Earnings Call Transcript - AMBA Q2 2021

Operator, Operator

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

Louis Gerhardy, Speaker

Thank you, Chris, and good afternoon. Thank you for joining our second quarter fiscal year 2021 financial results conference call. Our speakers will be Dr. Fermi Wang, President and CEO; and Casey Eichler, CFO. The primary purpose of today’s call is to provide you with information regarding the results for the second quarter of our fiscal year 2021. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions among other things. These statements are 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’re under no obligation to update these statements. These risks, uncertainties and assumptions as well as other information on potential risk factors that could affect our financial results are more fully described in the documents that we file with the SEC, including the Annual Report on Form 10-K filed on March 27, 2020, for fiscal year 2020 ending January 31, 2020 and the Form 10-Q filed on June 8th for the first quarter of the fiscal year 2021 ending April 30, 2020. Access to our second quarter fiscal 2021 results press release, historical results, SEC filings, and a replay of today’s call can be found on the Investor Relations portion of our website. With that, I’ll turn the call over to Dr. Fermi Wang.

Dr. Fermi Wang, President and CEO

Thank you, Louis, and good afternoon, everyone. First of all, I would like to provide an update on how Ambarella is responding to the health pandemic. We are focused on ensuring the health and safety of our employees, their families and their communities, and to safely and effectively serve our global base of customers. The majority of our global workforce has returned to their offices, although our U.S. employees continue to work from home. Ambarella’s workforce has always been globally distributed and collaborative. And we believe this culture and structure helped us adapt, remain highly engaged and productive during this global health crisis. Our business is facing tremendous crosscurrents. On one hand, AI and computer vision has become pervasive, we are embedding AI in all of our new products, and we have strong and growing evidence of market acceptance. On the other hand, the pandemic and geopolitical risks are high. The economic constraints over the pandemic remain and we are managing the operational challenges. Despite the challenges, in Q2, we delivered results slightly above the midpoint of the guidance we provided three months ago. Q2 revenue of $50.1 million was down 8% sequentially, and down 11% versus the same period a year ago. The healthy customer and product mix supported by strong operational execution all contributed to gross margin above the high end of our long-term model. Our AI business continued to show growing signs of acceptance with the CV revenue now representing a mid to high single digit percent of total Q2 revenue. And we are still confident that 10% of total revenue will be earned from CV products in fiscal year ‘21. Our CV SoC commands an ASP more than 2x our non-CV ASP, and we are now seeing our overall blended ASP increase. While revenue growth returns, we expect that a higher gross profit dollars per CV unit will drive positive operating and the EPS leverage for shareholders. I will now talk about our markets and the customers. We have previously spoken about our ability to get SoC share in a professional security camera market outside of China and this continued to play out. With continued geopolitical uncertainty, we are now seeing additional opportunities to gain market share within China, in particular at the high end and the middle end of the market. Chinese IP camera makers have become concerned about continuity of supply of existing solutions and have restarted evaluating camera designs based on Ambarella solutions, including our CVflow AI SoCs. Outside of China, we are continuing to see strong design win momentum for our CVflow SoCs in professional IP cameras in all geographies, and a very strong pipeline of new customer introductions planned over the next 12 months. During the quarter, leading Japanese camera supplier PTZ, previously Panasonic continued to introduce more new models based on our CVflow SoCs following their extensive product rollout in the previous quarter. This includes a 4K Vandal Resistance for outdoor dome network camera, and a 4K outdoor bullet surveillance camera, both based on Ambarella’s CV22 SoCs. AI features include smart coding detection, recognition and third-party application support. And in August Motorola Solutions announced the availability of Ambarella-based Avigilon H4 thermal elevated temperature detection solution. It is a prescreening solution that can be used to detect indications of elevated body temperature in a person, composed of infrared spectrum thermal camera and featuring edge-based analytics, it provides a contactless alternative to traditional screening methods. In the consumer IP camera market, we have seen a rebound in orders from the major home monitor camera makers following initial push-outs of orders earlier in the quarter as a result of the impact of COVID-19. Our customers offering monitored security services have seen an increase in the number of installations in the second half of the quarter, while demand for our customers in the self-installation market segment has now recovered. We are also winning new designs for our CVflow SoCs in future generations of home monitoring cameras, as customers demand advanced AI features such as smart person detection. In July, Taiwanese baby monitor and sleep analytics company Cubo introduced its Cubo Ai Plus monitor based on our H.263 SoC. The camera’s face detection technology alerts you if it recognizes that your baby’s mouth and nose are covered or if they are stuck or rolling over. During the quarter, we held two online webinars to promote our Janus access control reference platform, which enables contact-free access control face recognition. The design has been developed jointly with ON Semiconductor and Lumentum, and the features of our CV25 SoC to enable 3D sensing capability using a single camera. The two webinars hosted by Lumentum and IPVM, the leader in video surveillance reporting and research, attracted over 200 potential customers and partners, helping to secure our first design wins for the new platform. In the automotive market, we are seeing strong interest in our SoC solutions for a variety of new OEM applications, including front ADAS, Level 2+ autonomous vehicles, electronic mirrors and car recorders applications. In particular, our CVflow AI SoC are winning designs based on their combination of low power, advanced image processing AI processing performance and ability to process multiple video streams. Since the beginning of the year, we have won new OEM design wins that we estimate will generate approximately $200 million in revenue over the lifetime of their production, typically between two and three years. During the quarter, we won two designs for Japanese automaker Nissan. Chinese tier 1, Longhorn introduced a pre-installed single channel Wi-Fi DVR for Dongfeng Nissan passenger cars, based on our A12A automotive SoC for our tier 1 Hansen introduced stereo kit dual channel DVR for global Nissan models based on both our A12A and H22A SoCs. And during the quarter, Shanghai Max-AI began shipping its front ADAS solution in Shaanxi Trucks, a leading commercial vehicle maker in China. This is a new customer for Max-AI in addition to the Etong win, which we announced on March 3rd. The ADAS system is based on Ambarella’s CV28 CVflow SoC and leverages deep learning algorithms to achieve high accuracy visual perception of 3D scene modeling using monocular fusion. In August, UK and European dash cam leader Nextbase launched its next generation 622GW 4K dash cam, the first dash cam to offer lifesaving emergency SOS alert capabilities. Based on Ambarella’s H22 SoC, the dash cam provides 4K HD recording and image stabilization, while a rear camera module also supports 10 TP video. Also during the quarter, another company introduced its dual channel car recorder for leading e-commerce company, Sun Valley. The aftermarket car recorder features 4-mega plus 2-mega resolution recording and it’s based on H22a automotive SoC. As we mentioned in previous earnings calls, we are winning designs in automotive fleet management designs, where our CVflow SoC provides the required AI performance for driver monitoring and front ADAS applications. During the quarter, Eyesight Technologies, an Israeli company providing driver and cabin monitoring systems and software announced it has selected CV25 for its telematics fleet device. The device will implement Eyesight’s Fleet Sense driver monitoring solution with Eyesight’s algorithm being executed on Ambarella’s CV25 CVflow SoC. The CV25 has been selected for its capability to run sophisticated AI algorithms and low power, best-in-class image processing and ability to support additional applications, such as video recording and streaming. In summary, we’re addressing AI megatrends, such as security, safety and efficiency, all enabled by the integration of our leading video processor and our new computationally intense AI processor. We continue to offer evidence of a broad and extending customer adoption of SoCs. For example, during Q2, we had a record quarter of CV activity with more than 80 unique customers purchasing engineering parts, evaluation kits and/or development boards with activity roughly split between our security and automotive sectors. We are comfortably on track to achieve our guidance for professional security CV revenue or wave 1 to become mature this year. And we are on track to reach our similar wave 2 goal for the smart home market in calendar year ‘21. Our wave 3 guidance for auto CV revenue to become mature in calendar year ‘22 and ‘23 is also on track. For example, during Q2, we had six automotive CV production customers. Our long-term automotive revenue funnel is just starting to build with multiple projects either won or in a bidding pipeline. For example, year-to-date, we have one automotive project representing approximately $200 million in lifetime revenue. Some of the most significant projects start production in calendar year ‘22 or calendar year ‘23. And we will be providing further updates as the overall sales funnel develops. I would like to thank our employees worldwide for adapting to changing conditions and delivering strong results. And I’m thankful for the support of our customers, vendors, and shareholders during this volatile time. I will now turn the call over to Casey who will give you more details of what we are seeing and expect for the business. Thank you.

Casey Eichler, CFO

Thank you, Fermi, and good afternoon everyone. Today, I’ll review the financial highlights for the second quarter of fiscal year ‘21 ending July 31st, and provide a financial outlook for our third quarter ending October 31st. During the call, I will discuss non-GAAP results and ask that you refer to today’s press release for detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense adjusted for the impact of taxes. Our revenue of $50.1 million was slightly above the midpoint of our original guidance. This represents a decrease of 8% from Q1 and a decrease of 11% when compared to the same quarter in the prior year. In Q2, revenue declined sequentially in automotive and other markets, with the security camera business increasing in the low single digits sequentially. Professional security was down and home security increased sequentially. Non-GAAP gross margin for Q2 was 62.4% compared to 59.1% in the preceding quarter, and was above the high end of our guidance due to a professional security concentration shift from China to other parts of Asia and North America. Margins were also supported by continued operational execution in a very difficult environment. Non-GAAP operating expense for the second quarter was $30.2 million, compared to $31.9 million for the previous quarter. Operating expenses decreased and were below the low end of our guidance, primarily due to reduced employee expenses, lower depreciation from deferred capital expenditures and a one-time foreign subsidy related to COVID-19 of $700,000. Other income of $1.3 million reflected the impact of lower interest rates. Non-GAAP net income for Q2 was $2.1 million or $0.06 per share compared to non-GAAP net income of $1.3 million or $0.04 per share in the first quarter. The second quarter’s non-GAAP earnings per share were based on 35.4 million diluted shares as compared to 35.2 million diluted shares in the prior quarter. The non-GAAP net income for the second quarter of fiscal year 2021 includes a change in the non-GAAP tax rate calculation to exclude losses from jurisdictions where there are no tax benefits associated. This was done to improve the alignment of non-GAAP income tax to the non-GAAP profit before tax. Accordingly, non-GAAP net income and non-GAAP earnings per share for the second quarter of fiscal year 2021 have been adjusted for the change in non-GAAP income tax effect and presented consistently with the second quarter of fiscal year 2021 presentation. The reconciliation of GAAP to non-GAAP calculation is included in the financial statement portion of our press release. Total headcount ended for the second quarter was 758, with about 81% of the employees dedicated to engineering. Approximately 69% of our total headcount is located in Asia. Cash and marketable securities were $410.7 million, down slightly from $411.3 million at the end of the first quarter. In Q2, we had negative operating cash flow of $2.4 million due primarily to increases in operating assets, while current liabilities remained relatively unchanged quarter-over-quarter. Total accounts receivable for the second quarter were $23.3 million or 43 days sales outstanding. This compares to accounts receivable of $20.7 million or 34 days sales outstanding at the end of the prior quarter. Net inventory at the end of the second quarter was $23.9 million compared to $22 million at the end of the previous quarter. Days of inventory increased to 109 days in Q2 from 91 days in Q1. We did not purchase any shares of common stock in Q2. In May, Ambarella’s Board of Directors approved an extension of the current $50 million repurchase program for an additional 12 months ending June 30, 2021. As of today, there remains $49 million available from the $50 million repurchase agreement authorized through June 30, 2021. We had two 10%-plus customers in Q2. WT Microelectronics, a fulfillment partner serving multiple customers, came in at 56% of revenue; and Chicony, a Taiwanese OEM, who manufactures for multiple customers, came in at 20%. I will now discuss the outlook for the third quarter of fiscal year ‘21. Forecasting continues to be difficult with geopolitical and pandemic risk continuing to create an environment of low visibility. It is a challenge for us and for our customers to confidently forecast government, business and consumer spending for our products. The rate of order push-outs and cancellations previously discussed in March 3rd and June 2nd earnings calls has slowed, and design activity has begun to recover. However, not all customers’ programs have returned to their pre-pandemic revenue trajectory and global political tensions remain high with a wide variety of risks. In our prior earnings calls, we estimated two professional security camera customers in China have pulled in roughly $10 million of revenue from fiscal year ‘21 to fiscal year ‘20. We believe there has been some inventory reduction, but we continue to expect weak and/or volatile ordering patterns from these customers. During Q2, these two customers combined represented a mid-single-digit proportion of our total revenue. Based on these factors and our best judgment at the current time, we expect total revenue for the third quarter ending October 31, 2020 to be in the range of $52 million to $56 million. We anticipate security camera revenue will be down sequentially with automotive revenue flat and other revenue expected to increase sequentially. We estimate Q3 non-GAAP gross margin to be between 60% and 62% compared to the 62.4% in the second quarter as customer, product mix and operational control sustain gross margins in our long-term model range of 59% to 62%. We expect non-GAAP OpEx in the third quarter to be between $31 million and $33 million due to continued lower travel, equipment and employee expenses related to the current environment. Q3 other income should be modeled around $1.2 million. The Q3 non-GAAP tax rate should be modeled at approximately 15%. We estimate our diluted share count for Q3 to be approximately 35.7 million shares. Ambarella will be participating in the Colliers Institutional Investor Virtual Conference on September 10th, the Deutsche Bank Virtual Conference on September 14th and Jefferies Hong Kong Virtual conference on September 15th and 16th. Please contact Louis for more details on these events. Thank you for joining us today. And with that, I’ll turn the call back over to the operator for questions.

Operator, Operator

Thank you. And our first question comes from the line of Matt Ramsay with Cowen. Your line is now open.

Matt Ramsay, Analyst

Thank you very much. Good afternoon, guys. For my first question, I just wanted to follow up on something that you guys just said in the prepared script. I was surprised to hear that the combination of Hikvision and IOI, I think, Casey, you said mid-single digits of revenue, if you could confirm that that’s right. And I guess, the follow-up question to that, for me, if you could talk to us about the makeup of your current professional security camera business in terms of customers within China, outside of China and what kind of customer concentration there is in that business at this point if in fact those two big guys are down to that level of revenue currently?

Dr. Fermi Wang, President and CEO

Well, I think first of all, we confirm that it’s mid-single digit of between Hikvision and IOI. I think there are two factors around that. One is, there are definitely a few safety stocks from last year; I think they definitely drew on those safety stocks at this point. And also, we talked about the potential for them looking for a second source because they worry about the geopolitical situation. So, that’s definitely two things happening. But also, in my script, I talked about another thing, which is not impacting our revenue yet. We talked about our CVflow SoC getting more design win opportunities inside China also because of the geopolitical situation and our customers’ current supplier may face some supply issues. So, that’s why we started seeing some momentum in the design win activity in China. However, we do believe our technology, especially has been proven outside China. We don’t have a significant revenue concentration problem because most of our customers outside China, although they are larger than the others, we don’t think we have more than 10% customer in any account. Outside China, we still believe we have major market shares for both CV and non-CV professional IP camera supply. But inside China, I think that the mid-single-digit revenue number reflects the two factors I just talked about. But, at the same time, I believe that we will have more CV revenue inside China or more CV market share inside China in the near future.

Matt Ramsay, Analyst

Got it. That’s really helpful. As a follow-up question, it was nice that you guys provided some revenue pipeline clarity within the automotive business, I think, the $200 million. It sounded like that was a two to three-year revenue lifetime. Is that right? And maybe you could talk to us about how many design wins are in that, what are the relative sizes and concentrations of them? I’m just trying to get a sense of do we have a few big deals that you could build upon in momentum? Is this a whole lot of smaller deals? And just any kind of color as to what that pipeline looks like will be helpful. Thanks, guys.

Dr. Fermi Wang, President and CEO

Yes. First of all, I think the pipeline you talk about, the $200 million design win, is only from the beginning of the year to now, all the design wins we have in the automotive space. We think that there are some big deals; there are some smaller deals. When we say big deal, we are talking about lifetime revenue close to $100 million in one design. And of course, there are multiple smaller deals for different spaces, and the applications cover ADAS, e-mirrors, recorders, and also in-cabin monitoring. So, there are multiple different applications in there. And also, the other thing you can say is that among that $200 million, more than half of that is CV-related applications.

Operator, Operator

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

Tristan Gerra, Analyst

Hi. Good afternoon. At this point, and I know you’re only guiding a quarter away, is it fair to assume that we should see normal seasonality in your fiscal Q4 top-line? And I’m basically asking a question in reference to the prior quarter commentary about the full-year revenue guidance year-over-year.

Dr. Fermi Wang, President and CEO

We haven’t provided any guidance beyond Q3. However, while we are starting to see a reduced impact from the pandemic in the upcoming quarters, that impact still persists. Despite this, we believe seasonality is still a factor, perhaps not as pronounced as in previous years. I am confident that our Q3 revenue will surpass Q4. Additionally, assuming the pandemic's impact continues to lessen at the start of next year, we expect to see positive growth next year as well. While we cannot offer specific guidance at this time, this is the trend we are considering.

Tristan Gerra, Analyst

Okay. That’s useful. And then, if I look longer term, if you could remind us of the operating leverage that exists in the model a few years out, is it fair to assume that SG&A should grow at half the weight of your revenue growth? And then, what about R&D, if you could maybe perhaps give some tidbits on the operating leverage beyond just the mix as you’re back on year-over-year growth starting next year?

Casey Eichler, CFO

Yes. While there will be an increase in sales, marketing, and SG&A, the primary growth in operating expenses will come from R&D. This includes not only the expansion of the team and efforts in terms of headcount but also the rising costs related to tape-outs, CAT tools, and others as we transition from our current geometries down to the 5-nanometer technology that Fermi discussed in our last call. These costs are increasing as well. The leverage that will counterbalance this growth comes from the two times average selling price for CV compared to non-CV. Although our margin target remains similar, this dynamic enables us to achieve operating leverage that should return us to levels over 25% as CV develops further in the model.

Tristan Gerra, Analyst

Great. And then, last quick one, are you guys planning or maybe I missed it and you could remind me, support for LIDAR in the future, given that all your demos have centered around camera support for your CV chips?

Dr. Fermi Wang, President and CEO

Right. Although we are very vision-centric company, but in the long run, we do believe we want to be the central computers in a level 2+ car or even moving forward with level 4, level 5. So with that goal, we need to support not only this vision-based processing but also we will be able to interface with other sensors like RADAR, LiDAR or even other potential sensors out there, and then, we can take in those sensor data; we can help our customer to do a sensor fusion algorithm on the CPUs on our chip. I think that’s our goal. And definitely, we are planning to do that. And in fact, the functional safety chips that we present CV2 and CV22 functional safety chips, both of them can support taking in LiDAR data and dual sensor fusion online.

Operator, Operator

Our next question comes from the line of Joseph Moore with Morgan Stanley. Your line is now open.

Joseph Moore, Analyst

It’s actually Morgan Stanley. Thanks, everyone. I wanted to revisit the situation regarding China surveillance. It seems encouraging that those two customers are experiencing a decline in the mid-single digits, and that there is potential design win traction there. Considering that this has traditionally been a core aspect of your business, am I being overly optimistic about this? What are the alternatives if HiSilicon is unable to meet the needs of those customers and you're beginning to see some progress? Shouldn't there be a significant potential increase coming? Is there a third competitor? Are they bringing in new suppliers to reduce reliance on U.S. products? How should I assess the future potential of those mid-single digits?

Dr. Fermi Wang, President and CEO

Yes, absolutely, Joe. First of all, I’m not sure that I catch your firm right. To answer the question, from the CV point of view, from the high end and middle end products, on the HiSilicon side, we don’t believe there is a competitor out there yet. However, the rumor is that a lot of customers and also along with HiSilicon, they built a huge amount of inventory to try to ride out this uncertainty period. So I think, that’s one thing you need to consider. Then from the high end, middle end, I think that we are very strong. You can see the evidence on the outside China market we are basically the leaders and probably have the biggest market share among all the possible customers. On the low end side, there’s a huge amount of Chinese and Taiwanese companies trying to come in to sell $2 to $3, $4 of CV chips. And that’s on the low end side we do see a lot of competition. But, for the people who pay attention to the performance, power, and the best image processing on the middle and high end products, I think we are probably in a very good position.

Casey Eichler, CFO

I would only add, Joe, that I think your interpretation is accurate. I think, to be able to maintain our revenue and grow our revenue with the headwinds that we talk about and the change in market share there in the short run has been encouraging to us because we’ve got a lot of other activity going on, not only in that business but in other businesses. And as Fermi indicated, we look forward to hopefully having that come back and be a stronger piece. But the fact that we’re able to maintain the revenue where it is with that level of business there I think is positive.

Dr. Fermi Wang, President and CEO

Right. And another point I would point out is in Taiwan; we are starting to see that there is some shortage on the substrate. And the reason we were told is that HiSilicon is supporting inventory in a very, very huge way, and that caused a short-term disruption on the supply side. So, that gives me also indication that for some of the customers in China, they are probably building up huge inventories to try to weather this difficult period of time, and that’s definitely something you should consider, too.

Joseph Moore, Analyst

Great, that makes sense. I have a separate question regarding the thermal win you mentioned with Motorola. We haven't previously seen your involvement in many thermal cameras, which seems to be a significant category given recent developments. Should we consider this a substantial opportunity? Are you experiencing potential interest from more customers? Could this become a sizable business for you?

Dr. Fermi Wang, President and CEO

We definitely believe that this is a market worth targeting, and we have collaborated with several customers, with Motorola being the leading company to ship a product based on our solution. Our perspective on this market is that many thermal cameras today merely gather thermal information. However, we see significant potential for integrating both CMOS image sensors and thermal sensors within a single camera. This integration would allow for temperature overlay on objects while utilizing CV neural network algorithms, enabling identification and contact tracing of individuals with high temperatures. I believe that the fusion of AI with thermal technology will significantly enhance our customers' ability to develop more effective contact tracing algorithms and systems. There is undoubtedly a substantial market for this.

Operator, Operator

And our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore, Analyst

Hey, guys. Thanks for letting me ask the questions. I had one shorter term question and one longer term question. Maybe, either Casey or Fermi, on the shorter term side of things, I just wanted to walk through the segments just a little bit. It seems like in your guidance for the third quarter, if you have it down and you have automotive flat, but the other portion has to be up significantly, is that just because of seasonality, or is there something else going on there? And also part of that is, why is auto flat sequentially? Most everyone else, at least because the shelter-in-place orders have come off, I know it’s early days for you guys in auto, but I would have thought just the world kind of turning back on and that end market would have led to a little bit of sequential growth for you in fiscal 3Q?

Casey Eichler, CFO

Yes. We could, by the end of the quarter see a little bit, but I think the guide to flat is reasonable, and to your point, somewhat pointing to where we are in our lifecycle in the automotive business that maybe differentiates us a little bit from others. The consumer business has been one that’s typically has grown pretty well in Q3 in front of the holiday season and into the year. And you’re right, we are seeing that. That business today is dominated by DJI and a whole series of products that I think they’re having pretty good success with. So, we appreciate the relationship and look forward to them having a good season. But, I think your assessment is fairly accurate around the consumer. It is really more the normal seasonality along with maybe a few new product introductions that are looking pretty promising.

Ross Seymore, Analyst

Thanks for that, Casey. And then, I guess, my longer-term question, kind of a bridge from the shorter to the longer, it’s nice to see your gross margin upside so much. So, any more color about what happened there? Not company-specific, customer-specific, but how is that so good in the quarter? And then you mentioned that CV has 2x the ASP. Obviously that will have higher gross profit dollars. Any sort of at least directional commentary on what that does to the gross margin as well, do CV gross margins rise versus the prior gen as well, or is it just the dollars we should think about?

Dr. Fermi Wang, President and CEO

Right. So for the gross margin, I think, the main factor is that the Hikvision and Dahua combined have only mid-single-digit revenue this quarter. I think that’s the main factor. The product mix is always the most important factor for our gross margin number. And moving forward, I think that for CV products, we continue to believe that our CV gross margin will be consistent with the video product gross margin. However, like you said, with twice the higher ASP, we believe it could provide leverage on the EPS, but not on the gross margin.

Ross Seymore, Analyst

Got it. And one final one, if I could sneak it and as a follow-up to your first answer there. For me, if you diversify outside to other Chinese vendors, like you talked about earlier in the call, is it the same dynamic where the gross margin pressure would be there, or is it a more fragmented customer base regardless of the geography, something that could be less detrimental to your gross margin than Hikvision and Dahua given their size?

Dr. Fermi Wang, President and CEO

I think that gross margin with other customers will be better. Just Hikvision and Dahua have so much leverage because of their volume. They probably dominate more than 60% of total security camera market combined. So, that’s why they have a much better purchasing power. But with other Chinese vendors, we do see that the gross margin with that will be higher than the ones with Hikvision and Dahua.

Operator, Operator

And our next question comes from the line of Quinn Bolton with Needham & Company. Your line is now open.

Quinn Bolton, Analyst

Hey, guys. I wanted to ask about the China market. Obviously HiSilicon is no longer able to supply its security processors post September 14th. Can you give us some sense how much market share does HiSilicon have in the IP security camera market, which I think you guys in your slide deck estimated about 200 million units?

Dr. Fermi Wang, President and CEO

I would say that in China, they hold the largest market share. However, I want to point out that a significant portion of this is on the low end. In fact, if you analyze the distribution, more than half, likely much more than half, falls into the low-end category, with average selling prices around $2 to $4 per chip. The most profitable segment for us is actually in the middle and high end. Historically, HiSilicon has held the largest market share in China, while we have been in second place. Looking ahead, I believe this provides us with a competitive advantage in the middle and high-end market. However, it's important to note that even though HiSilicon is unable to ship after September 15th, they have built up a significant inventory for existing customers. On the low end, there are numerous competitors vying for market share primarily based on price, which will likely result in price pressure in that segment. Outside of China, the situation is different. We are supplying to non-Chinese customers across both the low and high ends because they value using the same system software throughout their platforms. This consistency is a key design requirement for nearly all of our non-Chinese clients.

Quinn Bolton, Analyst

I guess, if I could get you to maybe even guesstimate, Fermi, if it’s a 200 million unit market, you said earlier, Hikvision and Dahua are 60%. So, it sounds like just those two customers alone are 120 million units a year. I assume most of that’s probably for domestic China. I mean, is the mid-range and the high end, I mean, is that 30 million or 40 million units that you share with HiSilicon? I mean, it feels like there are tens of millions of units that once those customers burn through the HiSilicon inventory that are going to be up for grabs, and it sounds like that’s a meaningful unit opportunity. Just wondering if you could help us at all try to size what that mid- to high-end market in China might be on a unit basis?

Dr. Fermi Wang, President and CEO

We don’t have that number available. It's difficult for us to gauge its size, and I don’t want to leave you with the wrong impression. However, once our Chinese customers begin production with our CV solution, we will be able to provide more clarity on our CV revenue in the China market next quarter. I believe that will be the best time for us to offer a clearer indication.

Quinn Bolton, Analyst

Okay. I appreciate it. And then, I guess, just a follow-up on the automotive design win pipeline that you talked about being $200 million. I was just wondering I know you had automotive designs prior to the beginning of this fiscal year. I was wondering, could you give us sort of what the total aggregate design win pipeline is now or if you can’t give that number, is the $200 million a significant majority of the total pipeline? I’m just trying to figure out how important that $200 million is. Is it in relation to the entire pipeline that you’ve built up since you started sampling CV?

Dr. Fermi Wang, President and CEO

So, first of all, in my script, I talked about our sales funnel exercise inside the Company. And we are just doing what you’re asking, which is really trying to evaluate the category. One is design win that is wholly confirmed with the customer or design inside the pipeline that I think that we have RFQ or answering question or doing evaluation, and then that’s a secondary category. The third category is the meaningful customers that we think in the long run we want to target, and we think that the chance we can win. So, among those three things, three categories, we put the first and second category into our sales funnel, and we start building models based on that. And we are not ready to disclose the number, but I think in the near future, we should be able to talk about that number. And I would think that the $200 million number is just a part of it. It’s not a majority of it.

Operator, Operator

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

Kevin Cassidy, Analyst

You’re observing some weakness in the professional surveillance market outside of China. Do you believe there is pent-up demand? Are your customers accumulating inventory, and are you maintaining inventory for them for when these products are deployed?

Dr. Fermi Wang, President and CEO

Yes. Hey Kevin, first of all, welcome back, and nice to hear from you. From the outside China, we don’t see any inventory buildup. In fact, because of the pandemic, people cut back so severely at the beginning of the quarter, and we start seeing people trying to pull in orders from our customers. So, I would say there is really no inventory buildup anywhere outside China. And also, we continue to believe that the design win activity, design win momentum as well as that many customers will start introducing more and more CV models in the next 12 months will be helping us to build a significant business outside China. And also, we are very comfortable with our guidance. And we talked about wave 1 meaningful revenue from professional security cameras by the end of the year. I think, that’s definitely there already. And we believe we can build up on that.

Casey Eichler, CFO

The only thing I would add there is, while there are significant challenges, our relationship with Samsung and our package and test partners have been very good. Zemo and Vincent and his whole team have done an excellent job of really managing this. And there’s always a chance that you can have issues. Everything so far, they’ve worked through very, very well. And Samsung and those partners have supported us very well.

Kevin Cassidy, Analyst

Okay, great. And maybe if I can turn to the 5-nanometer products. Can you talk a little more about how that schedule is going? And then, also what’s your performance in power consumption improvements are you expecting with 5-nanometer?

Dr. Fermi Wang, President and CEO

First of all, we only taped out the 5-nanometer test chip to Samsung, and we’re expecting to receive the test chip in maybe in two to three months and then we can start testing it. We believe our first tape-out of the 5-nanometer chip will be roughly the end of the year or early next year, and that’s our target. And of course, that’s definitely another CV chip for our key customers. And the power consumption saving for 5-nanometer is significant. We believe, for example, that to do 8K video, we can reach 2 watts power, which is not even reachable for any other people’s design. But we do believe that the potential 5-nanometer product can continue to help us to strengthen our position, not only this performance improvement but also power consumption improvement.

Operator, Operator

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

Tore Svanberg, Analyst

Thank you. First of all, I know you typically don’t give out bookings in backlog. But, can you talk about your relative visibility for the October quarter? And it does sound like where there’s the most uncertainty is the professional security market. Would that be a fair assessment?

Casey Eichler, CFO

Yes. I think that we have pretty good visibility. And like I say, the quarter is moving very well for us. As far as the visibility going forward, I think it’s improving, as Fermi commented on, but there still are challenges. As I mentioned in my script, there’s still the challenges. We’re trying to balance all of this as we go forward. So right now, I think we’ve got the right inventory level. I think we’re doing the right things to meet our customers’ needs. And we feel pretty good about the way we’ve managed that. But, it’s not like there aren’t challenges throughout the quarter that have come up from time to time, no question.

Tore Svanberg, Analyst

That’s great. And as my follow-up to Fermi, on the competitive landscape, I understand the geopolitical stuff. Could you maybe elaborate a little bit on your partnership with Samsung, the move to 5-nanometer, and how that kind of sets you up against especially that big competitor you have in China for sort of the battleground next year?

Dr. Fermi Wang, President and CEO

So, I really think that our competitor in China, meaning HiSilicon, they’re moving very aggressively on the process now also. However, like we said before, we believe our power consumption advantage comes from our design, not from the process node. Moving fast with process just being defensive so that we don’t lose those advantages because we fall behind on the process. And so with the 5-nanometer, we believe we’ll continue to be a leader on the performance per watt as well as continue to provide differentiated features with potential more die size that we can play with providing extra functions and features to our customers. And our competitive landscape from a security camera high-end side didn’t change much. On the low end side, I talked many times, there are many smaller companies trying to compete. On the automotive side, I think our main competitors are Intel, especially Mobileye, NVIDIA and also NXP and TI and the FPGA company, Xilinx. So, I think they are our key competitors in this space right now.

Operator, Operator

Our next question comes from the line of Suji Desilva with Roth Capital Markets. Your line is now open.

Suji Desilva, Analyst

So, I’m trying to get a profile of the security camera business now versus maybe kind of prior peak or how far below prior peak is it, just to understand currently? And what’s the mix looking like now versus typically professional consumer? Just trying to understand if consumer can hold up the event Professionals Week next quarter?

Casey Eichler, CFO

Yes. Again, on the professional side, the biggest dynamic change is, over the last couple of years, we’ve added several customers, albeit not as big as those two major customers in China, and one tech win and others that I think have helped give us a little more balance. But, in the short-term right now, as we referenced, with those two customers being a bigger part of revenue in the current situation, we have seen a decline in revenue over the last couple of quarters there. And as we look forward, with the adoption of CV and others, that’s all remains to be seen. But for us, the mix has changed a little bit because we’ve gotten a broader acceptance across. And even in China, I think, Fermi referenced several new customers, albeit smaller, that are starting to engage with our technology. So, we’re going to continue to partner with everybody. The two customers from China are still very good partners of ours, and we have relationships, but we’re trying to be as supportive as possible in any way we can. But that’s really the change in the short-term dynamic. And the longer-term is again something we’ll talk to as it develops out.

Dr. Fermi Wang, President and CEO

Right. But I would say, it’s really too early to tell how far we are behind from the previous peak, with the professional security market or consumer market with the significant consensus we announced too. However, I think professionally, we continue to see recovery in orders for sure. Okay, great. And maybe if I can turn to some more thoughts...

Casey Eichler, CFO

...on automotive CV pipeline that you talked about, the number and the customers. I’m just trying to understand the geographic mix here and particularly what portion of that maybe is targeting the China market versus non-China? Is it geographically diversified?

Dr. Fermi Wang, President and CEO

In terms of design win activity and production, there are several developments in China. However, regarding the $200 million in revenue from design wins we've achieved since the beginning of the year, most of it comes from outside of China. We're gaining significant momentum in China with smaller designs, but we're also seeing progress in markets like the U.S. and Japan, which continue to strengthen our pipeline.

Operator, Operator

Our next question comes from the line of Charlie Anderson with Colliers Securities.

Charlie Anderson, Analyst

Yes. Thank you for taking my questions. And congrats on all the CV progress. A couple of questions on year-over-year comparisons. That $200 million number that you are disclosing on the pipeline, I wonder if you had a year ago number. So, as you folded in all the CV progress, I wonder if you could speak to how much that’s improved the same point in time from a year ago. And then, on the mid-single-digit number for the two large Chinese OEMs, enterprise security, I’m curious what that number would have been in Q2 a year ago as well. And I’ve got a follow-up.

Dr. Fermi Wang, President and CEO

First of all, compared to last year, the $200 million figure is obviously higher. However, we plan to share our sales funnels for both design wins and the design win pipeline in the near future, which will give you more insight into our progress with customers in the automotive sector. Regarding Hikvision and Dahua, about a year ago, they likely represented around 20% of our combined total business, which would be approximately $40 million to $45 million last year. It's important to note that they secured some orders last year to mitigate risks from potential geopolitical issues.

Operator, Operator

Thank you. And our last question comes from the line of Richard Shannon with Craig-Hallum. Your line is now open.

Richard Shannon, Analyst

Thanks, Fermi and Casey for getting me on the call. I guess, two questions for me. First one, if you look at your professional security market with OEMs outside of China. You talked about having the largest share, and I think it’s increasing here. To what degree do you see the potential for even more share coming? Have we seen the end of that? It seems like you’d have a bit more room to run from that perspective, but would love to hear what you think about that.

Dr. Fermi Wang, President and CEO

If there’s a growth for us outside China, it’s our hope that our customers will start gaining market share against their Chinese competitors outside China. I think that’s probably one of the major areas that I think our customers are hoping for and we hope for too, that they can grow market share there. However, at the same time, in terms of total design win available out there for us to win, we’re working hard on that. But if you look at we mentioned probably all of the major professional IP and camera outside China already as our customer for CV, and so, the biggest issue for us is helping them to start rolling out more CV models to replace the non-CV medium camera they have. And that’s another way we can grow market share in terms of total revenue. So, I think that two areas are what we’re working on. Okay, thank you. And thank you all for your attendance today. I’m looking forward to seeing you next time.

Operator, Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you for participating. You may now disconnect.