wi-Fi is a big problem. It’s really caused by different levels of shortage.

Tore Svanberg, Analyst

I remember you reaffirmed the 25% contribution of CV revenue for '22. Have you mentioned your expectations for next year, '23, or beyond? Any insights on that would be appreciated.

Dr. Fermi Wang, President and CEO

Yes, we haven’t addressed next year yet, but I definitely think we need to give you more guidance at the CMD time.

Tore Svanberg, Analyst

I look forward to the upcoming CMD where you’ve already shared some information. Lastly, I wanted to follow up on Rivian. You mentioned the successes, and I noticed the car has 5 cameras and 10 radars. I’m wondering if that ratio, or possibly I mixed it up with 10 cameras and 5 radars, reflects what you plan to implement in the future. Additionally, regarding the chips you’ve sold, with multiple chips involved, are you now making any AI chips in the car less specific or possibly replacing them? I’m trying to grasp how innovative and potentially forward-looking the design revenues are.

Dr. Fermi Wang, President and CEO

First of all, I believe the ratio sounds accurate because the front radar is positioned in front of the vehicle, along with four corner radars. Some manufacturers are also beginning to utilize radar for internal perception, which presents a unique opportunity. In terms of cameras, we observe that customers are adopting anywhere from 10 to 16 types of cameras moving ahead, and I think that ratio will likely remain consistent. From our standpoint, we are managing a significant number of cameras with just three combined CV22 chips. Looking ahead, I anticipate a shift toward unified domain control chips. This is the first generation of our work in this area. In fact, we began collaborating with Rivian around three years ago, and it has taken us that long to reach our current stage. We expect that in the future, there will be a reduced number of digital signal processing chips, but they will be more powerful and capable of handling all the cameras and radars effectively.

Operator, Operator

And our next question will come from the line of Joe Moore with Morgan Stanley.

Joe Moore, Analyst

Could you discuss your progress in Level 2 technology for passenger cars in the U.S., Western markets, and China? Are the greatest successes expected to come from replacing the current technology with a single forward-facing camera, or do you think advancements like radar or stereo vision are essential to bring Ambarella into those markets?

Dr. Fermi Wang, President and CEO

I think the biggest near-term opportunity is to replace the incumbents in the full-facing ADAS market because our current CV2 functional safety chip is well suited for that. Now, we can integrate radar solution into CV2 functional safety chip and provide a combined sensor fusion online chip, becoming an even more powerful solution for our customers. For the near term, this is the biggest opportunity for us. However, similar designs can also be used in consumer vehicles. For high-volume consumer vehicles, a much more integrated solution in terms of number of chips and to do video and radar integration into a single domain controller will be required; I think that’s further out for us.

Joe Moore, Analyst

Okay. And if I could just ask a follow-up. I mean, it seems like the case for stereo vision is pretty compelling. You guys have been talking about it for a number of years. And it seems like with the type of density and frame rate that you guys can pick up, that you can do really good distance triangulation at speed. What is the barrier? Is it just price? Is it just time for your customers to do the development? What is it that kind of gets you into those wins longer term?

Dr. Fermi Wang, President and CEO

Right. First of all, I think stereo is really trying to provide a different type of sensor modality against LIDAR in Level 4 or Level 3 autonomous vehicles. In Level 2, when you’re talking about a smaller number of cameras, the price becomes sensitive. So, for most people evaluating and adopting stereo processing is really having multiple sensors to provide that information. That’s the limit of the number of applications that require stereo processing. However, I still believe this is a very powerful tool for us. In fact, we do have projects that we have already taken into production, and in the near future, we can talk about more design wins we have with stereo. It will take a little longer time.

Operator, Operator

And our next question is going to come from the line of David O’Connor with BNP Paris.

David O’Connor, Analyst

Maybe for me, a couple of questions on the Oculii. Firstly, can you talk us more a bit around the positioning of Oculii radar from the processing perspective versus the existing radar processing guys? Where do you see the microcontroller sitting behind the sensor? And also, when you integrate Oculii into the CV chip, what type of gross margin upside are we kind of looking at there, given the software component to that? Lastly, do you plan to maintain the module business there initially? Just trying to understand the synergy there of having that margin business with the existing chip business. And maybe one final one for John: Did you quantify how much revenue you’re leaving on the table given these supply constraints?

Dr. Fermi Wang, President and CEO

So first of all, on the radar side, we do plan to continue with the module business because, first of all, it’s a very well integrated product, easy for any of our customers to evaluate our technology. We can easily give them a module so they can understand how the Oculii algorithm software works. More importantly, there are some small volume customers who will likely adopt our module for mass production. So, we do plan to continue our module business. The differentiation between Oculii and their competitors is that Oculii for us is an algorithm company, and their unique AI algorithms do generate what we call intelligent transmit waveforms that adapt based on the environment. After those waveforms are sent out, we process the received signals over time to improve resolution. It’s really about the signal processing algorithms that Oculii has developed over the years, which significantly improves resolution, both on the angular or horizontal, but more importantly, also on the range side. Very few radar companies focus on algorithms; a lot focus just on hardware. So, Oculii's approach to solving this resolution problem is quite unique.

John Young, VP of Finance

Yes, David, you also had a question in there about gross margins in the Oculii business. The reason we’re not ready to provide guidance on that is, you’re correct, the licensing side of the story would carry gross margins that are better than our long-term model. However, when you start layering in the module business, that can bring it back into our long-term model. Until we understand that mix a little bit better, I think it’s appropriate to think of this blended as being in our long-term model, 59% to 62%.

Louis Gerhardy, Corporate Development

And then, David, just finally on your last question, the short answer is no. We didn’t quantify any Q3 lost revenue as a result of the supply chain constraints.

Operator, Operator

And our next question will come from the line of Tristan Gerra with Baird.

Unidentified Analyst, Analyst

Hi, this is Tyler Bomba on for Tristan. Thanks for taking my questions. First, are you seeing a demand slowdown in China? And is that possibly going to extend from consumer weakness into infrastructure spending there? And then also, how do you see automotive demand trends in China currently?

Dr. Fermi Wang, President and CEO

In China, our primary focus is on the professional security camera sector, specifically security cameras designed for professional use. We do not engage in the consumer security camera market in China. For professional security cameras, we collaborate with companies like Hikvision and Dahua, among others, that are utilizing our computer vision solutions. Regarding the automotive sector, the forecast for China's automotive market shows a decrease in total unit numbers for next year. However, there is an increasing trend in the adoption of computer vision for advanced ADAS or autonomous driving solutions. This creates a balance in the market. We continue to secure design wins in the Chinese automotive sector, particularly in driver monitoring systems and advanced driver assistance systems, such as our recent announcement with Shanqi for their ADAS application in commercial vehicles. We are also actively working to enter the consumer vehicle market and expand into Level 2+ applications.

Unidentified Analyst, Analyst

Great. And then, for my follow-up, in China, are the surveillance camera OEMs, the professional ones primarily driven by government orders, or are they from the private sector?

Dr. Fermi Wang, President and CEO

I believe it's a combination of both. Most of the projects for Hikvision and Dahua have been coming from government contracts. This is also why they are providing weak guidance for Q4, as government spending seems to have decreased during this period. This has significantly impacted Hikvision and Dahua's recent results.

Operator, Operator

Our next question will come from the line of Martin Yang with Oppenheimer.

Martin Yang, Analyst

My question is on your access given first part of CV design wins. If I remember correctly, it follows up with the first product from Bosch with CVs. So now that those two major IP camera security are adopting CV, do you see we reached a potential milestone where we see a much higher adoption of potential shipments of CV in the professional security camera market, first in the European market?

Dr. Fermi Wang, President and CEO

I think from an adoption point of view, the coverage is very good for us. However, if you look at the products they use CV for now, the majority of them are still on the higher-end side. It’s really high-end products that have converted to CV first. I believe the biggest revenue opportunity for us moving forward is for our customers to gradually move downwards and integrate more and more CV solutions into their low-end products. Then we’ll start seeing more unit numbers contributing to our revenue mix. Because we provide software compatibility from HD cases between our low-end and high-end CV chips, any company that designs in for their one CV product can easily convert the product to a different type or different performance point. So, I do hope that in the near future, we’ll start seeing more products coming from all of those companies using our CV solutions.

Operator, Operator

Thank you. And our next question will come from the line of Derek Soderberg with Colliers Securities.

Derek Soderberg, Analyst

I'm interested in what you're hearing from your customers, particularly regarding any timelines they might have for when they expect their operations to return to normal. There's been significant coverage on the auto chip shortage. Have things worsened in recent months? Any insights on this would be appreciated.

Dr. Fermi Wang, President and CEO

I spoke to a lot of people in the industry to understand the situation. The consistent message I heard is that they don’t expect the situation will improve until the second quarter, maybe the third quarter next year at best. However, we do start seeing signs that things are changing a little, right? We do see some components catching up. Even yesterday, I saw some news about microcontroller situation in automotive improving. I do hope that the situation is not as bad as everybody thinks; this is going to be a problem for the next few quarters.

Operator, Operator

And with that, I see no further questions. I would like to turn the call to Dr. Fermi Wang for closing comments.

Dr. Fermi Wang, President and CEO

Thank you. We are excited to be returning to Las Vegas in January to host both, our Capital Markets Day and CES events. We will be demonstrating a wide range of automotive, security, access control, and robotics technologies and offer rides in our Level 4 autonomous vehicles and provide our first demonstrations of Oculii’s radar software. So, we really hope to see all of you in person. And thank you for your attention today. Goodbye. I’ll talk to you next time.

Operator, Operator

Once again, we’d like to thank you for participating on today’s conference call. You may now disconnect.