Earnings Call Transcript - AMBA Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to Ambarella's First Quarter Fiscal Year 2021 Earnings Conference Call. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program; Louis Gerhardy, Corporate Development. Please go ahead, sir.

Louis Gerhardy, Corporate Development

Thank you, Jonathan. Good afternoon and thank you for joining our first 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 our results for the first 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 the fiscal year 2020 ending January 31, 2020. Access to our first quarter fiscal year 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. I'll now turn the call over to Dr. Fermi Wang.

Fermi Wang, President and CEO

Thank you, Louis, and good afternoon. First and foremost, ensuring the safety and well-being of our global workforce has and will continue to be our highest priority. I'm very proud of our 760 employees around the world and I thank them for their dedication and efforts to ensure their own safety and that of fellow employees, their families, and the communities where we operate. The Ambarella team quickly implemented robust safety measures, modified work processes, and operated as one team to execute our business plan, a plan that benefits all stakeholders including employees, suppliers, customers, and shareholders. I am confident that we will emerge from this difficult period more resilient and in a strong position to seize the opportunities that we believe remain firmly in place. We are operating in the midst of an unprecedented period of uncertainty and volatility. Geopolitical risks are high with the dispute between China and the U.S. moving into its second year, and each round of foreign policy trade and/or IP matters can bring new risks. The global health pandemic COVID-19 has brought another set of risks to consider. This combination of geopolitical and pandemic-related risks has made the duration, severity, and impact of the associated downturn unknown. Despite the fluid environment and the full quarter of challenges in Q1, we delivered results slightly above the midpoint of the guidance we offered three months ago. Q1 revenue of $54.6 million was down 4% sequentially and up 16% versus the same period a year ago. Our operations team and the supply chain performed admirably, maintaining the safety of employees while quickly adapting to volatile order patterns and sustaining a high level of on-time deliveries for our customers. CV design activity in February and March remained at a high level, though activity slowed in April and May as customers altered work patterns for the pandemic. CV revenue momentum was strong in Q1 off a small base, representing a mid-single-digit percent of total revenue. Despite many of our development sites having to work from home, we have remained highly effective in our continued development of chips and software. During the quarter, we successfully brought up and verified our new automotive functional safety SoCs, the CV2FS and CV22FS, which were announced at CES. Initial hardware verification work in our labs in Taiwan and the U.S. has been completed, and the majority of the work has been in software development. Our software engineers have become highly effective working from their homes, and we are fully on schedule to sample the SoCs and their corresponding software development kits to customers and partners in the second half of the year. Not to be outdone, our VR sizing has also been very active during the quarter. We marked the rollout of our six 10-nanometer SoC, a new member of our CVflow AI SoC family that we look forward to discussing with you later this year. We also introduced a test chip utilizing advanced 5-nanometer process technology. This test chip enables us to take our future SoCs to this advanced process node, allowing us to maintain our performance and power advantages in future generations of chips. I will now discuss our market and address the impact of the COVID-19 virus on our customers. In the professional security camera market, we are witnessing some reduction in demand as a result of the impact of the COVID-19 virus. A significant percentage of professional cameras are sold to integrators and installers whose ability to access buildings has been restricted. This, in turn, has impacted camera demand. However, once the industry recovers from the COVID-19 pandemic, we perceive upside opportunities for cameras in medical, educational, retail, and access control locations, as well as new camera designs that integrate both thermal and video sensors combined with advanced AI processing. Retail camera applications can include people counting and social distancing monitoring for intelligent active control solutions, as well as video monitoring and face recognition for contactless access. Our design win pipeline remains extremely strong, with camera makers continuing to develop cameras with advanced AI capabilities. This quarter saw several significant customer product introductions based on our CVflow AI SoC solutions. During the quarter, Panasonic, Japan's leading provider of security services solutions, introduced 10 new camera models based on Ambarella SoCs. The extensive new product lineup includes seven I-pro series models based on our S3 H.265 SoC, and three AI network cameras based on our CV22 and CV4 SoCs. The AI cameras are available in box, bullet, and dome configurations, leveraging AI processing at the edge to detect and identify movement, capture human faces, and optimize data compression. In May, Motorola Solutions announced that it would offer advanced security cameras with software analytics to help organizations maintain compliance with health guidelines, including protective face masks and social distancing measures. This solution combines the power of video and intelligent AI-powered analytics running on Ambarella's AI SoC. Also during the quarter, Motorola announced it was acquiring U.K.-based IndigoVision, an existing user of Ambarella-based cameras, to expand its video security and command center software product offerings in the European market. Additionally, in May, European security leader Axis Communications entered the body-worn camera market with its first solution designed for use by law enforcement and private security. The body-worn camera was developed on an open system architecture to support a wide range of video management and evidence management systems. Based on Ambarella’s HI SoC, the camera captures 1080p video, offers advanced image processing, and operates for up to 2,000 hours. During the quarter, leading Korean video security camera company Hanwha Techwin introduced the Westnet T Series 8K camera based on Ambarella's CV2 SoC, delivering high-performance capabilities on par with our CV4 family. This series includes the TMB 9000 8K camera, which retains image clarity while zooming in on any area of interest. We also introduced three 4K cameras in various form factors and featuring advanced AI-based video analytics, including personal face and vehicle recognition, people counting, queue management, and heat mapping. In April, March Networks rolled out its ME6 Series 6-megapixel IP camera based on Ambarella's CV22 AI SoC. This camera utilizes deep neural network processing power to accurately differentiate between people and vehicles, combined with next-generation security analytics for real-time event detection and analysis. In the home security camera market, we have also seen some impact on sales due to order pushouts from customers. Typically, home security cameras are sold in retail or online, and the closure of retail stores has negatively affected demand. Most of these cameras are manufactured by Taiwanese OEMs who have generally remained in production throughout the crisis. Beyond the pandemic, we anticipate continued growth in this segment, including increasing demand for video and more intelligent cameras. During the quarter, a U.S. Smart Home company introduced a new in-video approach based on Ambarella's H5L. The Google camera offers full HD video with a wide 180-degree field view, allowing users to see both visitor faces and packages left on their doorstep. Advanced camera analytics can notify users about the arrival of people and packages, while two-way audio enables interactions with visitors. In May, Logitech unveiled a new version of its Circle View security camera, supporting Apple's HomeKit smartphone system. This camera, based on Ambarella's S2Lm SoC, records 1080P video with a 180-degree field view and can capture infrared footage at night up to 15 feet away. In the access control market, Xiaomi, one of the largest smart lock brands in China, announced the Quora P100 Fingerprint Smart Lock with HomeKit support. The lock integrates an H2-based camera for UHD video viewing with an ultra-wide field of view and motion detection capabilities. In the automotive market, our current revenue is primarily driven by OEM car recorders integrated into new models in Asia and aftermarket dash cameras in retail. Our OEM business has been impacted by the temporary closure of automotive plants in Asia, while our U.S. and European markets have faced retail store closures. Additionally, the automotive market remains weak, with many OEMs and Tier 1 suppliers delaying decisions on future product generations. Despite this, we have continued to make progress in our engagement for advanced driver-assistance systems (ADAS) and electronic mirror applications. In the electronic mirror segment, car manufacturers are currently deciding on single-channel electronic mirror solutions instead of the three-mirror designs we initially targeted. Our SoCs provide efficient and cost-effective solutions for single-channel mirrors and can also integrate additional features, such as video recording. Consequently, we are seeing revenue opportunities for OEM partnerships, with production expected to begin in 2023. Ambarella is collaborating with Inceptio, a Chinese company founded in 2018, to build a nationwide freight network using autonomous driving trucks. Inceptio aims to achieve secure, efficient, and economical transportation-as-a-service for logistics customers. This goal is to be realized using Inceptio’s automotive-grade L3, L4, autonomous driving software and hardware in partnership with major automotive manufacturers. Inceptio is utilizing Ambarella's CV2AQ, AECQ 100, and CV2FS automotive SoCs to enable advanced new network-based solutions. In April, Korean dash cam leader Thinkware introduced its QXC 5000 model, featuring dual-channel QHD plus HD video, smart remote viewing, and remote alarm notifications. Based on Ambarella's H22a SoC, this dash camera includes ADAS functions such as lane detection warnings, full collision warnings, and traffic light change alerts. As previously mentioned, we continue to secure designs with customers providing aftermarket fleet management solutions for commercial vehicles, as well as solutions for ridesharing and taxi services. Besides video recording, the camera solutions support AI-based applications such as front ADAS, active driver monitoring, and blind spot detection. The AEC-Q100 version of our CV22 and CV25 SoCs combines advanced imaging capabilities, powerful AI processing, and low power consumption, making them ideal for AI camera systems operating in challenging automotive environments. We expect our customers to begin field trials and initial production in Q4 of this year, deploying AI software solutions based on their own in-house models and Ambarella's ecosystem products. In summary, as the environment around us is highly volatile and uncertain, we remain fully committed to our strategy and the long-term secular trends we are addressing amid the impact. Our strategy to leverage our successful video processor heritage into the development of a highly optimized legal AI computer vision platform has not changed. In ADAS, we are enabling higher levels of automation across various industries. As the industry emerges from the current crisis, demand for higher levels of automation should be increasingly important, driving the new large markets we have identified in the past. Furthermore, our operating cash flow, financial discipline, and the strength of our balance sheet allow us to sustain our planned level of visual AI investment through these challenging times. With strong execution, we continue to expect our significant R&D investments to yield positive returns. Our CV strategy is further validated by broad customer activity, the expanding list of customers in production, early CV revenue growth, and the introduction of new products and technologies that extend our platform and our reach into new markets. For example, during Q1 five more customers entered production status with our CV SoCs—three in the security camera market and two in the automotive market. In the coming months, we anticipate sampling our first automotive safety integrity level SoCs to customers, while the development of our new family of 5-nanometer SoCs continues to progress. Finally, in response to the health pandemic, our corporate giving initiatives, including employee donations and corporate matches, have raised over $300,000 for various aid organizations in the regions where we operate. I thank Ambarella's employees for their response to this giving initiative and for managing their safety and the safety of those around them, as well as for their strong execution to support our customers and advance our regional AI initiatives. I will now turn the call over to Casey, who will provide further details about what we are observing and expecting for the business.

Casey Eichler, CFO

Thank you, Fermi, and good afternoon, everyone. Today I will review the financial highlights for the first quarter of FY 2021 ending April 30 and provide a financial outlook for our second quarter of fiscal 2021 ending July 31. During the call, I will discuss 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 adjusted for the impact of taxes. We faced a full quarter of public health and geopolitical challenges in Q1. Despite this, our revenue of $54.6 million was slightly above the midpoint of our original guidance. This represents a decrease of 4% from Q4 and an increase of 16% when compared to the same quarter of the prior year. In Q1, revenue declined sequentially in all end markets, with automotive down in the very low double-digits and security and other product revenue down slightly. Both the professional and smart home security businesses declined slightly sequentially. Non-GAAP gross margin for Q1 was 59.1% compared to 58.7% in the preceding quarter and was close to the high end of our guidance due to favorable business mix. Non-GAAP operating expense for the first quarter hit $31.9 million compared to $30.5 million for the previous quarter. OpEx increased primarily due to higher payroll taxes and increased amortization expense for the tape-out of our new 5-nanometer and 10-nanometer SoCs. Other income of $1.3 million reflected the effect of lower interest rates. The non-GAAP net income for Q1 was $1.3 million or $0.04 per share compared to a non-GAAP net income of $4.9 million or $0.14 per share in the fourth quarter. In Q1, non-GAAP earnings per share were based on 35.2 million diluted shares, compared to 35.1 million diluted shares in the prior quarter. The non-GAAP net income for the first quarter of fiscal year 2021 includes a change in the non-GAAP tax rate calculation to exclude losses from jurisdictions with no tax benefit associated. This was done to improve the alignment of the non-GAAP income tax to the non-GAAP profit before tax. Accordingly, the non-GAAP net income and non-GAAP loss per share for the first quarter of fiscal year 2020 ending April 30, 2019, have been adjusted for the change in the non-GAAP income tax effect and presented consistently with the first quarter of fiscal year 2021 presentation. A reconciliation of the GAAP to non-GAAP calculations is included in the financial statement portion of our press release. Total headcount at the end of the fourth quarter was 760, with about 81% of our employees dedicated to engineering. Approximately 69% of the total headcount is located in Asia. In Q1, we generated positive operating cash flow of $7.6 million. Cash and marketable securities were $411.3 million, up from $404.7 million at the end of the fourth quarter. We purchased 25,719 shares of common stock in the quarter for $1 million, representing an average price of about $39 per share. 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, the remaining $49 million available from the $50 million repurchase agreement authorized in June 30, 2021. Total accounts receivable at the end of Q1 were $20.7 million or 34 days sales outstanding. This compares to accounts receivable of $18.5 million or 30 days sales outstanding at the end of the prior quarter. Net inventory at the end of the first quarter was $22 million compared to $23 million at the end of the previous quarter. Days of inventory increased to 91 days in Q1 from 82 days in Q4. We had two 10%-plus revenue customers in Q1. WT Microelectronics, a fulfillment partner in Taiwan, came in at 63% of revenue; and Chicony, a Taiwanese OEM that manufactures for multiple customers, came in at 15%. I will now discuss the outlook for the second quarter of fiscal 2021. The confluence of the health pandemic and geopolitical factors has led to unprecedented volatility and continued uncertainty in forecasting. The global health pandemic continues to disrupt demand. On our March 3 earnings call, we stated we were beginning to see order pushouts and cancellations. This trend, combined with a slowdown in design activity that began in Q1, is expected to persist into Q2. Most importantly, the pandemic has put global economies into sharp contraction, with rapidly rising unemployment, and the impact of changes in government business and consumer spending remains significantly unknown at this time. In addition to the health pandemic, we have consistently highlighted a range of geopolitical risks, many of which are still very fluid. Geopolitical risks include new U.S. export controls on advanced technologies and the risk that customers in China may take action to reduce their dependence on U.S. components subject to export controls, shifts in the entity list, tariffs, and market share dynamics among our customers. We remain concerned about the dual China and non-China supply chain emerging and its impact on our customers based in China. The foreign direct product rule announced by the U.S. on May 15 and the addition of 33 companies to the entity list on May 22 have further escalated tensions, potentially leading to adverse reactions from both the government and our customers in China. In previous earnings calls, we estimated that two professional security camera customers in China had pulled in roughly $10 million of revenue from fiscal year 2021 to fiscal year 2020. We do not believe there has been a material change in the inventory of Ambarella SoCs carried by these two customers, and we continue anticipating weaker order patterns from both customers in the second half as they work through their safety stock of inventory. Based on these factors and our best judgment at this time, we expect total revenue for the second quarter ending July 31, 2020, to be in the range of $50 million, plus or minus 6%. We anticipate the security market will be up sequentially, while automotive and other revenues are expected to decline. With a very wide range of public health and geopolitical forces influencing our outlook, we are unable to forecast beyond the second quarter at this time. We estimate Q2 non-GAAP gross margin to be between 59% and 60.5% compared to 59.1% in the first quarter, as a favorable customer mix brings gross margins back into our long-term model range of 59% to 62%. We expect non-GAAP operating expenses in the second quarter to be between $31 million and $33 million due to increased engineering expenses, including amortization costs for the tape-out of our first family of 5-nanometer SoCs, as well as potential changes in our ability to continue receiving the engineering credits discussed previously. Second quarter other income should be modeled around $1 million, reflecting lower interest rates based on our net cash position. The second quarter non-GAAP tax rate should be modeled in the range of 15% to 20%. We estimate our diluted share count for Q2 to be approximately 35.3 million shares. Ambarella will participate in the Bank of America Virtual Global Technology Conference on June 3, the Stifel Cross Sector Insight Virtual Conference on June 9, and the Roth London Virtual Conference on June 24. Please contact Louis for further details on these events. Thank you for joining our call today. With that, I'll turn it back over to the operator for questions.

Operator, Operator

Certainly. Our first question comes from the line of Joe Moore from Morgan Stanley. Your question please.

Joe Moore, Analyst

Yeah. Thanks a lot for letting me ask the question. I think you guys said of the CV customers that are in production, that two are in automotive. I was a little surprised by that. I wondered if you could talk about what types of applications are already in production with CV. And then, for my follow-up, just are you still thinking you're on track to be sort of 10%, CV for the year?

Fermi Wang, President and CEO

Well, first of all let me answer that 10%. I think although we have less visibility on the second half, we still continue to believe that we have a very good chance to deliver the 10% total CV revenue. I think that's on track. We'll continue to report on the progress on that. The 10% CV target is definitely something we think is an important milestone, and we are continuing to track on that. In terms of the five customers, we didn't announce their names, but the total revenue is most likely coming from commercial vehicles for ADAS and/or fleet management for ADAS or internal monitoring. Those types of applications don't require ASIL certification, making it easier and quicker to get into production. So, that's the context of the automotive production we're discussing.

Joe Moore, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question please.

Tristan Gerra, Analyst

Hi. Good afternoon. Could you remind us, as of last quarter, the percentage of your revenue coming from China customers and whether they started to diversify procurement away from U.S. vendors? I think the number was about 20% in the prior quarter. Also, any details you could add regarding the new restrictions list and their potential impact this has? And at the same time, in light of HiSilicon potentially being cut off from TSMC, what dynamics does that create later this year for the camera market in China?

Casey Eichler, CFO

So let me have Fermi answer the last question. Regarding the geographic breakdown of revenue, we don't disclose details by country. A significant portion of our revenue in Asia, especially China, goes through WT. You can see that WT represents a large share of our revenue along with Chicony and others, but we don’t specifically mention customers. We have noted customers like WT and Chicony account for over 10% of our revenue.

Fermi Wang, President and CEO

Regarding the HiSilicon question, I want to clarify that there are still many unknowns about the new rules we've seen. We are trying to understand customer reactions to these changes. However, we believe this will ultimately positively benefit us outside of China as we have already announced new design wins. Inside China, the scenario is different due to various factors. Although HiSilicon might not have a shipping capability from TSMC, many of our Chinese customers are likely avoiding U.S. components currently and opting for alternatives when available. The situation is quite uncertain at the moment. We're in constant communication to understand how our customers are feeling. Outside China, we have noted positive developments.

Tristan Gerra, Analyst

Okay, great. That's very useful. And then just a quick follow-up: are you seeing any lingering supply chain disruptions including at your customers? And you mentioned a significant rebound in your security-related revenue this quarter. Is that simply backlog from Q1, or are you effectively back in line with end demand in Q2 for security?

Fermi Wang, President and CEO

First of all, from a supply chain point of view, our supply chain has seen very little impact from COVID-19. However, we have noticed strange ordering patterns from our customers. When we discuss with them, they mention facing disruptions in their supply chains, particularly within the automotive sector. There are also some disruptions for our security customers. Among all the current markets, professional security cameras seem to be the least affected by COVID-19, as there are new demands for integrations, such as thermal sensors in cameras for proactive applications. This is likely the reason for better performance on the professional security side. However, I must emphasize that the consumer security segment is facing challenges due to retail channels shut down in the U.S. and Europe. Supply chain issues and end demand differ significantly. Since the future demand is still uncertain, we are trying to keep close contact with customers to gauge the situation.

Tristan Gerra, Analyst

Very good. Thank you so much.

Operator, Operator

Thank you. Our next question comes from the line of Tore Svanberg from Stifel. Your question, please.

Tore Svanberg, Analyst

Yes, thank you. Fermi, I had a question on the professional security market. You mentioned the integration of thermal sensors and so on. Is that something that you're already offering? If not, when would you expect to start delivering SoCs that would include thermal sensors?

Fermi Wang, President and CEO

While we don't include CMOS sensors with thermal imaging in our silicon, we can easily interface thermal sensors with our CMOS sensors. In fact, several of our customers, for example, Flare and Digital, are already shipping thermal cameras alongside traditional security cameras using our solution. There is considerable demand for thermal sensors, especially due to the pandemic, and we are confident about their integration in future designs. However, the potential is substantial, particularly with applications like home security cameras—and the technology is such that as prices decrease from current levels, thermal sensors can find uses in various areas, such as automotive for identifying people or animals. Our existing chips can interface with thermal sensors seamlessly, and we're working on software-fusion capabilities with AI technology.

Tore Svanberg, Analyst

Very good. And as a follow-up regarding the automotive space, that market has been weak for you for several months. Now that production is starting to resume, are you seeing any positive signs or movements in the automotive business?

Fermi Wang, President and CEO

We see some positive signs in China, but not elsewhere. For example, I'm hopeful that Japan can recover soon since a lot of our recorder business is situated there. However, the Japanese government has been on and off with city lockdowns, creating uncertainty. Thus, from the automotive business perspective, we favor positive signals in China but see weakness elsewhere.

Tore Svanberg, Analyst

Great. Thank you very much.

Operator, Operator

Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.

Ross Seymore, Analyst

Hi guys. Thanks for letting me ask the question and congrats on weathering all the storms simultaneously. My first question would be for Casey. You talked about directionally up for IP security in your fiscal second quarter guide, and then down for automotive and consumer. However, we know the automotive market can decline significantly. Do you have any valuation on that or ranges like you provided for the first quarter?

Casey Eichler, CFO

Yes. I said that we would expect automotive and other to decline. However, providing tighter brackets isn't feasible in this environment. I think directionally, it makes sense for the security market to be up. Quantifying that further is complicated given the overall uncertainty.

Ross Seymore, Analyst

Got it. Thanks for that. As a follow-up, regarding the $10 million you expect customers to use up in the second half of the year, have you observed any changes in their behavior? I find an ironic situation where as trade tensions remain high, customers may feel inclined to carry buffers. Has anything shifted your belief about utilization in the second half?

Fermi Wang, President and CEO

We're still observing. We see some signs suggesting that order patterns are slowing; this indicates they're drawing down inventory. However, as they consider how to manage HiSilicon supply, it's likely they're building more of that inventory. It influences their order timing as well. So we do see trends indicating they're gradually perusing down inventory.

Ross Seymore, Analyst

Got it. And one final housekeeping question: Casey, how do you anticipate OpEx behaving in the second half of the year? You managed effectively in Q1, yet several variable costs are maintained at a constant level. Will the first and second quarters represent a run rate into the second half, or are certain items likely to be lumpier?

Casey Eichler, CFO

As we continue to drive our roadmap in both 10-nanometer and 5-nanometer, you can anticipate the tape-out costs and CAD tools to increase our costs somewhat. However, no dramatic programs are affecting OpEx direction. We'll remain vigilant in managing costs given the current climate.

Fermi Wang, President and CEO

I'll add that, during these challenging times, closely watching our expenses in various areas is crucial. While we commit to progressing 5-nanometer and 10-nanometer silicon development, we are also cautious about hiring and other areas, such as trade show travel, which will be minimal. Thus, we are monitoring those expenses closely while maintaining dedication to R&D expenses for tape-out and silicon development.

Casey Eichler, CFO

It's uncertain when employees will feel comfortable returning to travel and attending conferences in person again in the second half, and we'll need to watch for that.

Ross Seymore, Analyst

Hopefully in the second half. So thanks guys, I appreciate it.

Operator, Operator

Thank you. Our next question comes from the line of Adam Gonzalez from Bank of America Securities. Your question, please.

Adam Gonzalez, Analyst

Hi guys, thanks for taking my question. Apologies if this was addressed in the prepared remarks; my connection was a little spotty. I just wanted to know how the current pandemic and crisis have impacted your design momentum and pipeline, particularly with automotive. How has customer interaction changed?

Fermi Wang, President and CEO

The impact is multifaceted. For instance, customers working from home or working part-time certainly slow down decision-making processes and engineering activity. We are keen on learning how investments will be evaluated and whether there will be changes in project funding. While we haven't discerned clear indications yet, productivity is definitely hindered due to the working style impacts.

Adam Gonzalez, Analyst

Got it. And then on the per security side, as mentioned earlier, you indicated that China customers might prefer procuring chips from non-U.S. vendors moving forward. Which other options exist in the first surveillance market aside from HiSilicon?

Fermi Wang, President and CEO

As we previously indicated, there are various suppliers in China and Taiwan on the lower end. That's a concern overall. However, for mid-tier and high-end options, particularly for CV applications like CV22 or CV2, availability is limited. We're engaged in discussions with our Chinese customers to ascertain their perspectives on this situation, and the ongoing uncertainties make it challenging. Still, we're optimistic about opportunities outside China.

Adam Gonzalez, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Jeff Kessler from Imperial Capital. Your question please.

Jeff Kessler, Analyst

Thank you, and thank you for taking my question. Regarding access control, several integrators managing to get into closed schools and government facilities have made progress in installing access and video solutions in those spaces. Are you seeing an uptick from your end markets in this area, particularly concerning electronic network locks that integrate with video?

Fermi Wang, President and CEO

We have been in contact with our customers and understand they are re-engaging with their end users. Yet we have yet to see changes reflected in ordering patterns, as there's a lag. Customers first need to deplete existing inventory before placing orders again. Conversations reveal re-engagement, which is a positive signal, leading us to believe that once the pandemic subsides and the economy normalizes, professional security will rebound. Additionally, we anticipate that systems using contactless technology and AI-enabled cameras will further strengthen our AI solutions in this market.

Jeff Kessler, Analyst

Thank you. One other question regarding Axis and their introduction of body-worn cameras. Higher-end camera manufacturers seem to be focusing on obtaining more analytics for mobile usage—not just for police work, but other applications as well. Are you seeing demand for AI in mobile applications such as those offered by Axis?

Fermi Wang, President and CEO

Yes, the demand for mobile cameras is evident. The main challenge is integrating AI and video capabilities while minimizing power consumption to ensure operation for a full day. Our solutions aim to address this challenge effectively. We anticipate advancements will enable wider usage of wearable cameras. Demand is in the early stages, and we target not just policing, but various utilities leveraging these technologies to broaden our total addressable market. We see the trend emerging, and while we face technological limitations, we have a roadmap to enhance performance and reduce power consumption while improving AI capabilities.

Operator, Operator

Thank you. Our next question comes from the line of Quinn Bolton from Needham. Your question please.

Quinn Bolton, Analyst

Hey, guys. First a clarification from Casey. In your second quarter outlook, did you say that the overall security market would be up? Is that just for professional security or...

Casey Eichler, CFO

I indicated it applies to overall security.

Quinn Bolton, Analyst

Can you specify if that is both professional and consumer, or whether your review is for the overall bucket?

Casey Eichler, CFO

I think it applies to overall security. Because we see multiple customers, both in professional and consumer moving forward. However, I recommend we keep it at that overall bucket for our expectations.

Quinn Bolton, Analyst

Great. Regarding the slowdown in design activity mentioned in April and May, what do you believe is needed for customers to reengage? Do they need to return to the office, or is it more about them figuring out how to be effective while working from home?

Fermi Wang, President and CEO

I don't believe it requires 100% office presence. For example, many automotive customers are only working in the office a couple of days a week. This situation has disrupted productivity noticeably. We are discussing gradual and incremental returns to the workplace, which will expedite the return to normal levels of productivity, but policies limiting employee work hours will have to be adjusted.

Quinn Bolton, Analyst

Understood. Lastly, you mentioned the e-mirror design win, which has a way to go, but can you provide further detail? Is that just a rearview camera, or do you have multiple channels?

Fermi Wang, President and CEO

Previously, our focus was on three mirror solutions, but now we’re prioritizing single-channel designs. Although it's a single-channel solution, many customers want to include additional functions. We're working on a roadmap that features not just a single channel but expands to two and three channels, capable of fulfilling various electronic mirror needs at competitive costs. So, while the initial design win may be single-channel, we aim to provide a flexible roadmap for leveraging our three-channel experiences.

Quinn Bolton, Analyst

Thank you, Fermi.

Operator, Operator

Thank you. Our next question comes from the line of Suji Desilva from Roth Capital. Your question, please.

Suji Desilva, Analyst

Hi, Fermi. Hi, Casey. Can you revisit the consumer security market? I'm trying to combine your comments indicating some momentum earlier this year with the current limited visibility due to macro uncertainties. Can you clarify your qualitative overview of this segment heading into a typically strong holiday season, albeit in a different context this year?

Fermi Wang, President and CEO

As we stated during the last conference call, we believe the consumer security camera market significantly contributes to our revenue and its long-term potential has not changed. However, in the short term, retail stores have closed, harming traditional channels. Until those stores reopen, our visibility on second-half demand remains significantly limited. With businesses gradually reopening, we expect it may take considerable time for our customers to determine how to adapt to selling seasons this year. They need to begin product preparations as soon as possible if a holiday selling season is anticipated.

Casey Eichler, CFO

It’s important to note that last year, the consumer security market characterized the second wave of CV. This year, we see the potential for a similar impact. However, the current circumstances have clouded our visibility on the second half, making it challenging to provide precise predictions.

Suji Desilva, Analyst

Okay. That’s helpful information. A high-level question for me. What are the key vectors you’re targeting in your 10- and 5-nanometer product roadmap compared to competitors within automotive to maintain your competitive edge?

Fermi Wang, President and CEO

Low power consumption remains a key differentiator for us, and we've emphasized that previously. If we fall behind process nodes significantly, we risk losing that advantage. Our competitors, especially in automotive and security, are growing aggressively, and we must keep pace. In the 5-nanometer segment, we plan to cover both security camera and automotive designs, as performance requirements continue to escalate in ADAS applications. Our 5-nanometer solutions will help us maintain our advantages in performance while ensuring lower power consumption.

Suji Desilva, Analyst

Okay. Thanks, guys.

Operator, Operator

Thank you. Our next question comes from the line of Charlie Anderson from Colliers Securities. Your question please.

Unidentified Analyst, Analyst

Yes. Thanks for taking my question. Casey, inventory decreased modestly this quarter. Considering the various uncertainties ahead of us, could you provide a high-level rundown on how you plan to manage inventory for the rest of the year? I have a follow-up.

Casey Eichler, CFO

As you know, we've brought inventory down rigorously over the last four to six quarters, which has reinforced our discipline. Currently, we're hovering around similar levels, and adjustments depend on order flow and timing. The shift was just a $1 million change, so it’s not a meaningful variation. Most of our inventory and product stocks involve popular items, so we feel resilient against long-term exposure. While we’re managing inventory prudently, we must remain prepared for an upward trend without getting caught off guard if demand rises unexpectedly.

Unidentified Analyst, Analyst

Okay. Great. For my follow-up regarding thermal cameras, it seems the market is witnessing an immediate surge. Where do things stand in relation to serving that market? Is there significant design work required, or do you have existing models in production? Is this feed into 2021 and beyond?

Fermi Wang, President and CEO

Several professional security camera customers are working on thermal integrations and I believe you will see products launching this year due to strong demand. The capability to include thermal in traditional models will greatly expand market applications. While thermal sensors faced limitations price-wise and in the integration process previously, these challenges have begun to decrease dramatically amid the current demand surge. I envision that the combination of thermal capabilities and the right price will foster significantly different applications across the industry.

Unidentified Analyst, Analyst

Great. Thank you so much.

Operator, Operator

Thank you. Our next question comes from the line of Matt Ramsay from Cowen. Your question, please.

Matt Ramsay, Analyst

Thank you very much. Good afternoon guys. Obviously, there’s a lot of uncertainty, but it's encouraging to hear the ASIL products are ready to roll out. Could you discuss programs in automotive that have awaited ASIL certification? What are your growth expectations for those products over the next 12 to 18 months?

Fermi Wang, President and CEO

The ASIL chip, CV2FS and CV22FS, is primarily designed for ADAS applications, though they can also function with DMS and in-cabin monitoring. Multiple clients are in active discussions regarding these chips; included is a Chinese automotive client planning to rely on CV2FS, which will start sampling shortly. We have numerous customers evaluating the CV2 and CV22FS in light of their new programs. Ultimately, the considerable growth opportunity for us hinges on enabling commercial ADAS applications supported by both hardware and our software partners.

Matt Ramsay, Analyst

Got it. Thanks. Lastly, I noticed that over the last year, you've communicated your movements into logistics and shipping automation markets. There have been contracts won with trucking companies, along with developments related to Amazon Go Stores and partnerships with Amazon for software stacks. What is your view on the opportunity in those spaces? When do you anticipate further deployment?

Casey Eichler, CFO

We are investing in these areas as they represent important mid-to-long-term market opportunities for us. Although COVID-19 may have slowed some projects, we remain committed to pursuing them. Our business development continues via various means, including remote conferencing tools, ensuring we adequately support our clients. We trust the trajectory for these projects will normalize as businesses reopen. We may not have discussed this direction explicitly during the last call, but it remains a focus for our ongoing investment and cooperation with our customers.

Matt Ramsay, Analyst

Thank you very much, guys. I appreciate it.

Operator, Operator

Thank you. Our final question for today comes from the line of Richard Shannon from Craig-Hallum. Your question please.

Richard Shannon, Analyst

Thanks guys. Two quick questions: In your guidance for the July quarter, you indicated the security market is expected to rise. Can you provide a geographic breakdown of expectations, specifically regarding China versus the rest of the world?

Fermi Wang, President and CEO

Regarding China, we have indicated two customers are navigating their inventory levels currently, so that's likely affecting their revenue in Q2. In parallel, we maintain a belief in stability for professional security camera revenue forecast across other territories. Our expectations include both consumer and professional sides for the security market.

Richard Shannon, Analyst

That's helpful. For my follow-up, your thoughts on the anticipated CV revenues for this year, reaching the 10% goal, can you share how that looks regionally? Is it largely in China, or do you see a global balance?

Fermi Wang, President and CEO

I wouldn’t say it's driven overwhelmingly by China. It is fairly balanced overall. We maintain that we are confident in meeting our target of 10% CV revenue for this fiscal year.

Operator, Operator

Thank you for your questions. This concludes the question-and-answer session of today's program. I'd like to hand the program back to Dr. Fermi Wang for any further remarks. Please go ahead, sir.

Fermi Wang, President and CEO

Thank you all, and I'm looking forward to speaking with you next time. Thank you. Talk to you later. Bye.

Casey Eichler, CFO

Thanks.

Operator, Operator

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