Earnings Call Transcript - AMBA Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to Ambarella Q1 Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today, Louis Gerhardy. You may begin.

Louis Gerhardy, Speaker

Thank you, Towanda. Good afternoon. And thank you for joining our first quarter fiscal year 2023 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO; and Brian White, CFO. The purpose of today’s call is to provide you with information regarding the results for our first quarter of fiscal year 2023. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth and demand for our solutions among other things. These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We’re under no obligation to update these statements. These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents we file with the SEC, including the annual report on Form 10-K that we filed on April 1, 2022, for fiscal year 2022 ending January 31, 2022. Access to our first quarter fiscal 2023 results, press release, transcripts, historical results, SEC filings and a replay of today’s call is on the Investor Relations portion of our website. Fermi will now provide our business update for the quarter and Brian will review the financial results and outlook, and will be available for your questions.

Dr. Fermi Wang, President and CEO

Okay. Thank you, Louis, and good afternoon. Thank you for joining our call today. During our first quarter, we announced the passing of Casey Eichler, who had been our CFO since 2018. Casey’s positive demeanor was an inspiration to many of us and we are thankful to have experienced his leadership. On March 28th, we announced the appointment of Brian White as Ambarella’s CFO. After two months, we are excited about the leadership and experience Brian brings as we scale the company for the significant opportunities ahead. Our Q1 revenue was essentially as expected, flat sequentially and up 29% year-over-year. CV revenue grew significantly, both sequentially and year-over-year, representing about 40% of total revenue, and our video processor business declined about 20% sequentially. Our blended average selling price continued to rise. During Q1, the pandemic flared up in China and the resulting lockdown disrupted customer production schedules and orders placed on us, as well as logistics in the greater Asia supply chain. A majority of our customers’ products are manufactured in this region and subject to impacts from China-related supply-chain disruptions. We are seeing a similar degree of impact across both our automotive and IoT businesses, further complicating the pre-existing kitting issues we have discussed before. Last quarter we reported a supply constraint for our 14-nanometer video processor SoCs. At this time, we continue to expect the Q2 impact to remain at about $5 million. We are now confident we will see a Q3 and Q4 improvement in supply of 14-nanometer video processor SoCs. As previously noted, the supply of our computer vision SoCs has not been impacted. We are very excited to announce that in late May, we received first silicon for CV3, our first central domain controller processor, and we have successfully brought up the key functional blocks on this 10-plus billion transistor SoC. There is more bring-up work to be completed, but we are confident this first rev will be sampled over the summer to key customers and will demonstrate significant performance and power leadership. As a reminder, CV3 will be a family of SoCs we expect to command a selling price between 5 times to 20 times our current corporate ASP. We remain focused on capturing the significant revenue opportunities in front of us. New 5-nanometer products are on schedule, with CV3 close to sampling and CV5, our first 5-nanometer SoC, is expected to commence mass production in the second half of the year. We continue to expect our CV revenue to be about 45% of revenue this year and this richer mix is expected to drive our blended average selling price higher. Interest and activity around our products and technology remains very strong. I will now provide some examples of our market development activity. In the automotive market, during the last quarter Ambarella continued its success in sensing applications, an entirely new market for the company, in applications such as ADAS and driver monitoring, as well as new viewing markets like electronic mirrors. At Japanese OEM Honda, two of their joint venture companies introduced EV models using our H32AQ SoC for a multi-function electronic mirror plus drive recorder. Dongfeng Honda’s eNS1 EV and GAC Honda’s eNP1 EV both use this solution. Also during the quarter ISUZU, a Japanese OEM, introduced through a joint venture company its new MU-X SUV. Based on our CV22AQ SoC, the SUV enables an intelligent driving assistance system utilizing a front-facing camera supporting lane departure warning. We remain optimistic about the vehicular in-cabin monitoring systems opportunity for us. In June, we expect Geely to announce a new passenger vehicle utilizing our CV28AQ for driver monitoring. Dongfeng, one of the largest commercial truck OEMs in the world, shipped its new DF760 truck utilizing a single CV22AQ SoC to support multiple cameras and multiple functions for driver monitoring around vehicle monitoring and blind spot detection. In IoT, our smart home business, which we have referred to as CV Wave 2, we are pleased to announce Vivint as another major CV customer. In May, Vivint announced four new products, including outdoor, indoor and doorbell cameras and a spotlight. All of the cameras implement our CV SoCs to execute Vivint’s intelligent AI algorithms for a variety of people and package detection and tracking functions. The spotlight uses the advanced detection algorithm of the outdoor camera to illuminate intruders and follow them as they move around the property. In the IoT market, the largest portion of our CV revenue has so far been realized from new product cycles in our enterprise and public security camera business, where the trend continues with a vast majority of our customers’ design activity involving our CV SoCs. During the ISC West Security Exhibition in March, almost every major security camera company was demonstrating new products based on our CV SoCs. There were also many public demonstrations at ISC West of companies entering the access control market with systems based on our reference designs. The access control market is a great example of how our CV portfolio allows us to reach entirely new markets we did not serve before and access control is one of the areas where we are showing encouraging early customer wins. In access control, Motorola Solutions announced the new Openpath Pro Series Video Intercom reader based on our CV25 SoC. The reader combines video, audio and enterprise call routing. Motorola has made a number of acquisitions in the last few years to leverage its IoT camera expertise into new verticals and Openpath is one example. We are proud to report that most of the camera companies acquired by Motorola are using Ambarella SoCs and we are eager to help them grow their business. Also in access control, based on our CV22, RealNetworks announced its SAFR SCAN, a touchless biometric system with anti-spoofing based on the fusion of structured light and cameras to ensure the most accurate results. During the show, targeting the enterprise and public markets, Hanwha Techwin announced two new AI-powered multi-sensor cameras based on our CV2 SoCs and featuring deep-learning based object detection and classification. Also in the enterprise and public IoT market, i-Pro, formerly part of Panasonic, introduced its new multi-sensor S series camera, which is based on our CV2 SoC, offering deep learning intelligence at the edge with pre-installed AI applications and the ability to add third-party applications. In the public safety fleet market, i-Pro also launched a 4K panoramic front camera based on CV22 with the form factor and thermal budget to be mounted behind the rearview mirror on the windshield. Factory automation is another greenfield market opportunity and during the quarter iRAYPLE introduced two products based on our CV2 AI SoC, a stereo 3D factory automation camera with precise measurement capability and a code reader with high resolution and deep learning abilities. In other IoT markets, Insta360 introduced the One RS action camera. The innovative consumer camera is based on our H22 SoC and can shoot 4Kp60 video, take 48-megapixel photos and includes AI driven editing to make stitching 360-degree footage simple. Recapping these announcements, a majority of the projects I just described are CV based. In these products, our state-of-the-art video processing expertise is leveraged into new applications where the camera, instead of just enabling a great human viewing experience, is sensing, collecting data and then making decisions. A lot of incremental and specialized processing is needed to do this most efficiently and our high-bandwidth CVflow AI SoCs provide this for an increasingly diverse set of IoT sensing applications. About half of these products I described represent new product cycles in existing markets and the other half represent entirely new markets for us such as automotive sensing, factory automation, and access control. We are in the midst of a very strong shift in design activity to our CV SoCs. Long-term, we expect to earn a higher ASP with CV products and the combination of higher ASPs and unit volumes is expected to drive premium growth. We are confident our strategy addresses the megatrends for security, safety, and automation, enabling our customers to innovate and transform their own businesses. Our rapidly expanding AI product portfolio serves the diverse secular growth opportunities emanating from these trends. Now Brian will review our financials.

Brian White, CFO

Thanks, Fermi. I’ll review the financial highlights for our fiscal Q1 and provide a financial outlook for our second quarter of fiscal year 2023 ending on July 31, 2022. I’ll be discussing non-GAAP results and ask that you refer to today’s press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense and acquisition related costs adjusted for the impact of taxes. Revenue for fiscal Q1 was $90.3 million, in line with the midpoint of our prior guidance, flat to the prior quarter, and up 29% year-over-year. As expected, a sequential increase in IoT revenue offset a decline in automotive. Both IoT and automotive were up strongly on a year-over-year basis. Non-GAAP gross margin for Q1 was 63.8%, slightly ahead of the midpoint of our prior guidance range. Non-GAAP operating expense for fiscal Q1 was $39.8 million, down $500,000 from the prior quarter. Non-GAAP operating expense was $2.2 million below the midpoint of our prior guidance, driven by the timing of new product development activities. Our non-GAAP tax provision was $0.9 million or 4.8% of pre-tax income and we reported non-GAAP net income of $17.1 million or $0.44 per diluted share. Now I’ll turn to our balance sheet and cash flow. Cash increased $30 million to $201 million, driven by strong operating cash flow of $34 million. Fiscal Q1 cash flow was aided by decreases in both inventory and accounts receivable. Inventory decreased $4 million from 128 days to 117 days and accounts receivable decreased $16 million from 45 days to 28 days. The substantial decrease in accounts receivable was attributable to a front-end skewed revenue profile in the quarter. We had three logistics and ODM companies represent 10% or more of our revenue in Q1. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 57% of revenue. Chicony an ODM who manufactures for multiple IoT customers was 11% and Hakuto, a logistics partner who primarily supplies multiple automotive customers in Japan was about 10% of revenue. I will now discuss the outlook for the second quarter of fiscal year 2023. As Fermi described, the external environment remains complex and dynamic. The supply chain already stressed with persistent kitting issues is now also facing the rolling pandemic impacts in China. Our guidance to the best of our knowledge contemplates these challenges. We estimate our Q2 revenue to be in the $78 million to $82 million range or down approximately 11% sequentially at the midpoint. We estimate Q2 non-GAAP gross margin to be between 63% and 64%, relatively flat to the prior quarter. We expect non-GAAP OpEx in the second quarter to be in the range of $42 million to $45 million. The sequential increase in OpEx is driven by the beginning of an advanced 5-nanometer automotive grade CV SoC development project. Our fiscal Q2 forecast for Ambarella’s non-GAAP tax rate is 4% to 6%, and we estimate our diluted share count to be approximately 38.7 million shares. Ambarella will be participating on June 1st in Craig-Hallum’s Virtual Investor Conference, June 2nd at Cowen’s TMT Conference, June 8th at Bank of America’s TMT Conference and on June 9th at Rosenblatt’s Virtual AI Scaling Conference. Please contact us for more details. Thank you for joining our call today. With that, I will turn the call over to the Operator for questions.

Operator, Operator

Thank you. Our first question comes from the line of Joe Moore with Morgan Stanley. Your line is open.

Joe Moore, Analyst

Thank you. Could someone elaborate on the issues in China for the upcoming quarter? Can you clarify whether there are any demand-side challenges or if everything is related to supply? You mentioned it affects multiple customers; can you provide more details about whether these are Chinese customers manufacturing locally or multinationals? Any additional insights into the dynamics of the challenges would be appreciated.

Dr. Fermi Wang, President and CEO

Hi, Joe. This is Fermi. So what we saw was that, at the end of March and early April, when we started seeing the China lockdown in Shenzhen and Shanghai, and almost at the same time, we started seeing our global customer base pushing all the acute demand and like we believe the reason was that with the kitting issue persisting and also the lockdown making the kitting issue allow worse for our global customer base, particularly for those manufacturing in China or in greater Asia locations, and they were impacted the most. And that’s the degree we’re seeing. In terms of demand, at this point, particularly outside China, I would say that most of our customers are telling us they can sell almost everything they can build. So I think the demand, at least outside China, is pretty solid, in my opinion. We believe that we’ll continue to monitor this progress through this lockdown situation and we all heard that the Shanghai lockdown will probably expire on June 1st. We are looking forward to seeing any updates on the market and following up from a customer point of view.

Joe Moore, Analyst

Okay. That’s helpful. Thank you. And then in terms of the incomplete kitting issue, is that an issue that people aren’t ordering Ambarella parts because they’re waiting to get other things or is that an issue that they have inventory of Ambarella parts, because they can’t get those other things? Like, can you tell how much of this is going to be an inventory burn off that’s required versus just a pent-up demand?

Dr. Fermi Wang, President and CEO

Well, I think a portion of that is definitely, there’s some kind of inventory sitting in the channel. But I do believe this lockdown is really when the customer finds out that they cannot allocate enough other parts, particularly like PMIC and the WiFi and microcontrollers for automotive. I think that they decide to push out the acute demand to future quarters. So I think that inventory situation is like what we discussed before. But this time, I think that a lot of push out is based on the kitting issue, particularly new kitting issue, which is amplified by this lockdown situation.

Joe Moore, Analyst

Great. Thank you.

Operator, Operator

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

Ross Seymore, Analyst

Hi, guys. Thanks for letting me ask the question. Brian, welcome to Ambarella. I just want to ask about the duration side of this equation. I know lockdowns and what COVID is going to do and China is going to do is kind of beyond my pay grade and maybe you guys don’t have great visibility into that. But what’s your assumption beyond the July quarter, whether it would be the Samsung side getting better, as I think you alluded to, Fermi, or the persistence of the lockdown headwinds?

Dr. Fermi Wang, President and CEO

Well, I think the major impact on the last quarter is lockdown headwinds and I am sure even today, we don’t have visibility into how fast this recovery will look like. But you mentioned this Samsung situation, Samsung 14-nanometer. We still expect a $5 million impact to us in the July quarter, but we’ve expected that in Q3 and Q4, the 14-nanometer supply will improve. So I think this time we are really talking about this China lockdown causing a lot of kitting issues for our customers.

Ross Seymore, Analyst

And I guess as a follow-up question to get into the model. You guys are now just having the two segments, the IoT and the automotive side of things. Can you give us any color about the size they were in the quarter, either as a percentage of sales? What they did sequentially? I know you said up and down, but any numbers around that? And then is there a difference in the guidance for the July quarter between the two segments?

Brian White, CFO

Yeah. So in Q1, automotive represented about 25% of our revenue with IoT at 75%. As we look into Q2, we expect both of those segments to be down approximately equally in percentage terms. So both down into double-digit sequentially.

Ross Seymore, Analyst

Got it. Thank you.

Operator, Operator

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

Quinn Bolton, Analyst

Welcome, Brian. I guess, Fermi or Brian, just seems like it’s a dynamic environment out there with the rolling lockdowns in China. I guess my question is, sounds like customers have been delaying orders here in the near-term because of these kitting issues. Do you guys have any sense based on your customer conversations, whether you expect that to extend beyond the July quarter or do you think that as the rolling lockdowns hopefully come to an end that orders start to pick back up?

Dr. Fermi Wang, President and CEO

I think, when we talk to our customer we got a lot of uncertainty from them, because they still don’t know how fast this lockdown situation will improve. We believe that if the lockdown and those kitting issues do not get any worse than right now, we believe Q3 revenue should be better than Q2 and maybe even have better to be covered in Q4, but that’s under a lot of assumptions that how this kitting issue and lockdown issue will continue or not.

Quinn Bolton, Analyst

Got it. That’s helpful. And then I guess maybe, Fermi, a longer term question. I know you guys have been talking about the opportunity around Level 2 plus design wins. I know you haven’t announced any to date. But do you feel like you’re making progress? Do you think you’re getting closer to potentially a large Level 2 plus win that I believe in the past you’ve said you expect to hopefully secure at least one if not multiple Level 2 plus wins this year?

Dr. Fermi Wang, President and CEO

Right. So, I think that throughout our discussion about people keep asking about our CV3 and we believe that by announcing a CV3 that is up and running and we have bought our multiple functions in there. We have high confidence that we will ship the sample to the CV3 over the summer. I think this will really give our customer a sense of how real this project is and what kind of performance and the power number we can prove in a real so they can then just show up in presentation. So I think that with the CV3, we are very optimistic that we continue to make progress with key Tier 1 OEMs on this design win.

Quinn Bolton, Analyst

Thank you.

Operator, Operator

Thank you. Next comes from the line of Matt Ramsay with Cowen. Your line is open.

Matt Ramsay, Analyst

Good afternoon. Thank you very much. Fermi, I wanted to follow up on what you just discussed regarding CV3 and get an idea of the next steps from here. It seems you have some initial work being done in the lab for silicon back, but there’s still work on software, BIOS, and other areas needed to prepare everything for customer sampling this summer. I'm particularly interested in the steps after that, such as how you plan to engage with customers regarding CV3, demonstrate it live in labs, and what the timeline might look like for potentially converting some of these opportunities in the automotive sector into a business. What kind of timelines are we looking at for announcements concerning CV3, and what steps do you have ahead to achieve that? Thank you.

Dr. Fermi Wang, President and CEO

I think it's important to discuss the progress we've made with CV3. The CV3 silicon arrived back in our lab just a week ago, and in this short time, we have successfully activated all the fundamental components and ensured that the chip is operational, allowing us to begin software integration. We are currently validating the performance and power metrics that we previously communicated to our customers, and our confidence in the results is increasing daily. Our immediate objective, after sampling to our customers, is to implement our VisLab software and Oculii software on CV3 to conduct a system-level demonstration. This demonstration will not only showcase the capabilities of the CV silicon but also the support we can provide to our customers. This is a significant milestone, as our OEM partners often ask not only about the performance of our silicon but also about the availability of software that can help them achieve optimal performance. We have both VisLab, which offers a complete software specification for autonomous driving up to Level 4, and Oculii’s centralized radar processing capabilities. We see this as a crucial next milestone and are still aiming for a start of production with our customers by 2025 or 2026.

Matt Ramsay, Analyst

Got it. Thanks for that, Fermi. That's helpful. Just a quick follow-up on that before my second question: do you have any sense of how many customers you expect to sample CV3 this summer? I'm trying to get a better understanding of the level of engagement. For my follow-up question to Brian, can you give any estimate of the impact of the logistics issues in China on the guidance for July? I'm assuming it’s about $5 million for the Samsung impact, but if you could provide any quantification of that impact in dollar terms, that would be helpful. I know that's difficult, but thank you all. I appreciate it.

Dr. Fermi Wang, President and CEO

Yeah. In terms of CV3 sample, I would believe the double-digit customers.

Brian White, CFO

Yeah. And in terms of the impact associated with the supply chain disruptions in China, I think our guide is down about 11% to the midpoint, and that’s really all attributable to that factor.

Matt Ramsay, Analyst

Got it. Thank you very much.

Operator, Operator

Thank you. Our next question comes from the line of David Kelley with Jefferies. Your line is open.

David Kelley, Analyst

Hi, guys. Good afternoon and thanks for taking my questions. I believe you noted CV mix for the year is still on track for 45% of sales. So can you talk about the lockdown and supply chain disruptions specific to CV, if you’re seeing a less or more impact there and maybe demand trends throughout the last couple of months?

Dr. Fermi Wang, President and CEO

Yeah. I think that this lockdown and kitting issue impacts both IoT and automotive equally, but also applies to video processor and computer vision chip equally, and we don’t see particularly which product line can impact more than the others. But I also believe that the kitting issue right now it can happen to any product line, because it’s really, for example, both video processors and computer vision need PMIC or WiFi or microcontroller to complete a product.

Brian White, CFO

Yeah. We said that OpEx would increase coming in the second quarter, which is really driven by a new CV 5-nanometer project that’s beginning and that’s starting to kick in to the OpEx.

Operator, Operator

Thank you. Our next question comes from the line of Tristen Barra with Baird. Your line is open.

Tristen Barra, Analyst

Hi. Good afternoon. I know there’s been some questions obviously already on the impact of the July quarter guidance and you reiterated the mix of CV at 45% of revenue. Previously, we thought that CV revenue will double this year. Assuming that the lockdowns go away on June 1st, notably in Shanghai, how much of your second half concerned about the topline rebounding sequentially would be, I guess, impacted by weak consumer demand in China as opposed to component shortages like MCU and WiFi. Where do you think is the biggest bottleneck or uncertainty as to the lockdowns impact goes away?

Dr. Fermi Wang, President and CEO

I believe that WiFi demand from our customers may extend beyond the second quarter into the third and fourth quarters. The main issue is uncertainty. Although the lockdown was eased on June 1st, we still need to consider how quickly production can return to normal and ramp up to full capacity. This uncertainty affects not just the supply side but also our customers. Therefore, we remain uncertain about the third and fourth quarters. Regarding demand in China, while the economy appears weak, about 15% of our products are sold there. Currently, we are more focused on assessing the demand situation outside of China, where I believe our demand remains strong.

Tristen Barra, Analyst

Okay. Great. And as my follow-up question, how should we quantify the ramp of CV5 in the second half, which I think you’ve said previously, it initially is going to go into consumer is that as well impacted by the current lockdowns or is this going to be material in terms of lifting your second hand versus first half?

Dr. Fermi Wang, President and CEO

Right now because also most of CV5 products are still in design phase and the revenue ramp up will be happening in Q4. So I think that the lockdown or the development cycle are not severely impacted yet. We are watching it. We’re still confident that several of our customer, AI IoT customer will take CV5 into production, particularly on the security camera side and we don’t give a consumer, we put it all in a past consumer product into the AI IoT. So I think multiple AI IoT customers will take CV5 into production in Q4 and start ramping up on it.

Tristen Barra, Analyst

Great. Thank you very much.

Operator, Operator

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

Andrew Buscaglia, Analyst

Hey, guys. I wanted to talk through maybe a dynamic you might be seeing in that, you have all the supply chain constraints your customers are seeing. I wonder if customers that have yet to really move forward with implementing AI in their products, sort of speed that process up and move kind of to the next gen AI stuff rather than kind of continuing to purchase and develop or maintain non-like more so human viewing applications?

Dr. Fermi Wang, President and CEO

Yeah. So I think independent of this lockdown and also the kitting issue, we did see that most of our customers' new products are CV based. Of course, there are still new projects based on our video processor, new products, I mean, that kick off in the last several months, but in terms of percentage, we will see higher and higher still CV based product kickoff in the last several months.

Andrew Buscaglia, Analyst

Can you elaborate on the stock repurchase statement in your press release and, considering the current stock price and valuation in relation to the CV developments, whether share repurchase will be a more significant focus in your capital allocation going forward?

Brian White, CFO

Yeah. I don’t think that there’s really a change to the strategy or thought process around repurchases. As you mentioned, the Board did extend the existing $49 million authorization for another year. We have had strong cash flow. We believe we have sufficient liquidity. So it did consume around $300 million for the purchase of Oculii and the radar technology late last year. So at this point, we still view the repurchase option as being an opportunistic alternative rather than something that has changed from a strategic perspective at this time.

Operator, Operator

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

Kevin Cassidy, Analyst

Thanks for taking my question. This quarter you had accrued to the Japanese automotive distributor was a 10% customer, last quarter there were 12% customer, do you expect them to stay as a large customer and maybe what kind of service do they provide and maybe if you could just give us a little more description of your relationship with them?

Dr. Fermi Wang, President and CEO

I think Hakuto is our automotive distributor in Japan, and nearly all of our Japanese automotive business goes through them. Their services focus on logistics, ensuring proper chip delivery and facilitating cash flow. Additionally, they play a crucial role by maintaining inventory for automotive customers, as they require their distributor, Hakuto, to keep six to eight weeks of inventory to avoid supply issues. This is essential for the end of their production projects. As our Japanese automotive business continues to grow, we believe Hakuto will also grow. However, there may be fluctuations from quarter to quarter due to various project timelines. Overall, I am optimistic that our Japanese automotive business will keep expanding.

Kevin Cassidy, Analyst

Okay. Great. Thanks for that answer. And also on Oculii, could you give us a little more description of what progress you made in the past quarter?

Dr. Fermi Wang, President and CEO

So, again, to separate out the Oculii disclosure, but it’s very consistent with what we said, when we acquire them. We believe this year we’re going to do roughly $3 million to $4 million of business with Oculii. Most of us still at the margin level and ORE level. The first major production will happen next year? And in terms of our automotive customer, we haven’t announced that product yet. So that’s all we’re doing. But, however, at certain times, I think, all the things, everything I just said is based on Oculii’s business before they got acquired. After acquisition, one of the major goals is to integrate Oculii software into our CV family chip, particularly in CV3, so that we can provide integrated audio, sorry, the radar and the video solution to our customer. That has to be a main focus for us and that will also be a long-term revenue source for us.

Operator, Operator

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

Jeremy Kwan, Analyst

Yes. This is Jeremy calling for Tore. First, just a quick clarification, I think, you mentioned, a percentage of products of your revenue that is consumed in China, was that 50% or 15%.

Dr. Fermi Wang, President and CEO

15%.

Jeremy Kwan, Analyst

15%? Okay. That’s what I thought. And then, secondly, in terms of the inventories, was down sequentially both dollars and days. Is this something that was intentional? Was this part of the impact of the $5 million constraint or is this something that you’re kind of managing a little bit more on the long-term basis, just help us understand your inventory strategy here?

Brian White, CFO

Sure. It was really driven by our ability to get materials during the quarter as opposed to active effort to reduce inventory levels. In the longer term, we’ll look at targeted inventory levels that, potentially lower levels, but in the current environment, we’re trying to have sufficient inventory on hand to satisfy customers in a very dynamic environment. So that decrease was not driven intentionally, it was driven by our ability to get materials.

Jeremy Kwan, Analyst

Great. Thank you. And I guess maybe a little bit of a longer term question, looking at some of the new markets that you’re just entering, whether it’s automotive, factory automation, access control? Would you or maybe just looking at the ladder two, since automotive seems to be its own category? Can you maybe weight which one you see ramping sooner and which one might have the larger TAM?

Dr. Fermi Wang, President and CEO

Well, in terms of larger TAM, I think the mobile robotics obviously is the largest one, in my opinion, for instance, is happening faster. In terms of revenue, I think access control is probably the candidate. But, however, I think the point we tried to make is that, we continue to see new verticals that we can address with our CV SoCs. And hopefully, of course, we are focusing on all of them. But I think that we have a high hope on mobile robotics, because of the revenue potential.

Operator, Operator

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

Suji Desilva, Analyst

Hi, Fermi. Hi, Brian. Nice to be talking to again. Best of luck in the new role. Brian on the OpEx, the R&D, you talked about the 5-nanometer project. I’m wondering if there’s any kind of sizable tape outs involved in the fiscal 2023 timeframe which may not recur or is that kind of too aggressive assumption about a year-over-year trend?

Brian White, CFO

Yeah. When I look at street expectations for OpEx for the fiscal year, I think the consensus is somewhere around $171 million to $172 million in total for the year and that’s probably in a reasonable range to think about.

Suji Desilva, Analyst

Okay. And then one for Fermi, on the CV3, can you help us understand the design cycle there? Presumably it’s longer given the level of integration and effort on the part of the customer with radar and other things. Can you give a sense of how much longer that design cycle might be versus the other CV products as you start having customers sampling in the middle of the year?

Dr. Fermi Wang, President and CEO

Right. CV3 is designed for automotive markets, just by definition, it takes longer and CV3 particularly complicated because not only because huge die, but also very complicated software integration. So I think we think that the four years design cycle is probably right, the first two years is probably just on a software and the integration and last two years is really qualification and verification. So I think that that design cycle is probably standard for the automotive market. I think that will be CV3’s design cycle.

Operator, Operator

Thank you. Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open.

Gary Mobley, Analyst

Hey, guys. Let me start out by saying, Casey will be missed, and welcome to the call, Brian. I have just one multi-part question and that relates to your Samsung relationship. Can you give us some color on what was the issue with respect to 14-nanometer constraints? And the reason I’m asking is just to try to assess the probability of future reoccurrence of the issue. And as it relates to perhaps some of your purchase obligations with Samsung, given the weakness in revenue, is this going to be a situation where you are going to be forced to maybe carry a little bit extra inventory than you hoped for or is that even an issue? Thank you.

Dr. Fermi Wang, President and CEO

Thank you. Regarding the 14-nanometer situation, we didn’t receive a definitive answer about what transpired. I suspect that someone outbid us for that inventory. That seems to be the reason. If this poses a problem, I need to discuss it with Samsung and I’m planning a meeting with the CEO to address not just the short-term issues but also our long-term partnership. This is particularly important for upcoming negotiations in the automotive sector, where our foundry partner is crucial. As for our inventory levels, I don’t think we need to acquire significantly more than we currently have. We don’t intend to do so, so I believe this won't be a concern for the near future.

Gary Mobley, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of David O'Connor, BNP Paribas. Your line is open.

David O'Connor, Analyst

Great. Good afternoon. Thanks for taking my questions. Maybe one for Fermi and one for Brian. Maybe, firstly, on the edge AI partnership with Lumentum, can you talk Fermi around the traction you’re seeing on that and the strategy kind of going forward on the edge AI? Do you have all the building blocks and software internally to kind of support all those different end markets or are we going to see more partnerships like this Lumentum partnership from you going forward? That’s the first question. And then maybe one for Brian on the ASP, I think at the start of the call you mentioned the CV3 family of SoCs with an ASP range of 5x to 20x the corporate average? Can you give us just an example of the functionality type for that 5x versus a 20x? Is that kind of redundancy or is it an L3 versus L5? Just conceptually how we should think about that the range of ASPs? Thank you.

Dr. Fermi Wang, President and CEO

Certainly. Regarding the ASP issue, when we mention the ASP for the CV3 family of chips, we're looking at a range of 5 times to 20 times the current corporate ASP. This is reflective of our plans to develop a family of CV3 chips that cater to various market segments, from low-end Level 2 to high-end Level 4. The ASP for each segment may differ based on customer pricing quotes. The range isn't primarily about redundancy but rather about functionality and performance. In terms of our partnership with Lumentum, our goal is to integrate multiple sensor modalities into our chips for various applications, particularly in access control. This partnership has been beneficial for addressing design and production issues. As we progress, we will identify software partners to facilitate rapid design and integration of additional sensors, such as thermal and LIDAR sensors. We aim to collaborate with companies like Lumentum to enhance our CV3 chips with their sensor modules, adding value through software solutions. We are also looking to expand our network of sensor modality partners in the future.

Operator, Operator

Thank you. Our next question comes from the line of Brian Ruttenbur with Imperial Capital. Your line is open.

Brian Ruttenbur, Analyst

Yes. Thank you very much. You mentioned in your commentary about the traction you're getting on the security side with Vivint, specifically. Can you talk about other traction you’re getting on the security side in the quarter? And are you able to more easily procure chips for the residential security industry versus other verticals?

Dr. Fermi Wang, President and CEO

We announced that Ring and Vivint are our two major customers in the home security camera market, and we expect to bring on more in the future. Regarding supply chain issues, we see similar effects across all our customers. While Ring is a large company with the ability to purchase components, they too are facing some supply limitations. The kitting issue and supply chain challenges are affecting everyone, albeit at different levels.

Operator, Operator

Thank you.

Dr. Fermi Wang, President and CEO

Is there a second part…

Operator, Operator

Thank you. Our next question comes from the line of Martin Yang with Oppenheimer.

Martin Yang, Analyst

Hi. Good afternoon. Thank you for taking my questions. So a question on CV3 potential customers that was sampled, can you talk about the geographic breakdown and how that compares to a current automotive customer base?

Dr. Fermi Wang, President and CEO

I believe this situation will be quite similar. We are likely to sample in various locations, including the U.S., Europe, Japan, Korea, and China. We have identified customers in these regions that we will probably be sampling.

Operator, Operator

Thank you. Our next question comes from the line of Richard Shannon with Craig-Hallum. Your line is open.

Richard Shannon, Analyst

Well, thanks, guys for taking my question. Fermi, first one for you. Maybe you could talk about the competitive dynamics that you’re seeing so far and expect to see with a CV3 chip, both in terms of some of the new sensor modalities like radar generating and also maybe compare that with competitive dynamics with past chips going into less complex use cases, I would love to hear perspective there? Thanks.

Dr. Fermi Wang, President and CEO

I think CV3 is competing across several different verticals with a range of performance and pricing options. This is why we are developing a family of CV3 chips to meet the demands of all our units. Regarding radar technology, there are numerous companies, such as NSP and Fenian, working on advanced imaging radar, and new entrants are also emerging with their own solutions. What sets us apart is our algorithm-first approach at Oculii, which aims to reduce the number of antennas and RF chips needed while achieving comparable radar performance. This allows us to create a high-quality, cost-effective solution and makes centralized radar possible in the future. It enables us to integrate video and radar sensing on the same chip, which is a distinctive offering that we believe will set us apart from our competitors. In terms of CV3, our main competitors are NVIDIA and Qualcomm. We are confident that we can demonstrate the performance and power advantages we discussed in our presentation, and we are eager to showcase this to our customers.

Richard Shannon, Analyst

Okay. Perfect. I appreciate that perspective, Fermi. Maybe one for Brian here, as we think about the goal of hitting CV 45% of sales this year and I think it’s a fair assumption to think that the IoT segment is higher relative to automotive. Would it be fair to think about that IoT segments already being or close to 50-50 CV already?

Dr. Fermi Wang, President and CEO

Right. So in fact that for the IoT portion, professional security cameras probably is close to 50%, but in other IoT street level is not yet. Think about, last year, we’re only 25%. So we need to grow to 50% this year. So by the end of the year, I will say probably, the professional security segment will be close to 50%, maybe a little more. But other areas will be way below that.

Richard Shannon, Analyst

Okay. Perfect. That’s what I was looking for. Thank you, Fermi. That’s all for me.

Dr. Fermi Wang, President and CEO

Thank you.

Operator, Operator

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

Dr. Fermi Wang, President and CEO

First of all, thank you for joining us this afternoon. Although the fiscal 2023 is bringing unexpected external challenges to us, but I am really glad our CV momentum remained very strong. I am particularly excited about the technology development progress we made with CV3 and the business development with CV5. These two 5-nanometer chips will provide significant opportunities for Ambarella for all of our markets. And with that, I want to thank all our stakeholders and especially our global base employees who continue to support us. Thank you. I will talk to you next time.

Operator, Operator

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